As cleanup costs mount, oilpatch may be forced to pay deposit before drilling new wells

Alberta's premier is floating the idea of ​​forcing oil and gas companies to post a bond before they can drill a new well, a requirement that hasn't been made in decades and that the industry often resists.

The provincial government is looking at ways to address the large number of old oil and gas wells that need to be cleaned up.

To prevent the problem from getting worse, speaking at an industry event this week, Danielle Smith said companies should set aside some money up front, offering $10,000 per well.

“They need to put some money aside so that by the time it reaches the end of its life, there will be money to be able to clean it up,” Smith said during an on-stage question-and-answer session in front of 800 people at a Canadian Association of Energy Contractors event in downtown Calgary.

If a company puts down a $10,000 deposit, the amount will grow over time and compound with interest, so when the well stops producing oil or natural gas, “the money will be there” to help cover remediation costs, Smith said.

“I hope we can find a way to come to a resolution on this issue,” Smith said during ongoing talks with industry representatives.

Industry rollback

Currently, there are approximately 250,000 old wells and other infrastructure that are inactive or producing little oil or gas.

At the same time, the Orphaned Well Association (OWA) has a record number of wells in need of cleanup. OWA is an industry-funded group responsible for reclaiming wells that no longer have an owner after the company goes bankrupt.

Smith's bail proposal isn't a bad idea, said Sean Fluker, a law professor at the University of Calgary.

However, he is skeptical that the proposal will ever become a reality.

“To be honest, personally, I’m not going to worry too much,” Fluker said. “Until I see something tangible in this regard, I just think these comments are hot air.”

Alberta previously had a legal requirement that a company must post a deposit when applying for a new well license, but this requirement was removed in 1986.

Fluker co-authored the forecast for 2023. research work on the issue, which describes orphaned and inactive wells as “made-in-Alberta failures.”

“There have been other instances then and now where industry has resisted programs that likely would have prevented us from being in the mess we're in today,” Fluker said. “Every time the province retreats.”

Some oil and gas industry groups opposed the policy, argue they will cause financial difficulties for some small companies and cause an increase in bankruptcies.

“We must wait for the official announcement before making any comments,” Elizabeth Besson, a spokeswoman for the Canadian Association of Petroleum Producers, said in an emailed statement regarding the premier's comments.

$10,000 is not enough, says landowner

Some jurisdictions, such as North Dakota, require companies pay bail at least $50,000 for each new well.

“Smith's proposal is too little, too late and doesn't address the enormous number of wells that need to be cleaned up,” said Dwight Popovich, chairman of the Polluters Pay Federation and a landowner who has an orphan well.

Popovich says $10,000 is too little, and there are still no deadlines requiring companies to do the remediation work.

“For me it’s just smoke and mirrors. That's what she's doing here. There is a problem, she admits there is a problem, but that is not the right way to solve it,” he said.

He would prefer to see industry contribute higher annual contributions to OWA funding so that orphan wells are cleaned up much more quickly.

The OWA is funded primarily through annual fees determined by the Alberta Energy Regulator (AER) and paid by the oil and gas industry. Two years ago, the fee was increased to $135 million.

OWA representatives stated they expect The AER will increase the collection again as the number of orphans has increased.

The AER has made regulatory changes in recent years in an attempt to limit the number of orphan wells.

Further changes could include the 21 recommendations listed in a report commissioned by the provincial government and released in April. the report included a consultation with indigenous groups, landowners and industry, and other stakeholders.

The initiative was led by David Yager, Special Adviser to the Prime Minister.

Recommendation No. 16 of the report mentions the need for companies to pay a deposit before drilling a new well: “Include mechanisms for financing asset closure and establish a working group for end-of-life third party liability models,” the report says.