Orphan well clean-up costs could sting Alberta taxpayers if regulator loses court battle

The soaring number of abandoned oil and gas wells across Alberta is overwhelming the industry-backed fund that pays to clean them up — and now there's concern taxpayers could share in that burden if the province's energy regulator loses a crucial appeal at Canada's top court.

Soaring number of abandoned wells will see industry levies jump to $45M this year — triple from 2014

Oil wells like this are being reclaimed by the Orphan Well Association, which is funded by industry to reclaim wells that have been abandoned by companies that simply don't have the cash or assets to pay for reclamation. (Orphan Well Association)

The soaring number of abandoned oil and gas wells across Alberta is overwhelming the industry-backed fund that pays to clean them up — and now there's concern taxpayers could share in that burden if the province's energy regulator loses a crucial appeal at Canada's top court.

The issue arose at the Supreme Court this month during a hearing that will decide what is the priority when oil companies go bust: creditors or the clean-up of abandoned well sites.

Lower court rulings have sided with creditors, spurring the Alberta Energy Regulator (AER) and Orphan Well Association (OWA) to launch appeals, in part due to fears bankrupt energy companies will essentially walk away from polluted sites and dump clean-up costs on the orphan well fund. 

The case has received wide attention because of the potential implications for old industrial sites across the country.

Lewis Manning, a lawyer for CAPP, told the Supreme Court that taxpayers could be on the hook to pay for abandoned wells

6 years ago
Duration 2:10
The lawyer says the oilpatch wants to avoid liability falling on the public.

If the appeal is lost, the court heard there are no guarantees the fund will be able to cover all the work required, with the regulator warning the possible costs could climb into the billions.   

"We do know there is a potential for the fund to be depleted or underfunded and those costs — the costs to deal with surface rights issues — falling to the public or to the landowners," Lewis Manning, a lawyer for the Canadian Association of Petroleum Producers, told the court on Thursday.

"From CAPP's perspective, that's to be avoided."

Levies to jump

In Alberta, energy companies are charged a levy that supports a fund paying for the clean-up of old wells and other abandoned infrastructure. Until recently, bankrupt companies contributed to the costs of cleaning up their sites through the insolvency process.

But since the first lower court ruling in 2016, 1,800 AER-licensed sites have been abandoned, with estimated liabilities of more than $110 million. In the same period, the Orphan Well Association's inventory more than tripled from almost 1,200 to more than 3,700. 

The annual levies charged to industry to support the fund have soared to $30 million in 2017 from $15 million in 2014. The planned levy for 2018 is $45 million.

The number of abandoned wells could spike depending on the Supreme Court's decision, according to Lars De Pauw

6 years ago
Duration 1:09
The executive director of the Orphan Well Association says the group is already in tough financial shape.

Lawyer Ken Lenz, representing the OWA at the hearing, said the association can't do the work in front of them unless it gets further levies every year, which is out of its control.

"Of course we'll try and perform the work that we can but, frankly, on a balance sheet basis, we're insolvent," he said.

One of the main reasons the OWA was created in the early 1990s was to avoid those clean-up costs falling to the public.

Could pay up front

In submissions for the Supreme Court hearing, ATB Financial, which argued against an appeal, said upholding the lower court decisions doesn't prevent Alberta's energy regulator from managing the energy industry.

It noted that other jurisdictions achieve the AER's environmental and policy objectives by requiring companies to pay up front for their remediation obligations before they are even allowed to drill.

During the hearing, Justice Suzanne Côté asked why Alberta did not do that.

Manning explained that requiring companies to do so would effectively sterilize a "vast amount capital" when industry could be spending it in the public interest by exploring for, developing and producing energy. 

"That was a balance that was specifically arrived at," he said. 

Losing the appeal, which is already dealing with a big spike in its workload, poses big challenges for the AER and OWA.

Lars De Pauw, executive director of the OWA, said if the organization doesn't win the appeal, there will be a "significant increase" in the number of inactive wells needing work as creditors disclaim them. 

"Right now the oil and gas industry has been committed to paying those levies," De Pauw said after the hearing.

"But there is a risk that if this becomes too big of a problem, and they can't do it, and then it comes basically back to the public, which is really what we want to prevent.

"And I think that's what everyone who was on the appeal was trying to prevent as well."

With files from Kyle Bakx