There are many instances of oil-patch assets being sold to small and poorly financed companies that are willing to bet on oil and gas prices rising. But if that doesn’t happen, the new owners don’t have the financial wherewithal to cover the environmental liabilities they have acquired.Rick Wilking/Reuters
"The oil and gas industry is a lucrative and important component of Alberta’s and Canada’s economy. The industry also carries with it certain unavoidable environmental costs and consequences.”
Those are the opening lines of the Supreme Court ruling in the case of Orphan Well Association v. Grant Thornton Ltd., released on Thursday. The words neatly sum up a dilemma facing the industry – and taxpayers.
Private investors enjoy the profits that can be earned from drilling for oil and gas, but not every company in the industry is carrying the full cost of cleaning up decommissioned wells.
What happens when a company tries to do the corporate equivalent of dining and dashing – eating its fill, but disappearing when the bill arrives?
In theory, that’s not supposed to happen. In theory, the oil and gas industry is regulated on the principle of polluter pay, with each company responsible for its environmental costs.
As the court explains, “Alberta has established a comprehensive cradle-to-grave licensing regime that is binding on companies active in the industry. A company will not be granted the licences that it needs to extract, process or transport oil and gas in Alberta unless it assumes end-of-life responsibilities for plugging and capping oil wells to prevent leaks, dismantling surface structures and restoring the surface to its previous condition.”
That’s how it’s supposed to work. But in practice, there are wrinkles in the law and loopholes in the system, and, as a 2018 investigation by The Globe and Mail found, too many players in the oil patch are slipping through them.
The result is privatized profits but socialized losses. Heads, oil and gas investors win; tails, the taxpayer loses.
The case before the Supreme Court was an example of that problem. The question was whether the trustee of a bankrupt oil and gas company should be allowed to pay creditors by selling off corporation assets, while saddling government – the Alberta Energy Regulator (AER) – with its environmental liabilities. The court wisely ruled that bankruptcy law was not meant to be used in this way.
That’s a victory for the polluter-pay principle. But in practice, a bankrupt company may only be able to cover pennies on every dollar of its environmental liabilities. Even the Supreme Court can’t get blood from a stone.
As a result, the court’s decision touches on only part of a larger issue facing the industry – namely, ensuring that taxpayers aren’t stuck with the environmental cleanup costs that are supposed to be borne by well owners. Addressing that is a question for regulators and politicians.
When the corporations behind the wells are going concerns with solid balance sheets, the public is at little risk of being presented with a bill. But this newspaper’s 2018 investigation of the problem of abandoned wells found that, since 2015 in Canada’s three westernmost provinces, at least 140,367 oil and gas wells changed hands. Almost half were transferred to companies with subpar financial status as determined by Alberta’s AER.
“Hustle in the oil patch” was the headline on The Globe investigation, because this isn’t just a case of previously financially sound companies running into trouble. There are many instances of oil-patch assets being sold to small and poorly financed companies that are willing to bet on oil and gas prices rising. But if that doesn’t happen, the new owners don’t have the financial wherewithal to cover the environmental liabilities they have acquired.
That’s privatized profits, socialized losses. And the way the industry is being regulated appears to be encouraging this.
In 2016, the AER toughened its rules, essentially requiring that the value of a company’s assets be at least twice the deemed liabilities upon completion of an acquisition. But the standard has been only loosely enforced. This newspaper found numerous instances of exemptions being granted to financially weak purchasers.
How to fix this? Regulators can insist on the financial viability of well owners. Owners can be forced to pay into a cleanup fund, as is already the case in Alberta, although that fund is significantly under-resourced. Well owners could be asked to post environmental bonds for each well. Regulators have many tools at their disposal.
What is clear is that reforms are needed. As the Supreme Court explained, the system is supposed to be one of polluter pay.