Alberta’s oil cleanup program: A cautionary tale for investors and regulators

By Mike Toulch, SHARE and Sharmeen Contractor, Oxfam America

In April 2020, the Government of Canada launched a $1.7 billion fund to clean up abandoned and inactive wells to reduce greenhouse gas (GHG) emissions and create jobs, as part of its emergency response to the COVID-19 pandemic.

Alberta received the majority of the funding – roughly $1 billion – and immediately established the Site Rehabilitation Program (SRP) to administer the funds. Oxfam Canada and the Parkland Institute evaluated Alberta’s roll-out of the program in their report “Not Well Spent” and observed issues with effectiveness, inclusion, and transparency, which should concern investors and policymakers. Some of the report’s findings include:

• The SRP appears to be a bailout for the oil and gas industry. At the time of the report’s publication, $800 million had been disbursed and more than half ($500 million) was allocated to 15 large oil and gas companies, relieving their environmental liabilities and in direct violation of the ‘polluter pays’ principle.
• The effectiveness of the program to achieve emissions reductions was questionable and went unmeasured. Environmental risks did not appear to be a priority in site selection, even though these wells are a significant source of methane emissions.
• Jobs created are non-permanent and in predominantly non-unionized companies. Though Alberta made many publicized attempts to include Indigenous participation, efforts fell short of expectations; Indigenous company participation was significantly low compared to non-Indigenous companies.
• Lack of transparency makes it challenging to assess how funds are spent. Information related to number of sites completed, locations of sites approved for grants, GHG emissions reductions, job creation, and community engagement, especially Indigenous participation is not readily available.

While the federal government was quick to hand out money during the COVID-19 emergency, similar bailouts are unlikely to be a viable long-term option, as they circumvent the ‘polluter pays’ principle and foist private costs on the public. Moreover, the  program’s minimal effectiveness and public dissatisfaction with the outcome makes it unlikely that further, larger or future cleanup programs will garner much public support.

Un-reclaimed wells present investment risks

Canada has committed to reduce its GHG emissions by 40-45% below 2005 levels by 2030. Investors with exposure to Canadian oil and gas producers and other companies servicing the sector in Canada should pay close attention. The year 2020 was marked as one of the largest asset write-downs to date for oil and gas companies, including in Canada, part of which can be attributed to growing concerns about climate change. Canadian fossil fuel producers continue to face lower demand, higher regulatory scrutiny around environmental impacts, and more competition from renewable sources.

More asset write-downs are likely as countries increase their climate commitment levels during COP26 this November. In addition, as pressure mounts on banks to decrease the carbon associated with their lending portfolios, the cost of obtaining finance could go up, increasing oil and gas companies’ debt servicing costs. Further, in the event of bankruptcy, Canadian firms can no longer evade environmental liabilities as the 2019 Supreme Court of Canada decision in Orphan Well Association et al. v. Redwater Energy Corporation demonstrates.

As the fallout of COVID-19 continues to curb fossil fuel demand, and the looming threat of climate change forces governments to accelerate the energy transition, Canada’s energy sector is likely to experience greater consolidation, less access to capital and an upswing in bankruptcies among small and mid-sized operators.

Factoring in the recent Redwater decision and the size of the potential costs associated with these well cleanups, it appears that the financial risks associated with reclamation liabilities, which the oil and gas sector and its investors had assumed would materialize well into the future, may be coming due faster than anyone had anticipated let alone planned for.

Just Transition – Opportunity for a ‘reclamation boom’

To reduce risk of exposure to un-reclaimed wells, investors must urge policy makers to learn from the SRP to ensure that future programs are properly developed and implemented. Firstly, investors should insist that the environmental benefits of funding should be represented in program design and performance measures with GHG emissions reductions must be prioritized, measured, and tracked. Wells should be prioritized for cleanup based on the environmental risks they pose.

Most importantly, any economic recovery should uphold the ‘polluter pays’ principle. While designing such programs, close attention should be paid to ensure that the problem is being addressed and that industry is held accountable. Any regulation must ensure that cleanup liabilities are accounted for on the balance sheets of companies and that these companies have adequate funding to cover cleanup costs. This will be immensely beneficial, especially in case of bankruptcy proceedings.

To provide information useful to investors, cleanup programs that are funded by the government should have minimum level of transparency and reporting requirements. For instance, this can include information about quality and type of jobs benefited, data about sites nominated versus those completed, recovery of unpaid taxes from sites, etc. Measuring GHG emissions pre- and post-cleanup should be a cornerstone of any such program. To address unequal power dynamics between industry, landowners, workers, and communities where oil and gas activities are taking place, relevant data should be publicly available, which will be useful for ensuring that companies do not lose their social license to operate.

It is in investors’ long-term interest if climate justice is a foundation of any recovery program. Well reclamation presents a unique opportunity to stimulate economic activity; recent estimates suggest that well reclamation can create over 10,000 full-time jobs that would require minimal to no skills re-training or relocation, and nearly $2 billion in contribution to Alberta’s GDP every year for the next 25 years. Cleanup programs must include constructive strategies to restore Indigenous sovereignty, correct socio-economic inequalities, protect workers, and promote direct involvement of affected communities in all stages of site cleanup and remediation.

Ultimately, if done well, oil and gas cleanup programs are not only environmental necessities but represent important economic and social opportunities and minimize investment risks.

• The SRP appears to be a bailout for the oil and gas industry. At the time of the report’s publication, $800 million had been disbursed and more than half ($500 million) was allocated to 15 large oil and gas companies, relieving their environmental liabilities and in direct violation of the ‘polluter pays’ principle.
• The effectiveness of the program to achieve emissions reductions was questionable and went unmeasured. Environmental risks did not appear to be a priority in site selection, even though these wells are a significant source of methane emissions.
• Jobs created are non-permanent and in predominantly non-unionized companies. Though Alberta made many publicized attempts to include Indigenous participation, efforts fell short of expectations; Indigenous company participation was significantly low compared to non-Indigenous companies.