The most recent severe downturn in oil prices is now forcing Canada’s oil patch to slash current capital spending plans. It is also raising the spectre of longer term solvency for operators with weaker balance sheets, which once again brings the question of reclamation liabilities to the fore.
What happens, in the event of insolvency, to unreclaimed wellsites, tailings ponds, and other lands affected by oil exploration? Canadian courts have recently helped answer that question, placing environmental reclamation claims ahead of other creditors in insolvency proceedings, but what happens if resolving those claims is beyond the financial capacity of even those mechanisms?
That’s what we would face if even a single major oil sands miner were ever to go belly up. And while majors have stronger balance sheets than most, it’s not an unreasonable question to ask when major oil sands firms lose more than half their share value, as they have in recent days.
Since oil sands mining operations first began in the 1960s, the lack of fluid tailings treatment has been recognized as one of the biggest challenges in the industry. Tailings pose ongoing environmental and social impact concerns including waste seepage, harmful emissions, and impacts on Aboriginal and treaty rights.
In the last decade alone, the ponds have nearly doubled from 732 billion liters in 2008 to 1.3 trillion liters in 2019, a globally unprecedented volume for any mining industry.
Under current government legislation, land used for oil sands mining must be returned back to its condition prior to development, or “equivalent land capability.” Even with technological improvements, only 0.1% of land disturbed by oil sands mining has been certified as reclaimed.
The uncertainty around oil sands tailings reclamation creates regulatory, reputational, and litigation risks. For investors and other stakeholders, the biggest unanswered question is how reclamation obligations will be met – and by whom?
Canada’s oil sands tailings reclamation: an unfunded liability? is a new investor brief from SHARE that looks at the large gap between regulatory and corporate liability costs estimates, coupled with soft discussion regarding risks in company filings, which together suggest that oil sands companies and investors have not properly considered the full costs and the evolving nature of the risks associated with tailings pond reclamation.
The gap that concerns us? Regulatory estimates suggest that financial liabilities for oil sands mining could be as high as $130 billion, while companies’ calculations of their own mining liabilities add up to only $28 billion.
Regardless of the actual book value of these liabilities, estimates at both ends of the range are large enough to have material implications for a company’s balance sheet, should they ever be internalized, or forced into play by insolvency.
For a going concern, reclamation liabilities have the potential to significantly impact expenditures, the value of assets, access to capital, and the overall financial condition of a company, yet they are not sufficiently understood or reported.
And, while corporate balance sheets could not individually sustain those costs if forced to bear them, public finances will fare no better if a company goes belly up. The Alberta government currently only holds approximately $1.6 billion in liability security from oil sands companies through its Mine Finance Security Program, leaving the vast majority of reclamation costs hanging in the balance.
So how do we square this circle? Addressing the looming tailings liability will require both public policy approaches and a different approach to assessing long-term liabilities.
The issue is that we systematically undervalue long-term liabilities, often relying on vague reassurances that some kind of future technologies will protect us.
What we need on the investor side is a) better valuation methodologies that address systemic risks and cascading or co-dependent risks, and b) engagement on real solutions to the tailings problem with shorter-term milestones.
What we need on the public policy side are better regulations that assign responsibility for those risks on those that should be accounting for them, and set clear and precise targets for tailings treatment, as well as realistic timelines.
And here’s another idea: as long as we’re talking about using Canadian tax dollars to shore up the industry during this period, what about tying corporate financing to employ oil workers on reclamation projects during the downturn?
Learn more about our work with companies in sectors that are most vulnerable to water risks or whose operations can have serious impacts on water quality and availability here.