Inside look at Alberta officials’ preparations for ‘landslide’ of orphan wells

The Flesher’s property, located about an hour’s drive southwest of Edmonton in Alberta, has typical terrain for the area with small hills and valleys populated by boreal pines and numerous pump jacks. Their property is home to 14 wells, 10 of which have been abandoned over time. The family relied on the income generated by the wells, which functioned as an off-farm job and helped subsidize their farming and purchase machinery. However, as the oil and gas industry changed, the wells were sold multiple times, resulting in their abandonment and leaving the Fleshers unable to use the space as it is still under lease.

The Fleshers’ situation is not unique, as thousands of landowners in Alberta are affected by struggling and failing oil and gas companies. The Alberta Energy Regulator has expressed concerns about the problem, but they do not have a clear understanding of its scope or the cost of cleaning up old wells. The Orphan Well Association is currently managing almost 13,000 abandoned oil and gas assets, including pipelines, well pads, and wells, left behind by bankrupt companies. There are also nearly 75,000 inactive wells, some of which have been dormant for decades and are not compliant with current regulations. Alberta has a well on every 1.4 square kilometers of land, with hundreds of thousands of them in total.

The regulator predicted a potential 480% increase in orphan wells and has been attempting to address the problem, but critics doubt their reforms will solve it. Many believe the root of the problem lies in the regulator’s failure to collect sufficient funds from companies to cover the costs of cleaning up their messes. Large companies often sell wells to smaller ones with insufficient resources to handle reclamation, exacerbating the problem.

A gradual and slow-moving landslide

In 2019, the Alberta Energy Regulator was concerned about the impact of a price crash and economic downturn on the oil and gas industry. It identified “policy and regulatory gaps” in its management of companies’ responsibility to clean up old wells, and warned of a “slow-motion landslide of licensee failures” that could overwhelm the industry-funded Orphan Well Association (OWA). The regulator shared its analysis with officials from two ministries, Alberta Energy and Alberta Environment. Internal documents warned that if current market conditions persisted, the known failures could increase the OWA inventory by up to 160% within 12-24 months, potentially resulting in a 480% increase if more companies failed. This would have taken the number of wells in the OWA inventory from 9,703 to over 56,000. The regulator had only $224 million worth of security on hand, less than 1% of the estimated $30.2 billion in liabilities, and expressed concern that collecting more money from companies could push them further into financial distress. The lack of security meant that many of the abandoned wells would be left to the OWA. However, the regulator was also worried about non-orphaned wells.

Oil was never produced from 80% of the wells that have been reclaimed

According to internal documents, most of the cleaned-up wells had never produced oil or gas, which skewed the cleanup work’s complexity and expenses. The regulator’s calculations indicate that 80% of reclaimed wells and 44% of abandoned wells had never produced oil or gas, leaving behind a considerable number of difficult and costly sites. As a result, the regulator could not accurately estimate the true liability costs, which could be 2.5 times higher than its calculations. Furthermore, contaminated sites pose a significant threat to landowners, with many wells still leaking contamination into the land and air, and groundwater contamination potentially taking decades to remediate. The regulator was aware of at least 577 contaminated sites in 2019, with as many as 400 of them classified as “potentially high risk.” Despite the regulator’s claims of proactively identifying potential issues and developing timely solutions, it acknowledged that the regulatory regime was not adequately equipped to manage the industry’s environmental and health risks. While the worst-case scenario for orphan wells has not occurred, the regulatory regime’s limitations could pose significant challenges without significant changes.

A series of alterations

After internal conversations at the Alberta Energy Regulator, changes have been made to the system that oversees the reporting of cleanup costs and securities payments by companies. In 2020, the government passed a new liability management framework, which provides the regulator with greater flexibility to manage well cleanups. The new system uses a more comprehensive assessment of the financial health of companies and allows for proactive action if there are signs of financial distress. Additionally, there is an inventory-reduction program that mandates a minimum spending for cleanup and allows landowners to nominate old sites for prioritization. The Orphan Well Association has also been given new powers to manage sites, sell or operate assets, and appoint receivers.

While much of this work is still in progress, the first four components are well underway. However, the implementation of a mechanism to address older legacy sites that were reclaimed or plugged before current rules came into play has yet to begin, as the regulator is waiting for policy direction from the government. These legacy sites do not have owners and are not covered by any industry or government funding. Emergency work is covered by a fee the regulator levies on industry.

Recent data shows that the industry spent 40% more on cleanups in 2022 than the minimum required amount, for a total of $600 million, excluding any funds spent as part of the federal government’s pandemic relief package. However, the regulator has no information on how that money was spent or whether it went towards addressing older and more costly sites. Final results from data analysis are expected later this year.

Changes to licence transfers have also increased the amount of security collected through that process from $389,000 in 2020 to over $11 million in 2022. Under the regulator’s new inventory-reduction program, the oil and gas industry is required to spend $700 million on cleanup activities in Alberta in 2023, up from $422 million in 2022.

Completely fallen apart”: Critic’s assessment

Drew Yewchuk, a public-interest lawyer specializing in liabilities and who analyzed the documents obtained through the freedom of information request, doubts the Alberta Energy Regulator’s capacity to address the escalating concerns about abandoned wells. According to him, the regulator was aware that the system had entirely fallen apart, but has done little to fix it. Yewchuk believes that the new system for evaluating a company’s financial health is too intricate to be effective and that the spending requirements for cleanup activities are based on the regulator’s flawed assessments of province-wide liabilities. He also notes that companies in financial distress are given lower spending requirements, which he considers problematic. In his opinion, companies that cannot afford their cleanup expenses should not be protected, and the regulator should have pushed them into bankruptcy. Yewchuk claims that the regulator is playing a shell game, allowing financially unstable companies to obtain licenses, which delays the problem of abandoned wells. He believes that the Alberta Energy Regulator is controlled by the industry and that it should be split into separate organizations responsible for approvals, monitoring, and hearings. The nomination program allowing landowners to request cleanup of old sites is a positive development, but Yewchuk cautions that it is too early to evaluate its efficacy.

Alberta Government hails an “incredible” cleanup

According to the Alberta government, significant strides have been made in addressing the issue of inactive and orphaned wells, with the implementation of a new liability framework and $1 billion in federal funding for cleanup efforts. Alberta Energy Minister Peter Guthrie praised the progress made in this area, stating that it will continue to be a top priority in the coming years. However, the minister also acknowledged that concerns remain, particularly regarding the timely cleanup of sites, collecting security, and effective monitoring and inspections, which were highlighted in a recent auditor general’s report. The government is currently seeking public input on a pilot program that could provide tax credits to companies that tackle older inactive wells, with details to be provided in the fall. The lack of specific timelines for well cleanup in Alberta has also been a source of criticism, with advocates calling for such guidelines to be put in place, as is the case in several U.S. states.

Resource Extraction and Abandonment

Bill and Sylvia, who own land with oil and gas wells, are not against the industry but want accountability for those who have abandoned wells. Some wells on their property have been reclaimed, but they don’t think enough is being done to address past mistakes. Their neighbor Hansen is frustrated with the problem of orphaned wells, especially with small companies owned by overseas interests who take what they can and leave the government to deal with the problem.