Alternative Policies for Managing the End-of-Life Oil and Gas Liabilities in Alberta

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Oil and gas well assets go through various stages of their life cycles. Different stages include exploration/drilling, production, and end-of-life management. All stages need to be appropriately regulated to balance environmental costs and monetary returns. In particular, the end-of-life management is often an overlooked aspect of resource policies. However, end-of-life liabilities, or the cost associated with plugging wells and reclaiming affected sites, need to be managed properly to protect the Crown, industry, and landowners. This research project puts an emphasis on the financial aspects of the end-of-life management of liabilities. The financial aspect involves setting aside appropriate funds or deposits to abandon and reclaim wells and well sites within a reasonable time period. If appropriate measures are absent, the Crown, the ultimate resource owner, and landowner may bear the environmental costs of resource extraction. To prevent that outcome, the regulator (the Alberta Energy Regulator (AER) in Alberta), imposes a requirement of financial backing for the environmental liabilities that can be used even in the case of bankruptcy or insolvency. Over the last 35 years or so, end-of-life management policies in Alberta have evolved. The current generation of policy was established in 2001. The policy framework relies on two mechanisms, residual values of oil and gas assets and the Orphan Well Association. In Alberta, the AER mandates oil and gas producers to maintain certain residual asset values of oil and gas assets. Those values act as collateral for eventual abandonment and reclamation. If there aren’t sufficient residual asset values for the outstanding environmental liabilities, the industry funded OWA manages the end-of-life liabilities. However, with the recent decline of oil prices and the recent Redwater ruling, those mechanisms are no longer viable. As a result, new policy solutions are required to deal with the end-of-life existing wells and newly drilled wells. In Alberta there is currently anywhere between $611 million to $9.217 billion of irrecoverable environmental liabilities carried by already insolvent or bankrupt producers. Those liabilities come from 160,000 inactive or non-producing wells. This research project examines the following policy options: upfront deposit of financial security; cyclical adjustment to Orphan Fund levy; accelerated abandonment of wells; and public funding with policy reforms. Each policy option is evaluated on five criteria: public benefits; cost to the industry; cost to the crown: private benefit of policy; and, applicability of policy. Based on the assessment, policy solutions are proposed to deal with the end-of-life liabilities of both existing wells and newly drilled wells. The upfront deposit of financial security is the most appropriate solution for newly drilled wells. The solution imposes more financial responsibility for individual producers to cover the end-of-life liabilities. A combination of cyclical adjustments to Orphan Fund levy and public funding should be used to deal with the existing liabilities.
Lim, M. (2018). Alternative Policies for Managing the End-of-Life Oil and Gas Liabilities in Alberta (Unpublished master's project). University of Calgary, Calgary, AB.