Alberta’s orphan well crisis
The province is seeing a sharp rise in the number of inactive wells without operators, and the problem will be expensive to fix
Alberta has come in for criticism from the media and environmental activists for the large and rising number of inactive oil and gas wells in the province. The problem, in conjunction with a significant uptick in bankruptcies and insolvencies among oil and gas companies, is swelling the number of inactive orphan wells—ones with no company to cover clean-up costs.
Despite plans by the provincial government to change the regulatory regime for inactive and orphan wells, it appears that significant federal and provincial money will be required for decommissioning and reclamation. The province’s already weakened oil and gas industry is being hit significantly harder than most by the recent oil price war and demand destruction caused by Covid-19.
There are 94,000 inactive oil and gas wells in Alberta, amounting to roughly a fifth of all wells drilled in the province and an increase of 11,000 since economic problems began in late 2014. Alberta had 2,983 inactive orphan wells as of 15 April compared with a mere 74 in March 2013, according to the province’s Orphan Well Association (OWA), which is responsible for the clean-up of such wells.
Estimates of the cost of decommissioning all of Alberta’s active and inactive wells and remediating their sites vary, but they dwarf the amount of money companies have provided as deposits to the province and the financial resources available to the OWA. The Alberta Energy Regulator (AER) has estimated the clean-up cost at C$31bn (US$22bn), with inactive wells accounting for roughly a third of the total. In a 2018 presentation, Robert Wadsworth, vice president of closure and liability at the AER, provided a C$100bn figure under a worst-case scenario.
In contrast, the annual contribution of Alberta’s solvent oil and gas companies to the orphan well levy—which finances the decommissioning and remediation work carried out by the OWA—is only C$60mn, while the provincial government has collected a paltry C$220mn in deposits to cover the cost of such work.
In early January, Alberta energy minister Sonya Savage said her government, under the guidance of the AER, was considering “an entire suite of policies” to deal with the issue of inactive oil and gas wells, with an announcement to be made before the end of March. There has been no announcement to date, while public comments she has since made suggest the changes may be too timid to have a significant impact.
Savage has said she is not in favour of strict timelines for inactive well closures, one of the two most important policies for dealing with this issue in other jurisdictions. The other key policy, that of taking sizeable deposits before drilling, is also unlikely to be supported given the precarious state of Alberta’s industry.
94,000 – Alberta’s inactive oil and gas wells
Alberta requested funding from the federal government in late November to help deal with the province’s growing orphan well issue and to bolster activity in its oil and gas services sector. The provincial government did not request a specific amount of cash, but the Petroleum Services Association of Canada (PSAC) at the time suggested the creation of a resource environmental tax credit for energy companies that could potentially raise C$700mn over three years and decommission 7,000 orphan wells.
It would not be unprecedented for the federal government to grant such a request, having provided a C$30mn grant in May 2017 to allow Alberta to make a C$235mn interest-free loan to the OWA to accelerate clean-up work. In late February, the Alberta government announced an additional C$100mn loan to the OWA, while premier Jason Kenney is hoping the federal government will provide the OWA with a substantial new grant as part of a massive support programme reported to be in the works for Canada’s beleaguered oil and gas industry.