Decision on Alberta's RStar pilot expected in the fall, says energy ministry

A vast discrepancy exists between government and industry estimates on well reclamation costs, with the province estimating $18.5 billion a few years ago and industry experts stating it's north of $70 billion.

Decision on Alberta's RStar pilot expected in the fall, says energy ministry
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As a former lobbyist, Alberta Premier Danielle Smith endorsed the RStar program to address thousands of abandoned oil and gas wells across the province.

And as premier, Smith continues to advocate for the program to give tax breaks to energy companies for fulfilling cleanup work.

The provincial government is planning a pilot project to give $100 million in royalty breaks to companies that fulfill their legal obligations to restore old oil and gas wells.

A royalty is a price Alberta charges a company to develop a resource.

But internal analysts have criticized the RStar proposal for violating the polluter pay principle, an incentive for companies not to fulfill their obligations and a reward for those who haven't.

Analysts with Scotiabank said it "has the potential to generate negative public sentiment" toward the industry and "goes against the core capitalist principle that private companies should take full responsibility for the liabilities they willingly accept."

The bank said Canadian Natural Resources, Cenovus Energy, Paramount Resources and Whitecap Resources — whose combined net income nearly surpassed $5 billion in their last quarterly reports — benefit the most from the RStar proposal.

However, Smith defended RStar in mid-February, stating the government shares responsibility for the cleanup.

"There are a lot of practices approved by the government that would not be acceptable today," she said. "We think there's a joint obligation, especially for the wells, because environmental rules changed over time."

Smith said the necessity of RStar exists because previous attempts to address Alberta's 170,000 abandoned and orphaned wells have yet to work. 

She added that it was time to do something different.

Canada's Supreme Court ruled that energy companies must fulfill their environmental obligations before paying back creditors, per the Redwater Decision in 2019.

Okotoks-based Redwater Energy owned a stake in 17 wells producing oil and natural gas and many more inactive wells. At its insolvency in 2015, the company owed ATB Financial over $5 million. 

Its bankruptcy trustee wanted to sell the firm's valuable wells to repay the debt to its bankers and walk away from the non-producing wells — leaving them to Alberta's energy industry-funded Orphan Well Association (OWA) to clean up.

The top court's ruling meant energy companies could pay back creditors before cleaning up old wells, so they could walk away from aging oil and gas wells, leaving them someone else's responsibility.

But they also said energy companies "couldn't walk away from the disowned sites," ruling no inherent conflict existed between federal bankruptcy laws and provincial environmental regulations.

"The problem in Alberta is that we've had no mandatory requirement, no legislation, no policy requiring that wells be cleaned promptly," said land rights lawyer Keith Wilson. He has been raising alarm bells for 25 years, blaming companies for punting cleanup responsibilities down the road.

"Several small companies have been able to fold, by the Alberta Energy Regulator (AER), to take over these liabilities, which has exacerbated the problem," said Wilson. He worries about larger companies selling to smaller companies and what that means for cleanup.

"These bigger companies will package five or six good wells with 200 non-producing liabilities and hand them over to smaller companies. Then, they remove themselves from that liability, and whatever happens, happens."

In 2021, the Alberta Liabilities Disclosure Project (ALDP) analyzed the liability cost to clean up Alberta's oil and gas wells at over $25 billion. Retired wells will only add to the liability over time.

The organization found that Alberta's abandoned well problem would cost taxpayers billions of dollars to reclaim properly. However, a vast discrepancy exists between government and industry estimates, with the province estimating costs around $18.5 billion a few years ago and industry experts stating its north of $70 billion.

SanLing Energy, a Beijing-owned energy company, owed $67 million in security payments to the AER over repeated failures to comply with maintenance and cleanup orders of well sites and infrastructure decommissioning. 

The company harvested over 3,781 BOE (Barrels of Oil Equivalent) daily from Alberta's oil mineral reserves for years, despite not paying landowners, municipal taxes or local vendors for years.

According to the Western Standard, SanLing Energy ceased operations on April 30, 2021, prompting the Orphan Well Association (OWA) to apply to the Court of Queen's Bench to assume control of SanLing's inventory.

The AER said it would orphan the remaining assets to the OWA for closure.

In Stettler, several energy companies also failed to pay over $85,000 in property taxes, forcing its council to write it off in January.

"For oil and gas properties which all avenues of tax collection have been exhausted, a municipality can apply to the province for the provincial education requisition credits and designated industrial requisition credit program for uncollectible property taxes on oil and gas properties," reads a report prepared by Sharon Larsen, a local tax clerk.

Larsen noted Stettler exhausted all routes to recover the unpaid dues in question with all the owing parties either in receivership, bankrupt or "disappeared."

Wolf Coulee Resources Inc., Quattro Exploration and Production, Challenger Development Corp., Canadian Oil and Gas International, Rockbridge Energy Alberta and Aeraden Energy Corp collectively owe the municipality $85,613.64 dating back to 2018. 

More insolvencies, unpaid municipal taxes, and landowner leases left outstanding means less investment in Alberta's staple industry.

Sustaining Alberta's Energy Network (SAEN) claimed in a 2021 interview with The Post Millennial that the Redwater Decision over-empowered the regulatory system, resulting in penalties and delays, primarily targeting small and medium-sized producers and rendering outside investment virtually impossible. 

The concept of RStar is simple: Upon reclaiming an abandoned well and receiving a reclamation certificate, companies earn a future royalty credit based on a well site's liability value, as the Alberta Energy Regulator (AER) predetermined.

When the Alberta NDP formed the government, they implemented the CStar incentive program, resulting in changes to the Modernized Royalty Framework (MRF) to encourage investment in Alberta.

The CStar incentive program is an existing program that an RStar credit would dovetail onto, making RStar easy to implement and redeem with established regulatory oversight already in place.

Otherwise known as the Drilling and Completion Cost Allowance program, CStar consummates average industry drilling and completion costs and acts as a proxy for well costs. It determines the allowable revenue after which individual well sites pay higher royalty rates (post-payout). 

For example, an energy company accessing the program would pay a flat 5% royalty on a well's early production until the well's total revenue from all hydrocarbon products equals CStar. 

Afterwards, the company would pay higher royalty rates depending on the resource and market prices. They drop to match declining production rates when the well reaches a Maturity Threshold.

Harmonizing the royalty structures reduces exploration risk, enabling producers to assess the highest value development opportunities based on market forces without worrying about how the royalty framework will characterize the well's products or productivity. 

A company that reduces its drilling and completion costs below the industry average will benefit from lower royalty rates, as CStar reflects average industry costs. This provides an incentive for companies to innovate to reduce their costs.

SAEN suggested giving RStar credits for cleaning up Alberta's liabilities to improve the economics of drilling new wells in Alberta.

"Alberta, as a province, owns over 80 percent of the mineral rights. This gives Alberta a unique opportunity to attract investment by offering reduced royalties on new production," said SAEN. "Investors can recapture their investments quicker, and Alberta's government can use the reduced royalty rate on new energy production to stimulate capital investment in Alberta."

Formerly called the RStar Job Creation program is a "made-in-Alberta program" designed to incentivize decommissioning oil and gas liabilities while encouraging capital investment into Alberta's energy sector by providing a reduced royalty when drilling a new well.

According to SAEN, Alberta's $20 billion liability problem could become a $20 billion investment opportunity. 

"We have created and presented a new innovative program to Alberta's government. It will address Alberta's well-noted environmental liability while improving conditions for investors to invest their money in the Western Canadian Conventional Basin through reclaiming abandoned wells," said the organization in 2021.

According to the organization, they claim their approach would result in $76 billion in new economic activity and honour the principle of polluter pay, resulting in another job boom that could create as many as 366,000 new ‘high-paying’ jobs in Alberta. 

Brad Herald, vice-president of the Canadian Association of Petroleum Producers, said RStar could be part of a "dramatic acceleration" in the well cleanup. He said governments are already playing a role.

"We look forward to the consultation process with the Alberta government on their proposed Liability Management Incentive Program and will work to ensure the momentum built in the reclamation of legacy sites in Alberta continues," said Herald.

"Under the right circumstances and programs, the industry can clean up its liabilities without killing investment into our sector."

Since Smith became premier, she has prioritized RStar, penning it into Energy Minister Peter Guthrie's mandate letter.

Smith and her cabinet have openly advocated the plan, enabling companies to use reclamation spending to gain credits against future royalty payments, despite that reclamation being a condition of their original drilling license.

"I love it," said Smith on a 2021 YouTube broadcast as a lobbyist for the Alberta Enterprise Group. She also wrote a supportive letter that July as group president to then-energy minister Sonya Savage.

Guthrie spoke of its importance at the Legislature in 2021, addressing the "price volatility" that wreaked havoc on the industry. 

"Oil demand will be strong in the decades to come, and we need to look to the future to create a policy that supports companies to maintain strong ESG track records while upholding a competitive investment environment," he said.

The initial RStar program earned considerable praise in 2021 from then MLAs, now Ministers Peter Guthrie and Jeremy Nixon, who championed it for the industry. 

"This is an Alberta-made solution that will drive development in site rehabilitation," said Nixon. "Alberta is a leader in environmental stewardship and technological development, and R* builds on that legacy and the entrepreneurial spirit of Albertans."

"Rather than using a heavy hand to force reclamation, R* incentivizes companies to clean up sites while strengthening their balance sheets and provides the opportunity to grow organically," added Guthrie. 

He claims RStar provides credits that can only be redeemed in Alberta, which procures an economic benefit to the province and "good-paying jobs" for Albertans.

As of February, Guthrie continues to meet with landowner groups to discuss the project.

"Consultations are ongoing and will take several months to complete. We won't prejudge the consultation and analysis process, so we anticipate a decision next fall," said Energy spokesperson Gabrielle Symbalisty in a written statement to Rebel News.

"The Minister of Energy is meeting with landowners, Indigenous groups, municipalities, and industry to design a Liability Management Incentive Pilot program, after which the cabinet and government caucus will consider the feedback provided and make a final decision on whether and how to proceed." 

Symbalisty added that the pilot remains in its consultation and design phase, so different ideas are tossed around, "but none of them are final."

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