Budget watchdog estimates orphaned oil wells cleanup could cost $1.1B by 2025
Canada’s orphaned oil wells problem is going from bad to worse, and a new report estimates the cost of cleaning them up could rise to $1.1 billion by 2025, posing a threat to government balance sheets.
In a report released Tuesday, the Parliamentary Budget Officer (PBO) forecasted the cost to clean up oil wells abandoned by energy producers across Canada over the next three years. The newly projected figure is up from $361 million in 2020.
Oil and natural gas producers are required to decommission inactive well sites, but if the operator becomes insolvent or bankrupt, the well is abandoned and considered “orphaned” – and it’s a growing problem in the oil-rich provinces of Alberta and Saskatchewan.
Ninety-one per cent of onshore conventional oil and gas production in Canada takes place in those two provinces, according to the report. Only 35 per cent of wells in Alberta and 39 per cent of wells in Saskatchewan are active, the lowest share ever.
“The growing inventory of orphan, inactive, and plugged wells constitutes a fiscal risk due to the rising costs associated with clean-up, insufficient amounts of security being held to cover closure expenses, and a growing number of companies with a lack of financial capacity to meet closure obligations,” the report said.
As part of its COVID-19 Economic Response, the federal government allocated $1.7 billion to Alberta, Saskatchewan and British Columbia to help fund orphan well cleanups – which is in excess of the PBO’s cost estimate.
Regulators have also implemented a new “polluter pays” program, where oil and gas companies must pay a security deposit before drilling a new well to cover some of the liability associated with the cleanup.
But the report noted the security deposits collected by Alberta as of October 2021 totaled $237 million and the estimated cost cleanup was pegged at $415 million for that year – a gap of $178 million.
Furthermore, the report noted there’s evidence that the Alberta government gave portions of the money set aside to firms that the PBO considers financially viable. The report warned if this continues, there’s a risk that government coffers could come up short for cleanup costs.
As of 2020, there were a combined 17,500 orphaned and abandoned wells in Alberta and Saskatchewan.