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The damage control from Alberta’s oilpatch watchdog is nonsensical

By Regan Boychuk

The Alberta Energy Regulator efforts at damage control this week are nonsensical.

It’s difficult to overstate the consequences of the predicament that the regulator – assumed to guard the public interest, but long since captured to serve industry – has plunged the province.

For months its top experts have known that the financial liabilities accumulated by the oilpatch are staggering figures that are far higher than any the industry and government have told the public.

While industry has pocketed hundreds of billions in profits from public resources, complicit regulators have enabled $260 billion in unfunded cleanup to accumulate, as National Observer, Global News and the Toronto Star reported this week. Most of these liabilities have been kept off the balance sheets of government and industry.

After National Observer obtained these estimates and sought explanations from the regulator, it stalled for days, as its spin doctors tried to come up with explanations to downplay the financial catastrophe on the horizon.

Once they could no longer keep the numbers secret, they made a comical apology that suggested their top executive in charge of the file, vice president of closure and liability Robert Wadsworth, had made a mistake by telling people about their internal estimates during a private presentation that was prepared in advance with a slide show and speaking notes.

Were they apologizing because Wadsworth had dared to challenge the industry and embarrass the oilpatch?

Of course, it’s also worth noting that his presentation mentioned several times that the AER’s internal $260 billion estimate was likely lower than the actual liabilities that are hanging over Albertan and Canadian taxpayers.

At the heart of the problem is a regulatory system that Wadsworth admitted was “flawed.”

The AER will soon tweak rules governing the cleanup of aging and expired oilfield infrastructure. But the changes were developed in close collaboration with industry and will almost certainly fail to address the true scale, urgency or cost of the crisis.

Before the provincial election this spring, Albertans must get informed and get engaged if there is to be any chance of making the polluter pay and avoiding the worst consequences of the mighty oilpatch’s capture of Alberta energy regulators.

The starkest example is the scandalous mismanagement of aging and expired oilfield infrastructure and the accumulation of $260 billion in cleanup liabilities while hiding the true amount from the public.

Shocking scale of unreported liabilities

It puts the scale of off-balance sheet liabilities on a shocking level.

Liabilities not recorded on a company’s balance sheet are hidden from investors and lenders. Such hidden liabilities can become a significant concern when trying to assess a firm’s financial health.

This scale of unaccounted for liability also has the potential to seriously affect the province’s credit rating.

A screenshot from a private presentation delivered by Alberta Energy Regulator vice-president Robert Wadsworth in Calgary on Feb. 28, 2018 outlining the financial liabilities in the province’s oilpatch. Image from AER presentation

Regulators have failed to impose meaningful cleanup deadlines. Another central reason that industry has failed to fulfill a legal obligation to return sites to near their original state is this: accountants simply make the problem disappear.

Accountants do so in three ways. First, they begin with absurdly low estimates of the actual cost of reclamation.

Then, the schedule of payments necessary to fund cleanup is drawn far into the future with unrealistically long well lives.

Finally, the underestimated costs are discounted over too many years to arrive at the “net present value” that is recorded on a company’s balance sheet.

The result leaves fractions of a penny on the dollar of the actual cleanup costs on today’s books.

These accounting games mislead investors and lenders about the actual financial risks and allow insolvent companies to continue looting the dregs of our resources and postponing desperately needed cleanup until executives and investors escape into the unaccountability of bankruptcy.

Status of oil and gas wells in Alberta (January 1999 to May 2017) adapted from C.D. Howe Institute graph in the report “All’s well that ends well: Addressing end-of-life liabilities for oil and gas wells, September 2017.” Image by Regan Boychuk

The province currently holds a mere 0.6 per cent of the internally estimated $260 billion in cleanup costs as security deposits, leaving the Alberta public at severe risk of inheriting tens or even hundreds of billions in environmental liabilities from an industry with an uncertain future.

The bitumen and coal mining liabilities managed under the AER’s Mining Financial Security Program (MFSP) are publicly reported as $27.8 billion, while the regulator privately estimates reclamation will cost $130 billion.

The crude oil, natural gas, and in-situ oilsands liabilities managed under the AER’s Licensee Liability Rating (LLR) program are publicly reported as $30.2 billion, while the regulator privately estimates reclamation will cost another $100 billion.

This makes a mockery of what the Canadian Association of Petroleum Producers told the last royalty review: “The LLR Program protects industry, and industry protects the public.”

The days of hiding this crisis are over

The truth is that the LLR program protects industry from having to pay even tiny deposits on multi-billion-dollar cleanup costs. How is industry protecting the public?

The cleanup of hundreds of thousands of kilometres of pipeline has never been a part of a regulatory program in Alberta, so the liabilities are not accounted for on company balance sheets, and regulators hold no security for them. The internal AER estimate pegs the pipeline price tag at $30 billion.

The low-ball liabilities publicly reported under the MFSP are supplied by industry without verification by the regulator. And almost all oil and gas producers use the public LLR numbers, shown to be gross underestimates, to state cleanup costs.

What’s more, a case currently before the Supreme Court of Canada could effectively render polluters and their bankers immune from the environmental consequences of their profit. This is the RedWater Energy case in which lower courts in Alberta accepted an extreme interpretation of bankruptcy law that allows bankrupt companies to disown liabilities, dealing a huge blow to regulators’ ability to force polluters to clean up their mess.
The days of hiding this crisis under a rug are over.
Absent dramatic reforms, the Alberta public could inherit hundreds of billions in environmental liabilities while industry and their enablers escape with their pockets stuffed full of profit from our natural resources.

The AER’s response to the National Observer story is troubling.

Wadsworth is the senior-most official responsible for these issues; the new internal estimate was the product of AER subject matter experts; and his presentation and notes would have been approved by the AER before he could present them.

The presentation cannot be dismissed as some unfortunate slip of the tongue.

Who will ultimately pay for the cleanup is a huge concern, but not the main issue. The main issue is cleanup will cost at least $200 billion more than previously admitted.

And, as the AER recognized internally, even that is an underestimate.

There was less than 1/30th of the old estimate held as security and now there is barely more than 1/200th held by the regulator.

Where is industry going to get an extra quarter trillion dollars? We should be very worried about that, even if our captured energy regulator isn’t.

This article also appears on Canada’s National Observer website

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2018-11-08T00:04:35+00:00