Orphan wells (Alberta)
Orphan wells refers to well sites that have been permanently taken out of production that do not have any party legally or financially responsible to deal with decommissioning and reclamation obligations. The Orphan Wells Associated reported that, as of May 1, 2020, there were "2963 orphan wells for abandonment, 297 orphan facilities for decommissioning, 3781 orphan pipeline segments for abandonment, 3116 orphan sites for reclamation, and 939 orphan reclaimed sites." By February 2018, there were 1,800 orphan wells that had been licensed by Alberta Energy Regulator with combined liabilities of over $110 million. Oil and gas industry companies have asset retirement obligations, a legal obligation associated with the retirement of its operations. According to the National Observer, by January 2019, there were about "80,000 inactive wells around Alberta". According to a 2018 collaborative investigation by journalists from major media outlets and universities, entitled The Price of Oil, the clean up cost for "oilsands mining operations facilities" is about $130 billion. The Orphan Wells Associated reported that, as of May 1, 2020, there were "2963 orphan wells for abandonment, 297 orphan facilities for decommissioning, 3781 orphan pipeline segments for abandonment, 3116 orphan sites for reclamation, and 939 orphan reclaimed sites."
Inventory
By February, 2018, there were 1,800 abandoned or orphan wells—sites that had been licensed by AER with combined liabilities of over $110 million. In their 2017 annual report, the OWA anticipated an increase in orphan properties as nearly 30 companies regulated by AER were insolvent. The number of wells which have been plugged but not remedied is 1062.A December 28, 2019 Financial Post article said that the OWA had about 3,406 orphan wells on their "clean-up list".
The Post described "geriatric orphan wells" or "bottom dwellers"—wells that were built before the 1960s when environmental standards were not as demanding. These rusted—and in some cases—leaking wells, are more "likely to contaminate the ground." They are also more complex, time-intensive and costly to remediate. According to the Post, "farmers, ranchers and their lawyers" are concerned that an "additional 93,805 inactive wells could become orphaned given Alberta's economic outlook." There were "still more than 15,000 wells drilled before 1964 that have not been remediated."
As of May 1, 2020, there were "2963 orphan wells for abandonment, 297 orphan facilities for decommissioning, 3781 orphan pipeline segments for abandonment, 3116 orphan sites for reclamation, and 939 orphan reclaimed sites."
Economic costs of orphan wells
At the current level of the orphan well inventory, the cost of well abandonment and reclamation is expected to be around $611 million. This is based on the estimation from the OWA's annual report. The cost of abandonment and remediation per well can be estimated from reviewing the OWA's annual report; those costs are estimated to be $61,000 and $20,000 per well respectively. In 2013, the cost of cleaning up after Alberta's oil and gas industry was estimated by the AER to be as high as $260 billion.However, this estimate of $611 million does not include potential orphan wells. In this context, potential candidates include wells owned by financially insolvent firms and nearly insolvent firms. The recent CD Howe report estimates that the social cost of orphan wells, including the one incurred by financially insolvent firms, can be upwards of $8.6 billion.
From 2014 to 2018 the industry-led organization's Orphan Well Association's inventory increased from 1,200 to over 3,700. According to the C. D. Howe Institute, from 2012 to 2017, the increase in insolvencies has led to an increase in the number of orphan wells from 100 to 3,200. In 2017 there were 450,000 wells registered in Alberta with about 155,000 "no longer producing but not yet fully remediated". In their 2017 report, the C.D. Howe Institute estimated the cost of clean up of orphan wells was as high as $8 billion.
Environmental Impacts of Orphan Wells
Gas contamination from both active and orphaned wells, particularly hydrogen sulfide and methane, is increasingly attracting attention from Alberta government and the public. In addition to fugitive gas emissions, shallow aquifers can also be contaminated by gas, causing very serious issues. Groundwater contamination can be caused by casing leaks, of which orphaned wells are susceptible. However, because orphaned well-induced groundwater contamination is not reported annually, statistical data is not available for now. In comparison, gas emissions are more easily monitored and tracked by operators. Despite the lack of groundwater contamination data, gas emission data collected by Alberta Energy Regulator from oil and gas industry may potentially reflect areas of groundwater contamination.and Gas Migration are two commonly recognized gas contamination mechanisms. SCVF is defined as the flow of gas and/or liquid along the surface casing/casing annulus. GM is defined as a flow of gas that is detectable at the outer surface of the outermost casing string usually occurring at very shallow reservoir layers. According to recent statistics from the Alberta Energy Regulator, a total of 617 billion m3 of methane was released into atmosphere through venting and flaring in Alberta during 2016, which has been constantly decreasing since 2012. Among the total emitted gas, 81 million m3 originated from 9,972 unrepaired wells by GM and SCVF. Historically, there are 18,829 repaired and unrepaired wells reported with SCVF, GM, or both in Alberta, with 7.0% of them being inactive. Wells with reported gas migration issues within Alberta are shown by Bachu in 2017. Most of the thermal wells are orphaned oil/gas wells. A study from the International Journal of Greenhouse Gas Control concluded that gas migration mainly occurs within the central-northeastern part of the province, focusing around the Edmonton, Cold Lake, and Lloydminster areas. This observation is in agreement with the total gas flaring and venting conditions reported by the Alberta Energy Regulator.
According to recent studies, the primary factors that should be considered in the evaluation of gas emissions from oil and gas wells are: , drilling orientation, geological conditions, well age, and reservoir depth.
Alberta Energy Regulator
On July 14, 2016 the Alberta Energy Regulator – following consultations with "consultations with First Nations, local communities, environmental groups and industry itself" – issued Directive 85 with new guidelines and a phased-in approach on oil sands producers' management of their tailings ponds. Under Directive 85 "fluid tailings" must be "ready to reclaim" within ten years of the closing of an oil sands mine.An April 5, 2017 article in the Financial Post reported that the AER was "suing insolvent" Lexin Resources Ltd., a "relatively small natural gas producer in southern Alberta" to "recover money it is allegedly owed." The Aer claims that, "It is not open for a licensee, when times get tough, to transfer the burdens associated with holding AER licenses to the AER and/or the OWA." Lexin Resources Ltd owned "1,514 well licenses — many in partnership with 51 other energy companies." Once abandoned they fall under the management of industry-led agency, the OWA, which would double the number of OWA wells. Grant Thornton, Lexin's court-appointed receiver According to the Post, fifty-one companies, including Canadian Natural Resources Ltd., Exxon Mobil Canada, and Husky Energy, who own some of Lexin Resources Ltd. assets, may share the responsibility for Lexin's AROs.
On February 6, 2017, the Alberta Energy Regulator and the Alberta government revised Directive 67, which sets the "eligibility requirements for obtaining or continuing to hold a licence for energy development" in Alberta. The new requirements came in to place in response to concerns about the "growing number of licensees abandoning wells in an unprofitable market in bankruptcy proceedings." The changes gave AER the authority to refuse or grant licenses based on past behaviour, for example licensees with a "history, or a higher risk, of non-compliance". Previously, energy companies could get a license by paying a small down payment as long as they had an address, and some insurance. Revised compliance rules cover operational, pipeline, and emission issues.
In an AER presentation in February 2018, the AER's "vice-president of closure and liability" said that in "a hypothetical worst-case scenario", unfunded cleanup liabilities would amount to $260-billion based on "internal AER calculations". The oil industry's "accumulated environmental liability" estimate of $58.65 billion was the amount that the AER had publicly reported. Of that cost, "tailings ponds make up the largest but unknown portion of this AER estimate".
In a public statement released on August 8, 2018, AER CEO Jim Ellis, who had been CEO since AER's creation in 2013, took the "unusual step" of admitting that the Sequoia "situation has exposed a gap in the system" that needed to be fixed and "raised questions" about how to proceed in the future.
On November 1, 2018 AER CEO Jim Ellis apologized for failing to report "that cleaning up after the province’s oil and gas industry would cost $260 billion". On November 2 he announced his retirement as CE0.
A 2018 joint investigation by the Toronto Star, Global News, National Observer, and four Journalism Schools—Concordia University, Ryerson University, University of Regina and University of British Columbia—revealed that the clean up cost for " oilsands mining operations facilities" was about $130 billion. The investigation, which resulted in the series, The Price of Oil, was undertaken by "the largest ever collaboration of journalists in Canada".
According to the National Observer, the New Democratic Party provincial government began consulting with the energy industry in 2017 to "introduce new rules that might limit a multi-billion-dollar public liability for reclaiming about 80,000 inactive wells around Alberta." Margaret McCuaig-Boyd told Observer reporters that they had no "firm timeline".
Orphan Well Association
The oil-industry led Orphan Well Association is an independent, non-profit organization, that was established in 2002 with a mandate to protect public safety and to manage the "environmental risks of oil and gas properties that do not have a legally or financially responsible party that can be held to account." The OWA maintains an inventory of orphan wells and manages the decommissioning of orphan wells. As of February 28, 2018, it had "1,038 wells on its list for reclamation and a plan, using existing funds and a government loan of $235 million, to clean up about 700 wells in the next three years." From 2014 to 2018 the industry-led organization's Orphan Well Association's inventory, increased from 1,200 to over 3,700. Representatives from the Alberta provincial government, the AER and Alberta Environment and Parks, Canadian Association of Petroleum Producers, and the Explorers and Producers Association of Canada serve on the OWA's board of directors. Brad Herald is the Chair of the OWA and is also CAAP vice-president.According to their annual report, from its creation in 2002 until the fiscal year 2017 which ended March 2018, the OWA has "decommissioned approximately 1,400 orphan wells, with more than 800 of the sites reclaimed." In the fiscal year 2018, the OWA decommissioned 501 abandoned wells, with "382 wells downhole decommissioned and waiting on cut and cap of wellhead only". According to the OWA, by 2019, most of the orphan wells in their inventory, are "considered low risk and therefore do not require immediate closure".
The OWA's mandate includes the management of the "decommissioning of upstream oil and gas 'orphan' wells, pipelines, facilities and the remediation and reclamation of their associated sites."
OWA funding
OWA is supported at both the federal and provincial levels. OWA funding comes from a levy paid by Alberta energy industry and collected by the AER. The Government of Canada provided Alberta with a one-time grant of $30 million for "activities associated with decommissioning and reclamation". In 2017, the provincial government used the federal funds to "cover the interest on a $235 million repayable loan" which the oil and gas industry will repay over the next nine years, to support the OWA's efforts.Premier Jason Kenney announced that the government of Alberta is giving the OWA a loan of $100-million for 1,000 environmental site assessments, as part of the process of decommissioning 800 to 1,000 orphan wells. The loan is intended to "create 500 direct and indirect jobs in the oil services sector." Each sites will be returned to "its condition before the wells were built". The loan will enable the OWA to double its activity in 2020 to nearly 2,000 wells. This loan is added to the interest-free $235-million loan the province gave OWA in 2017.
Calgary-based Canadian Natural Resources is one of OWA's "largest single funders." Canadian Natural, which "produces more than one million barrels of oil and gas per day, is also one of the most active at cleaning up." Of the 1,293 wells abandoned in 2018, the company "submitted 1,012 reclamation certificates."
Orphan wells on private property
Energy companies can develop energy projects on the private property of landowners who do not, under Alberta law, have the right of refusal. Orphan wells are located on private property. Groups such as My Landman Group and landowners group Action Surface Rights, under the direction of Daryl Bennett, represent "landowners in disputes involving resource companies". Christine Laing, the lawyer who represented Action Surface Rights, said that, the AER "has the power to act in a bona fide way to protect the public interest but the AER "hasn't been doing so nearly as often as it should be. And it should change its approach so that it can do that earlier and better."Both the AER and CAPP are pleased with the Supreme Court ruling but the farmers who own the land on which defunct energy companies left several orphan wells, are concerned about the impact of the orphan wells on "crops, water and the environment".
Legal constraints of orphan well policies
Traditionally, extraction of natural resources and oil & gas belongs to the provincial regulation. Under normal circumstances, well abandonment and environmental policies are regulated by the AER.Oil and Gas Conservation Act is the provincial statute or law dealing with licensing, producing, and managing aspects of all oil and gas assets in Alberta. Under section 18, the regulator holds rights to set conditions for approving drilling licenses. Sections 24 and 24 states that the regulator may set directives and rules to allow or deny asset transfers. It can deny asset sales or transfers if all the environmental requirements or liabilities are not resolved.
However, since orphan well cases deal with bankruptcy law, they are also subject to Bankruptcy and Insolvency Act , which is a federal jurisdiction. Since both the OGCA and BIA are at play, there is a significant jurisdictional issue, in terms of which of two laws should be valid.
The BIA states the rights of bankruptcy trustees. Under section 14.06, bankruptcy trustees may renounce assets and responsibility related to bankrupt producers. Bankruptcy trustees can use that clause to dispose of any rights and responsibility related to problematic assets. Due to the federal paramountcy, the BIA takes precedence over the OGCA. The application of the BIA effectively nullifies the provincial jurisdiction of orphan well policies.
The Redwater case is an example of how the conflict of those two jurisdictions come into play.
Redwater Energy and orphan wells
When Redwater Energy declared bankruptcy in 2015 and said they could not clean up over a thousand orphan wells, this raised environmental concerns in what the CBC reported as a "tsunami of orphaned oil and gas wells" from 200 in 2014 to "3,127 wells that need to be plugged or abandoned, and a further 1,553 sites that have been abandoned but still need to be reclaimed". On January 31, 2019, in the case of Redwater Energy, the Supreme Court of Canada ruled 5–2 overturning "two lower court decisions that said bankruptcy law has paramountcy over provincial environmental responsibilities". The Supreme Court of Canada "allowed an appeal brought by the AER and the OWA from the decision of the Alberta Court of Appeal in Orphan Well Association v Grant Thornton Limited . The "case has been one of the most closely watched by the Canadian oil and gas industry in decades". Redwater lawyers said that it was not possible for the company to comply with both the federal and provincial legislation in regards to the Bankruptcy and Insolvency Act. The January 31 ruling means that "bankruptcy is not a licence to ignore environmental regulations, and there is no inherent conflict between federal bankruptcy laws and provincial environmental regulations."In late February 2018, CBC News and CP reported that Sequoia Resources Ltd, an oil firm that had purchased "licences for 2,300 wells" in 2016 from Perpetual Energy Inc., had notified AER that it was ceasing operations "imminently" and were unable to maintain "almost 200 facilities and nearly 700 pipeline segments". Sequoia Resources Ltd had defaulted on its "municipal tax payments" could reclaim all of its properties. According to The Star, after Sequoia Resources Ltd filed for bankruptcy protection in March "without decommissioning and cleaning up 4,000 wells, pipelines and other facilities", as required of all oil companies,
In 2015, two Alberta courts found in favour of the oil and gas company Redwater Energy's receiver against the AER. Redwater had filed for bankruptcy as a result of the "oil price collapse" and the AER wanted to recuperate funds from the any sales Redwater made, to "help pay to clean up after Redwater's inactive wells as required by provincial regulations". By going into bankruptcy, Redwater avoided paying for its Asset retirement obligations.
In May 2016, the Court of Queen's Bench of Alberta in 2016 ABQB 278, "confirmed that the federal Bankruptcy and Insolvency Act supersedes the provincial requirements that companies must clean up wells." "Bankrupt companies can avoid their liabilities and leave them as a public obligation."
On April 25, 2017 the Court of Appeal of Alberta dismissed the AER and OWA's appeal in a landmark decision, affirming the May 2016 decision of the Court of Queen's Bench of Alberta in favour of Redwater Energy Corporation's receiver, Grant Thornton Limited, in Redwater's bankruptcy proceedings. The ABCA found that Grant Thornton Limited "entitled to disclaim Redwater's non-producing oil wells and sell its producing ones".
On February 15, 2018 the Supreme Court of Canada held a hearing centering on Alberta's lower courts' findings in favour of Redwater Energy's creditors, to determine if Canada's bankruptcy laws are in conflict with Alberta's regulatory regime — and if those federal laws are paramount to the province's environmental rules".
On August 7, 2018 PricewaterhouseCoopers, the trustee for Chinese investors who purchased Sequoia Resources Ltd in 2016, launched a lawsuit against Perpetual Energy Inc. in an "unprecedented bid to void" the 2016 sale of Perpetual Energy Inc.'s subsidiary called Perpetual Energy Operating Corp. now known as Sequoia Resources Ltd to Chinese investors. An article in The Globe and Mail said that this appears to be the "first attempt by a bankruptcy trustee in Alberta to have a previous oil and gas transaction unwound." It could "introduce major new risks to the industry’s ability to buy and sell assets and could also deliver a severe blow to Perpetual." The lawsuit alleges that Perpetual and its CEO Susan Riddell Rose "knew the deal would sink the buyer". Perpetual says that "the claim is without merit".
In an October 29, 2018 article in the Globe and Mail Jeffrey Jones reported that Shanghai Sinooil Energy Corp and its subsidiary Shanghai Energy Corp made a statement of claim against 12 people including former Shanghai Energy CEO Wentao Yang and COO Kevin Richmond in a Calgary court. They were accused of falsified documents and diverting money to Sequoia Resources Ltd. Jones wrote that Sequoia Resources Ltd "with links to China's ruling Communist Party" "was set up to acquire aging gas assets with high abandonment liabilities, starting with a package of wells purchased from Perpetual Energy in 2016".
Potential geothermal conversion of orphan wells in Alberta
After oil wells become depleted, their depth and size make them good candidates for extraction of geothermal energy. The prospect of geothermal conversion of depleted wells is attractive for several reasons including potential recovery of abandonment costs, reduced consumption of non-renewable energy, and elimination of geothermal drilling costs. Several studies propose the conversion of existing wells into double pipe heat exchangers through the installation of an insulated pipe inside the well for fluid circulation.The economics of this alternative requires further analysis, since geothermal systems tend to require a significant capital cost posing a significant risk for investors. Logistical issues such as proximity to potential customers would also be a significant factor affecting the feasibility of geothermal conversion.
Across the province, a general northwestern trend of increasing geothermal gradient is commonly recognized with geothermal gradients ranging between 10 °C/km and 55 °C/km. The controlling factors for this broad geothermal range in Alberta are poorly understood. Two main reasons have been proposed up to date to explain the observed patterns.
- The flow of formation waters is the main controlling factor of the geothermal field, where low geothermal gradient areas coincide with water recharge areas and high geothermal gradient with discharge areas.
- The differences in lithosphere thickness is responsible for the geothermal gradient distribution in Alberta since conduction is the main mechanism of transporting terrestrial heat from the basement to the surface.
There was a recent push by the US Department of Energy to investigate the feasibility of Deep Direct-Use of low temperature geothermal resources. Future studies originating from this program may help provide a better understanding of the costs and technologies needed to convert oil wells for geothermal energy and reduce the financial risk that geothermal technology may present.