Concerns have been raised in the media about orphan wells in Canada. These are natural gas and oil wells where the owner has gone bankrupt and can no longer cover the costs of removing the well equipment and restoring the land. So how big is this issue and what's being done?
Energy Examined host Leighton Klassen speaks with Lars DePauw, executive director of the Orphan Well Association, an industry-funded group that deals with orphan wells. He describes what's being done, including a recent acceleration in reclamations that's also creating jobs across the industry.
Transcript of podcast:
Leighton: Hello and welcome to another edition of the Energy Examined podcast, the podcast that discusses the issues facing Canada's oil and natural gas sector with insiders in the know. I'm Leighton Klassen. Today, I'm joined by Lars DePauw. He's the executive director of the Orphan Well Association. In today's podcast, we talk with Lars about the current situation around orphan wells in the province [of Alberta]. Lars, thanks for being a part of Energy Examined.
Lars: Yeah, thanks for inviting me.
Leighton: So, let's start with your organization, the Orphan Well Association. What does the association do?
Lars: So, the Orphan Well Association is a delegated authority of the Alberta Energy Regulator. So, what that means is that in the legislation, the Alberta Energy Regulator has the power to deal with any site that doesn't have an owner. And we have to do, say, abandonment, decommissioning, remediation or reclamation work. So, what the energy regulator does is they designate those powers to the Orphan Well Association. So really, we're not a government organization. We're not for profit, but we have a lot of the powers that the regulator would do to do that work. So, the focus of our organization is really to do the abandonment, which is a regulatory term. We like to use the term decommission, but abandonment is the regulatory term. And we also handle remediation and reclamation. And so, our focus is doing those components as safely and efficiently as possible to make sure that these sites are returned to the landowner in a quick and efficient way.
Leighton: OK, and what role does the OWA -- sorry, what role does the natural gas and oil industry play in the OWA?
Lars: So, the industry funds the OWA. There is an annual levy that the Alberta Energy Regulator collects from the producers in the province. Each producer pays a proportionate share of the levy relative to their proportionate share of provincial liabilities. And those monies are then passed from the energy regulator onto the Orphan Well Association. So, the role within the industry is really to fund the Orphan Well Association. But we also work quite collaboratively with industry as they do a lot of the same work as we do. So, they provide us methodologies, techniques on how to be sharing how we do these projects. So, there's a lot of collaboration between industry and the Orphan Well Association besides just the funding, but the funding is the big component that we receive from the industry.
Leighton: OK, are you able to say how much approximately?
Lars: So, for this last fiscal year, the oil and gas industry contributed $65 million in the levy. The total contribution to-date is over $400 million. So, it's a sizeable amount of money that the industry has contributed to the Orphan Well Association to deal with these sites that are not their own.
Leighton: OK, and we'll get into a little bit more about the actual work that gets done, but let's first start with what is an orphan well and how does it reach orphan status?
Lars: Yeah, I think it's a great question because I think there's a lot of confusion around that from people who are not involved or from the general public and from no fault of their own. It's a complicated process. There's obviously a difference between inactive and orphaned, but some people would think that if a site hasn't been visited in a certain amount of time, that it might be orphaned, but orphan's actually a legislative definition. And one of the things that we always point to is that we list all of the sites that have been designated an orphan on our website so people can go and look at any time if they want.
So how does it become an orphan? Typically, it starts with some sort of insolvency process. So, the licensee is not able to financially pay for the obligations that they have. So, typically what happens is there might be a bankruptcy or receivership process. And then at the end, through that process, the receiver or trustee would be trying to find a new party to take over that site and take over the obligations of that site. But there are some that at the end of the day, nobody would want to take over.
And there's then a review process. So that review process goes to the Alberta Energy Regulator and they review all the records to make sure that there are no working interest participants. And so, I mean, a lot of people, again, don't realize that there's fractional ownership within wells or facilities there, that those parties might still be responsible for that. So even though the licensee might no longer be around, there might be a working interest participant. So, the AER needs to review that. If at the end of the day, there's no legally responsible or financially viable party, the site is designated by the energy regulator. And so, at the end of that process, we receive formal designation from the AER providing us with those delegated powers that I mentioned previously, that we would then go and do the decommissioning or reclamation work as what is required.
Leighton: OK, now the OWA doesn't just handle wells, can you talk about some of the other areas the association deals with?
Lars: Yeah, I mean, we deal with really any associated site in the development or production of oil and gas in the province of Alberta, so the Orphan Well Association is just focused in Alberta. That's a key component for ourselves, but B.C. and Saskatchewan have similar programs that are administered by different groups. But it can be any site associated with that. So, we deal with obviously wells, we deal with pipelines, we deal with facilities, we deal with roads. We deal with off lease issues occasionally, too. So really, it's anything that that licensee would be responsible for does come to us for handling. But again, there's that review process that the energy regulator needs to go through first.
Leighton: OK, so you guys keep pretty busy then, it sounds like.
Lars: Yes, very busy.
Leighton: And the association was established in 2002. Can you let us know approximately how many wells have been cleaned up and reclaimed?
Lars: Yeah, I mean, the association has been around for close to two decades. And, you know, we really have ramped up our level of activity in the last three years. In aggregate over that time, for instance, the OWA was established, the OWA has decommissioned or abandoned 4,000 well bores in the province. So, it's a tremendous number. Now, realistically, 70 per cent of those sites have occurred in the last three years. So, we've really ramped up our level of activity here. On top of those 4,000 wells that we've done, we've also got four -- oh sorry, 1,000 sites with reclamation certificates issued on them. I think it's important to remind people, too, that this is a multi-year process when you're talking about reclamation. Dealing with the well is on the order of days and reclamation's on the order of years is the way we put it.
So, a lot of these sites that we've dealt with on the decommissioning side, we're moving into reclamation and we're going to see a really large increase in the number of reclamation certificates that we have in the coming years. So, you know, as I mentioned, we've in aggregate received about a thousand reclamation certificates. Right now, as of today, we have an additional 1,300 sites just in the vegetation monitoring stage. So, we should expect to get reclamation certificates in those in the next year or two. So, you can see that it's really going to dramatically increase.
Leighton: OK, and now this is kind-of a good segue way into the next portion here. The OWA is playing a role in the federal stimulus package, which was announced back in April of last year, so 2020 where $1.7 billion in funding is funding the closure and reclamation of orphan and inactive wells in B.C., Alberta and Saskatchewan. So, just broadly, how much incremental work will the loan enable the OWA to complete?
Lars: Yeah, I mean, the OWA has received actually three repayable loans, two from the Alberta Government and one from the federal government. And one of the things that we do get some confusion on is that a lot of people ask about the $1.7 billion from the federal government and they confuse the loan that we received with the grant money that came with that. I mean, it was part of the same program, but we didn't receive grant funding.
We received the loan, and those loans have really helped us increase our level of activity since 2018. We would estimate that that has probably increased our level of activity by close to about double. Now, I say that also in that same time, the oil and gas industry has more than doubled their contribution to the levy through this time.
So, we've got increased loans from the government and we've also got increased funding from the producers. The oil and gas industry through the orphan levy has also repaid 10 per cent of those three loans that I mentioned as well. So, it's been a tremendous help to us. And I think it's also helped not only us to increase the level of activity, but it's also very important, I think, for the service community, because through those loans, we've been able to expedite that work and keep more people working through this downturn in the pandemic.
Leighton: Yeah, and that leads me to my next question. Can you give us a few examples of success stories?
Lars: Yeah. I mean the there's a couple that I think really stand out for me. And they're not on an individual site, per say. But, you know, we've seen the evolution of the Orphan Well Association into a pretty sophisticated organization and it's been a large team effort from the staff at the Orphan Well Association, our prime contractors and all the subcontracted community that works for us. We have significantly increased the volume of work that we undertake and that would have a direct impact to individual landowners. Starting in 2018, we've quadrupled our level of activity in basically two years and we're going to double that again here. So, we're talking about an eight-fold increase. And so, each one of those sites, when you look at that number, has an individual impacted.
At the same time, we've also been able to reduce our costs on a per site basis and we're continuing to focus on reducing those costs. You know, we would say that those results that we're getting are industry leading. And what's even more impressive, while we've gotten those results, we've talked about that increase in activity that we have there. And the other one here is that that really does have an impact to the service community. On a daily basis right now, we have about 100 crews out in the field. And so those ones, those are all individual ones, but in aggregate, they do come to a very important story and successes. There's a lot of individuals that are getting benefit out of this, but no one's any more important than the other.
Leighton: OK, great, yeah, that's really interesting. Now with that, there has been a lot in the media about orphan wells being a significant problem or issue. What can you say about the issue and how it's being portrayed in the media in some cases?
Lars: Yeah, no, I agree that there tends to be a negative portrayal in the media about the issue that we're dealing with, and I think I can understand why. I mean, there are some people who are concerned with the state of the industry and a perceived risk to the taxpayer. And again, that's one of those things where there's some misinformation out there, you know, talking about the industry have already contributed more than $400 million to this problem.
So, I think it's a question of the timeframe and it's ramped up, but if we're dealing with it very quickly here as well. So, I can understand why some people would have concerns, but I wouldn't necessarily share those concerns. This issue has taken a long time to get to this side. I would say that the Orphan Well Association is clearly demonstrating that we can deal with these issues safely and efficiently, but it's a question of how long we're going to take to deal with it. Most of these sites don't have a safety or an environmental risk. They don't need to be resolved in one year. It's a question of coming to a balance about the people who are funding it, which is the oil and gas industry, what they can contribute on an annual basis and how many sites we have to deal with.
Again, I mean, we've been dealing with this problem very quickly, maybe not as quickly as maybe as others would like, but I think that we're on the right path and that we're moving forward in a logical and progressed way and seeing fantastic results. But again, I think we can also understand that an individual site would have an impact to that landowner and to the stakeholders in the immediate area. But really, they don't need to be dealt with in one year. They can take a longer period.
Leighton: And while we're on the topic of perception, is there any other, you know, in terms of misinformation and misperceptions in that might be out in the public that you want to address?
Lars: Yeah, I think the big one for me is that when I look at the Orphan Well Association, I see it as a positive, even though the media might portray it negatively sometimes. The reason that it's a positive is that this should continue to add to our reputation of the oil and gas industry in Western Canada as being a positive, because these are companies that are dealing with problems that are not their company's problems. They're funding it. And so, this is quite different.
The way I kind-of talk about it with landowners is this is your neighbour fixing your fence, not their own fence. So that's one of those things I think it really demonstrates the integrity of Canadian producers. And I'm not really sure of any other jurisdictions or industries that do something similar what we're doing in Western Canada. And I would say that I'm proud to work in this industry as a result of that.
Leighton: And I know you kind-of touched on this already, but I was asking anyway, you know, in your view, what does the orphan well program do for the natural gas and oil industry, in terms of its reputation?
Lars: Yeah, and again, I would say that it should increase the reputation that we have from the industry. We're talking about, again, you know, over $400 million dollars being contributed to other companies' issues that they are not able to deal with. So, again, I think when we look at the positives the oil and gas industry in Western Canada contributes to the nation as a whole, this is another example of that positive.
Leighton: Now, I know you mentioned, you know, in the last three years, there's been quite a bit of significant progress. Where do you -- what do you see the next five years looking like?
Lars: Well, you know, I think I think we're going to be working diligently to work through the current inventory of sites that we have. We'll definitely be focused on efficiency and safety and getting through them. We're starting to see that we're starting to bend that curve and bring the number of orphaned sites left to be done being completed. Again, we're going to see a real big increase in the number of reclamation certificates that we see. And so, I think that I would like to think that we're going to start seeing some improvements in that area.
But I think, again, you mean part of what I would say that I look at is, we're not out of the woods yet from the downturn side. Until we see that, we still might see other companies having insolvency issues. But I wouldn't say that there's a concern on our end about that. It's just that until we see that increase, that that would be something that we're paying attention to. I do think that a lot of the funds that are coming to the producers through the federal site rehabilitation program that the province is administering and the new liability management framework that the province is putting in place should also help the number of orphan sites that are coming in the near to medium future and then obviously in the longer term as well.
So, I'm quite optimistic that all of those factors are going to have a benefit to the OWA, but we'll continue to focus on our job of decommissioning and reclaiming these sites as safely and efficiently as possible in the near term.
Leighton: Great, well, looks like, it sounds like 2021's going to be a positive year in this regard. So, thanks very much, Lars for bringing us up to speed on this really important issue.
Lars: OK, thank you.
Leighton: And that was our conversation with Lars DePauw with the Orphan Well Association. Stay tuned for our next Energy Examined podcast. And if you liked this episode, please share it with a friend and make sure you subscribe on whatever podcast network you use. For more stories and interviews on Canada's energy industry, check out our website, context.capp.ca. See you next time.