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Cleaning up inactive assets continues to hang over the energy sector like a dark cloud

Bill-WhitelawBad policy happens to good people. Like Albertans.

But bad policy, paradoxically, can often start in a good place.

Here’s an example.

Alberta’s UCP government recently floated a trial balloon entitled the Liability Management Incentive Program (LMIP). In a nutshell, the government was test-driving the concept of giving oil and gas companies a break on future royalties (on new production) if they agreed to start cleaning up their inactive assets – the volume and magnitude of which hangs over the sector like a dark cloud.

Public response was swift and, putting it mildly, pretty merciless in widespread condemnation of the idea.

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As critics pointed out, in Alberta, companies are legally obligated to clean up after themselves. The idea, for many others, was equally repugnant given the healthy state of corporate balance sheets and the provincial coffers.

Some Albertans even grasped that those “royalties” the UCP proposed to forgo actually belong to them as the real owners of provincial resource wealth.

Perhaps the most damning dimension was the fact LMIP was merely a rebranded version of a concept Premier Danielle Smith had previously touted on industry’s behalf when she was a lobbyist for the Alberta Enterprise Group. Then, it was called R-Star – a label presumably used to give the program legitimacy as it imputes reference to the C-Star (C*) formula used in the province’s royalty calculation methodology. As governments do when trial balloons are bazooka-blown from the sky, the UCP is walking back the proposed program under the guise of seeking more consultation.

In reality, it’s looking for face-saving ways to relegate the program to that dormant policy storage all governments have, resignedly nicknamed the “It-seemed-like-a-good-idea-at-the-time” shelf.

So, Albertans dodged a bullet of bad policy. But the fascinating thing about public policy is to peer back into its origin story and ponder if there is anything worth re-examining – because, as stated previously, it’s often good people who think about policy in the first place. It’s when policy becomes politicized that it often flips on itself and any elements of good are lost in the ensuing uproar of chattering and clamorous politicking.

Let’s wind the clock back:

Does Alberta have a problem with its duty of care over inactive wells and other assets whose useful infrastructure life is over?

Yes. It’s a black eye for an industry that is otherwise generally good at things. It was allowed to get out of control, and bringing back the inventory to a manageable state is the challenge of this generation.

Does Alberta’s energy regulatory regime operate under the “polluter pays” principle when it comes to who is responsible for abandoning and reclaiming old and inactive infrastructure?

Yes indeed. The Alberta Energy Regulator has rules that compel companies to spend prescribed dollars each year on asset retirement efforts. That amount is estimated to be $700 million in 2023 and, over the next four years, could top $4.2 billion.

That’s a significant economic opportunity, and it’s also substantial job creation and skills development opportunity.

Does Alberta’s track record in indigenous reconciliation need a boost?

Yes. Despite creative initiatives like the Alberta Indigenous Opportunities Corporation, life in many of the province’s indigenous communities is pretty hardscrabble. Non-indigenous Albertans might wonder how the province as a civil society permits conditions like this to exist in the 21st century.

Is Alberta trying to be a better ESG (environmental, social, governance) player as it seeks to remain a competitive investment destination in terms of global capital flows?

Yes. Alberta is proud that it is the first province to establish an ESG Secretariat and the first to draft a jurisdictionally driven ESG scorecard to show off to Albertans and the rest of the world.

Isn’t the treatment of indigenous communities a critical part of an ESG scorecard? And isn’t ten of thousands of ignored inactive oil and gas assets also bad for an ESG ranking?

Yes, to both questions. In fact, between the two dynamics, it hits all three letters of the sustainability trifecta squarely between the eyes. So much work to do in that regard.

So, let’s rewind the policy development clock and begin with a concept that is good policy for all Albertans – including Indigenous communities. Here, it is important to note a critical factor: indigenous contractors have proven themselves adept at asset abandonment. When the federal government dumped $1 billion into the energy economy to stimulate employment during the pandemic, the Indian Resource Council – representing more than 130 First Nations communities active in resource development – stepped up and led an initiative that shone in what was called the Site Rehabilitation Program.

First things first.

Drop LMIP as a descriptor. It’s boring and reeks of the bureaucratese that makes people roll their eyes.

Bring back the R-Star name. But reimagine it as Reconciliation-Star.

Put some leading oil and gas companies, together with indigenous leaders, Alberta Energy and the Alberta Energy Regulator, in a room and lock the door and tell them no one leaves until they come up with a workable policy based loosely on the following concepts:

  • As a province, we need to get a grip on the inactive asset problem. It’s a mess.
  • Our indigenous communities need the means to control their own economic destinies that cut out federal – and colonial – structures.
  • Most Albertans also agree that while oil and gas companies create wealth for Alberta, they also create wealth for their shareholders outside Alberta, so abandoning the polluter pay principle is not in the cards.
  • Most Albertans would agree to invest a share of THEIR future royalties if it meant a rapid rise in quality of life for indigenous peoples.
  • So, work on the idea that companies already have a required annual spend for cleaning up. But if they agree to contract at least 50 percent of that spend to indigenous contractors, they can anticipate a break on future royalties on new production. If the dollars invested rise above 50 percent, a formula would calculate a deeper future break on royalties. This creates work and work creates wealth – wealth that can be invested directly into communities.
  • If oil and gas companies endeavour to spend on recognized First Nations lands, they would be entitled to another layer of royalty breaks.
  • This partnership in resource prosperity approach permits Alberta and its indigenous communities to collaboratively create value without federal oversight or interference.

There are many threads to this policy tapestry – and of course, the devil is in the details. But Alberta and Albertans – all Albertans – need a win that demonstrates that good policy can happen to good people.

Bill Whitelaw is the Managing Director of Strategy & Sustainability with Geologic Systems.

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