Canadian oil companies keeping citizens in the dark on plans to handle CA$72B in clean-up costs

Jun 12, 2022 News

– Financial Analyst calls for rapid action to prevent use of tax dollars to fix a broken system

By Zena Henry

Kaieteur News – As the global energy system transitions toward lower-carbon fuel sources, oil and gas decommissioning liabilities are expected to become a more near-term issue than previously envisioned for many States.
Decommissioning or the cleanup of equipment used during oil production projects is an important part of an oil company’s overall plan for a field. This very costly activity is usually addressed upfront in agreements so as to ensure the company does not escape liability.
Left unaddressed, countries can be left with hefty clean up bills. This is a matter the Institute for Energy Economics and Financial Analysis (IEEFA) has already warned Guyana about since offshore oil operator, ExxonMobil is being allowed to recover clean up funds well ahead of the period that it would be needed for. Also, Guyana seems not to be keeping tabs on the funds to assure its availability when the time comes.
The IEEFA, which conducts financial and economic analysis and research in the energy sector, has highlighted a similar scenario is facing Canada since some oil companies there have not been transparent about their decommissioning plans.
A recent analysis by the IEEFA revealed that Canadian oil and gas companies are failing to make plans to pay for the CA$72B that would be needed for future decommissioning liabilities for oil and gas wells, pipelines, and facilities.
“The cleanup liabilities, collectively referred to as Asset Retirement Obligations (AROs), are likely to result in future corporate defaults, leaving the Canadian taxpayer to pay to resolve the mess,” the report stated.
What is worse is that IEEFA said the full extent of the decommissioning liabilities problem may not be fully known, “given the lack of transparency and reporting of AROs by oil and gas companies.”
To get a better understanding of the troubles facing Canada, the IEEFA conducted an in-depth analysis of five of the 10 most vulnerable small-cap oil and gas producers in Canada. This probe found that these companies are at high risk of defaulting on future decommissioning obligations even if they operate in a long-term US$80- to US$90-per-barrel oil price environment.
IEEFA said the situation could be worse than it appears as companies may be understating AROs through mismanaged accounting and by delaying classification to the Alberta Energy Regulator (AER), which obscures the actual size of AROs.
The report continued that the global energy transition will likely slow the growth of oil and gas demand which will make it more difficult for oil and gas companies to sell their assets and increase financial stress on oil and gas companies as clean-up liabilities grow.
This could result in the Canadian taxpayer being left on the hook to pay for mismanagement of assets from chief executives who are paid an average of US$950,000 annually. The fact that the transition towards lower-carbon fuel sources can bring decommissioning events closer than expected, IEEFA said that “vigorous government oversight, must take effective and rapid action to avoid defaults and debt impairments that would force the Canadian taxpayer to bail out a broken system.”
It is the same advice the agency gave to Guyana. ExxonMobil was accused of going against industry standards by already taking some US$3.2 billion for decommissioning, while Guyana was failing to monitor the cash.
IEEFA has, nonetheless, advised Guyana to keep its eyes on the money for if Exxon were to sell its offshore business or walk away, Guyanese would have to foot the company’s cleanup bill.

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Canadian oil companies keeping citizens in the dark on plans to handle CA$72B in clean-up costs

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