Energy sector's woes could put taxpayers on hook for cleanups

It turns out taxpayers are expected to be a big loser following the bankruptcy this month of the world's largest private-sector coal company, Peabody Energy.

In what could be a problem in other jurisdictions, including here in Canada, there are early signsbankruptcy rules will allow the giant company to sidestep the costs of fixing hundreds of millions of dollars worth ofdamage their mining has caused.

• Peabody Energyseek bankruptcy protection
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At issue is something called "self-bonding," where some states allow U.S. companies to set aside the money required for remediation within their internal accounts. Thelogic is that strongcompanies will always be good for that money, and rather than pay forsurety bonds that act as insurance that the cleanup bill will be paid, the company merely promises to cover the costs out of future earnings and assets.

Smarter in Canada?

In this case itmeans Peabodyowes about $1.5 billionUS in self-insurance costs, according to BloombergNews,and there are serious doubts whether state governmentswill see that moneyas creditors fight over the company's remaining assets.

"We're smarter here," chuckledChris Powter, a former Alberta government official who now runs his own consultancy.

Since resources area provincial responsibility, Canada has a patchwork of rules governing how companies clean up the messes they make while extracting natural resources. But in Alberta, which has a well developed program, it is it the responsibility of the Alberta Energy Regulator to protect taxpayers under two different pieces of legislation.

In that province, theLicensee Liability Rating covers oil and gas drilling sites. Coal mines and oilsands sites are covered under theMine Financial Security Program. Other provinces have similar rules.

Sufficient resources

"The fundamental principle of the MFSP is that the approval holder must have sufficient financial resources to suspend, abandon, remediateand reclaim oilsands and coal mine sites," saidenergy regulator spokesmanRyan Bartlett in an email.

"In the best of all worlds, they would be setting aside thatmoneyin a separate bankaccountand keeping track of it and having it available," Powter said of oil and gas companies, "but that doesn't always happen."

In the case of both the smaller drillers and the giant oil and mining companies, the regulator's rulesoperatein a waynot so dissimilar to the self-insurance system of Peabody Energy, withliability assigned to futurecompany earnings and assets still in the ground.

"Financial security and the future financial potential of bitumen or coal protect the public from paying for abandonment and reclamation costs," Bartlett said.

Auditor worried

However Alberta's auditor general has repeatedly expressed concern that taxpayers are not sufficiently protected under the Mine Financial Security Program. As Peabody has demonstrated, things can change quickly.

AstheAAG'soffice said in itsJuly 2015 report,"$1.57 billion of security is currently being held in comparison to estimated reclamation liabilitiesof $20.8 billion,"

In the case ofoil companies, "the AER assesses assets and liabilities to ensure licensees meet all abandonment and reclamation requirements," Bartlett, the energy regulator spokesman,said.

But according to Don Bester, whorepresents farmers thatlease their land to oil operators, that hasn't stopped a growing number of oil operators from going broke and leaving his members in the lurch, including a retired couple who owed $200,000.

"It's just a mushrooming effect here," Bester told me by phone ashe was waitingfor a couple calves to be born.

Taxpayers on the hook?

"As this thing unfolds, it's going to be the taxpayers of Alberta that are goingto have to clean up the mess," he predicted, saying promises by the oil industry to ante up will fade if prices and profits stay low.

Bestersaid he'sannoyed thatthe federal government was being asked for money to clean up oil wells in Saskatchewan and Alberta.

"To me,the person that created the mess is the one that should be responsible for cleaning it up, not the taxpayers of Canada."

Statistics seem to back up Bester's concerns. The number of "orphan wells," those without an existing company to take responsibility for them, isgrowingfaster than the resources available to clean them up. That may underestimate the true figure since there is no time limit on how long a company can leave a well inactive.

In holding oil companies to their financial responsibilities, North Dakota is light years ahead of Canada, saida report last month in the Financial Post. And according to Barry Robinson, a lawyer with environmental group Ecojustice, Canadian provinces would be wise to follow their lead.

"We should have time lines on decommissioningand reclaiming wells and we shouldhave a full securityprogram in the sense that companiesshould be forced to post full securitythe day they drill thewell," Robinson said.

And as to cleanup claims against a company being waylaid by a bankruptcy case, what is happening in the U.S. with Peabody is not unique to that country. Robinson is awaiting a ruling on aCanadian bankruptcycasewhere there are similar issues at stake.

"There's no decisionout yet," Robinson said, "but based on bankruptcy law, I'd guess that the bank as secured creditor is going to get the money and the Alberta Energy Regulator will move those wells into the orphan fund."

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