Unregulated Liabilities and Opaque Financial Reporting Last Seen in Mortgage-backed Securities During the 2008 Financial Crisis
May 25, 2022 (IEEFA)—Oil and gas companies across western Canada are unable to meet their share of the total $72 billion in future decommissioning obligations even if oil prices stay above $85 per barrel, according to a new analysis by the Institute for Energy Economics and Financial Analysis.
The $72 billion in future decommissioning liabilities includes wells, pipelines, and facilities in Alberta, Saskatchewan, British Columbia and Manitoba. Without a plan or more financial capacity, the research shows banks may face additional write-downs and the Canadian taxpayers will likely foot the bill.
The IEEFA analysis shows:
The IEEFA analysis looked at 10 publicly traded oil and gas producers in Canada. The combined decommissioning liabilities from the 10 companies total $3.5 billion—a snapshot of a much larger problem.
“This is a warning for creditors to reign in credit provided to risky oil and gas companies, and to encourage better risk management of abandoning and reclaiming old wells, pipelines and facilities,” said Omar Mawji, an IEEFA energy finance analyst and author of the report. “Ultimately, the taxpayer will remain the bailout system for mismanaged decommissioning obligations.”
The full extent of the decommissioning liabilities issue is not fully known, given the lack of transparency and reporting of AROs by oil and gas companies. In Alberta, more than 70 percent of the 459,000 wells require costly closure work.
AROs became a major issue after the Redwater case ruling by the Supreme Court of Canada that gave priority to decommissioning liabilities over the most senior secured creditor to oil and gas companies. The ruling added additional risk to the creditors of oil and gas exploration and production companies.
Omar Mawji ([email protected]), IEEFA energy data analyst.
Susan Torres ([email protected]), +1 (908) 565-3451
About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) examines issues related to energy markets, trends and policies. IEEFA’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.