Canadian oil and gas companies are failing to make plans to pay for $72 billion in 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.
Decommissioning liabilities are a major concern for the province of Alberta, which is burdened with more than 80 percent of AROs in Canada. More than 70 percent of the 459,000 wells in the province require closure work.
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.
IEEFA conducted in-depth analysis of five of the 10 most vulnerable publicly listed small-cap oil and gas producers in Canada. The analysis found:
- The vulnerable companies are at high risk of defaulting on future ARO obligations—even if they operate in a long-term $80- to $90-per-barrel West Texas Intermediate (WTI) oil price environment while they continue to make promises of investor returns through dividends and share buybacks.
- Future revolving credit facilities may face major impairments.
- The situation may be worse than it appears. 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.
- Landowners may pressure governments to fund delinquent lease payments, forcing immediate abandonment and reclamation of wells.
- The global energy transition will likely slow the growth of oil and gas demand growth, 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.
- The Canadian taxpayer may be left on the hook to pay for mismanagement of assets from chief executives who are paid an average of $950,000 annually.
As the global energy system diversifies and transitions towards lower-carbon fuel sources, oil and gas decommissioning liabilities will become a more near-term issue than previously envisioned. The industry, with 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.