Danielle Smith has a big idea to clean up oil and gas wells. It's all kinds of messy

Smith pitched this royalty break as a lobbyist. It's back, now that she's premier

October 30, 2022

In a July 2021 op-ed in the Calgary Herald, Danielle Smith, then a business lobbyist with the Alberta Enterprise Group, advocated for a program called R-Star. It would provide royalty credits to oil and gas companies completing cleanup activities already required of them. While it appeared for a long time to be dead, R-Star has new life.

Smith is now Alberta premier, and continues to champion the idea. Peter Guthrie, her new energy minister, promised to make a pilot of the scheme one of his first priorities.

This should never happen.

So, what is R-Star?

It’s a free lunch. Or, more properly, a lunch paid for by Albertans. It’s a wealth transfer to the oil and gas industry. Instead of ensuring the polluter pays, R-Star would have us paying the polluter.

R-Star, initially proposed by oil sector advocates, would reward firms with tradable credits to be used against future well royalty obligations, with one credit issued for each dollar spent on regulator-mandated clean-up.

Companies then apply R-Star credits to future production to get discounted royalty rates. Royalties increase with oil prices so, at today’s $110-per-barrel (Cdn) price, $1 million worth of required cleanup would net R-Star credits that reduce royalties by roughly $280,000. The same credits would be worth about $115,000 if oil prices dropped by half.

This raises the first of many issues with R-Star. It provides more help when less is needed. In periods of low prices, we should worry that companies might struggle to meet reclamation obligations. R-Star does little for producers when prices are low, but offers big rewards when prices and profits are high. It’s backward.

The second issue with R-Star is that it carries a massive, unnecessary cost to Albertans. In a letter to then energy minister Sonya Savage last year, Smith (still as a lobbyist at the time) proposes giving companies $20 billion of R-Star credits. R-Star’s proponents claim that “no government funds are required,” to speed reclamation.

But when oil and gas companies use these credits, government royalty revenues could decline by more than $6 billion. Perhaps, in time, Smith will see R-Star’s impact on government funds in a different light, now that she’s premier and those funds could otherwise fund programs and balance budgets.

Orphan oil wells are a big problem that’s likely to get worse. The Alberta Energy Regulator reports that $2.4 billion in cleanup liabilities are currently on the books of insolvent, but not yet bankrupt, companies.

We should do something, but that doesn’t mean we should do this.

Why not? Because R-Star is not going to do much to solve this problem. For the most distressed companies, a government gift that reduces their liabilities by 30 per cent won’t render them solvent. Their wells will still likely end up as orphans.

So, who will get the value here?

The R-Star subsidy will go mostly to healthy companies with large reclamation liabilities. More than 85 per cent of cleanup liabilities are held by companies in strong financial positions. These companies have a lot of required cleanup work to do and the money to do it. R-Star will reward them a bonus for doing it.

But, that’s not all. R-Star penalizes firms that already did what they were supposed to do, and will get less from R-Star than they would if they had allowed their liabilities to accumulate. R-Star rewards companies based on how big a part of the problem they are.

OK, the incentives are backward, and it rewards the wrong firms. But doesn’t it create jobs?

Yes and no. Any multibillion-dollar government program would create jobs.

But to believe these jobs are new, you have to believe two things. First, you have to believe the royalty revenues being forgone for R-Star would never be used for anything useful. Second, you have to believe companies were not going to do the cleanup work required of them.

Yes, R-Star’s jobs estimates rely in part on an assumption that the polluter wasn’t going to pay for all the cleanup.

Proponents of R-Star treat billions of dollars in government royalty credits as found money, and apply standard multipliers to estimate economic activity from spending the money they hope to find.

But R-Star wouldn’t be spending found money. Dollars foregone through the R-Star subsidy would otherwise be spent in Alberta, or would have been used to pay down provincial debt, or fund other investment priorities.

So, what should we do? Smith the lobbyist inadvertently offers a solution.

In her 2021 op-ed, she writes of a company that recently inherited a well drilled in 1963. “Everyone made money on the site for 60 years,” she writes, “but a pot of money didn’t travel along with the site to clean it up.”

The company, in the eyes of Smith the lobbyist, was but a player in a decades-long game of musical chairs, left without a seat when the music stopped. The problem, she finds, is that no one made sure the cleanup costs would be funded once the game was over.

Today, Premier Smith should look past R-Star and lobbyist Smith’s pitch, and find a way to make sure there is a pot of money attached to every well site to ensure its cleanup, funded by those who’ve made money for decades.

That’s the only way she’ll make sure Albertans aren’t left paying when the music stops.

Posted on:
October 30, 2022
5 minute read, 892 words
See Also: