A few months ago I was flipping through The Walrus’ Summer Reading Issue (July/August 2015), and I stumbled on some of my research! The article, “Money Pit: Who’s on the hook if low energy prices shut down the oil sands?”, was all about the risks that volatile oil prices can have on ability for oil sands companies to pay for reclamation of the land they have damaged. It was written by Jeff Rubin, former chief economist for CIBC World Markets.
The data was from a report I wrote back in 2010, while I was a policy analyst with the environmental and energy policy think tank, The Pembina Institute. The report provided the first public challenge to the Alberta government’s extremely low-balled estimate of the cost of bringing land scarred from open-pit mining to a point where the government would be willing to take the liability back from these companies.
The problem is this: oil is the most economically volatile commodity out there, as any Albertan can attest. Compounding this is the fact that oil sands are one of the most expensive sources of oil to produce especially for new producers who haven’t paid off the very high capital costs. If the oil price tanked, then logically the most expensive-to-produce oil would be the most at risk.
So to make sure the oil sands companies do not leave locals with a toxic mess and an exorbitant cleanup bill, the province has a policy in place to pledge the cash upfront from companies as they disturb the land. Since I wrote my report, Alberta has changed their reclamation liability management policy to a model that is based on, in my view, a highly problematic asset to liability ratio. Basically, the value of the booked oil sands reserves you have can be used against any liabilities you have incurred. If you have loads of oil still left in the ground, then the value of that oil can be used as collateral to pay for the clean up costs associated with extracting that oil in the first place.
The rub lies in that a) oil prices can fluctuate rapidly and b) there are decent odds that some breakthrough technology and climate policy combo (within the next few decades) will result in a rapid decline in the demand for oil. So you could imagine a situation where there is plenty of now worthless oil remaining in the ground and a very inadequate cleanup deposit collected by the province. This is where smart public policy can help correct a potentially toxic market failure.
I’m glad Jeff Rubin agrees with me. Hopefully his article convinced some Walrus readers that they should be asking tougher questions of oil sands companies and the Alberta government.