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Inactive oil and gas wells a potential problem in Alberta, says U of Calgary economist

by Mark Sabourin
EcoLog, 2/10/2017 2:14:00 PM

There are more than 80,000 inactive oil wells in Alberta, and University of Calgary economist Lucija Muehlenbachs says almost all of them will never produce another drop of oil. Some have been inactive for decades, and under Alberta law there is no incentive for owners to close them, a step known as abandonment.

Abandonment is costly, Muehlenbachs told EcoLog News. Owners must remove equipment, seal groundwater formations with cement and reclaim the entire wellsite. Muehlenbachs says those costs create a strong incentive to keep wells as they are, uncapped, unremediated, until the owner goes bankrupt and the cost of abandonment becomes a burden on Alberta’s Orphan Well Association or, at worst, the public purse.

Muehlenbachs, an Assistant Professor of Economics, says the rationale for not forcing abandonment is that if circumstances change, inactive wells may be reactivated. Muehlenbachs tested that assumption by modelling what would happen to inactive wells if there were a dramatic change in circumstances, such as a 200%-spike in oil prices or a revolutionary technological innovation that vastly increased recoverable reserves. In either case, no more than 10% to 12% of inactive wells would be put back into production. The balance appears destined to remain in a permanent state of inactivity.

Unlike many oil-producing jurisdictions in the U.S., Alberta does not put a time limit on well inactivity. American states vary in their practices, with time limits ranging from six to 300 months, and a further possibility of extension. The Alberta Energy Regulator has the authority to order a non-compliant well to be plugged and abandoned, Muehlenbachs says, but that seldom happens. Even when it does, the order is often rescinded.

Muehlenbachs concedes that there is no proof that inactive wells are placing a burden on the environment.

“It could be the case that they actually don’t cause that much damage,” she says. They may not be leaking methane, have contaminated the soil or groundwater, or be a burden on nearby landowners. “But the vast majority of them are not going to be reactivated,” she says. And the longer they remain inactive, the greater the likelihood that they will be orphaned.

By law, the oil and gas industry maintains the Orphan Well Association meant to manage the abandonment of orphan wells, but Muehlenbachs says “that’s a scenario that can only work when there are a lot of companies and very few wells becoming orphaned.” The Orphan Well Association currently counts 1,590 wells on its list of wells to be abandoned, more than twice the number reported as of March 31, 2016 in the Association’s 2015/16 Annual Report.

Muehlenbachs’ analysis is available from the University of Calgary’s School of Public Policy.

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