10 responses to “New Reclamation Guidelines (wonkish)”

  1. Dan Woynillowicz

    Hi Andrew,

    I really appreciate both your blog and Twitter feed — great to see somebody from the academic community engaging students and the broader public alike using social media.

    You raise an important question in this post with regards to whether, when it comes to royalty collection, Albertans might receive more of their “fair share” by collecting liability costs later. I confess that I hadn’t considered this angle, and I wonder whether or to what extent this was factored into the government’s approach. A good question to put to them.

    It would be interesting to have Andre Plourde run the numbers to give a sense of the benefit, if any, in order to juxtapose it against associated risks with this approach. A risk that I see, and which you did not mention, is tied to the basic underpinnings of the policy: an asset to liability approach.

    It strikes me that one of the most likely scenarios in which a company would abandon an oilsands operation is when the asset, the oilsands resource, has dropped in value to a point at which the operation is no longer economically viable. In this situation, there would be accrued liability that the government had assumed could be covered off by the value of the asset. Oops! Albertans would be on the hook for clean up costs.

    Given the volatility of oil prices and an increasingly uncertain energy future (especially looking more than 20 years out), it seems that this approach may not be all it’s cracked up to be – for Albertans at least.

    You also note, “The companies operating in the oil sands are large and seemingly very stable, but the energy business is not known for long-term stability.” It has been brought to my attention that “big” companies often create distinct subsidiaries for mega-projects, in part to shelter the parent company from liabilities. I just took a quick scan of Alberta Environment’s 2010 Environmental Protection Security Fund report and wonder whether this is the case for Imperial’s Kearl Mine, which is secured not by Imperial Oil Ltd. but by Imperial Oil Resources Ventures Ltd. Just how large and stable is IORV Ltd.? And how distinct is it from Imperial Oil, legally speaking? In other words, while most Albertans would, at first blush, think that the mine is backed by a large and stable company, if things go sour in the oilsands business will the liability really be backstopped by Imperial Oil Ltd.?

    Keep up the blogging – it’s very insightful.

    Cheers

    Dan Woynillowicz
    Pembina Institute

  2. David Sands

    Professor Leach, thanks for your thoughtful analysis of our new reclamation security program for coal and oil sands mines.

    I did ask some of my colleagues to have a look at your post and see if we could address your questions. Below is based on information I got back (and if errors exist they’ve been created by me in misinterpreting what was explained to me; my colleagues make admirable efforts to dumb it down for me, but that’s a task that can try the patience of a Kindergarten teacher).

    The reclamation security program changes are part of an overall program to increase oversight *and* transparency in government management of oil sands reclamation.

    The question of appropriate timing of reclamation security payments was examined relative to the ability of the mine operations to generate the revenue required to post security. We sought a balance between ensuring revenues are available to pay for reclamation security deposits, that the annual increments of deposits would be manageable, and that the funds are not being collected unnecessarily early – or too late – in the development lifecycle.

    The program does in fact address future price fluctuations through a “Forward Price Factor”, which reduces the asset value if future prices are projected to be lower (potentially triggering security earlier) but does *not* provide credit if the future price is higher.

    With respect to the Pembina liability numbers, we will have actual numbers from the industry, submitted as part of their Mine Financial Security Program Annual Reports, which will provide a grounded starting point for discussions on what the potential liability is, each year.

    On royalty deductions for reclamation and reclamation security: Actual reclamation costs are allowable costs for royalty calculations – provided that those costs are incurred at a time when revenues are being generated by the project. Costs of getting reclamation security instruments (for example, a Letter of Credit) are allowable costs, but not the face value of the Letter of Credit.

    To get into finite detail, there are a “Standard” and a “Guide” that lay out how the program works, and contain all the formulas, processes and calculations.

    Here’s a link to download the Standard: http://environment.alberta.ca/03403.html

    Here’s a link to download the Guide: http://environment.alberta.ca/03405.html

    Dr. Leach, I hope either what I’ve relayed here or information in those documents furthers your analysis and answers at least some of exacting questions you raise.

    As you note in your following post, I personally suspect this will be in line for a close look by the Office of the Auditor General, which had critically commented on our former reclamation program. (Typically the OAG does report on Government responses to its recommendations.) Assuming that does happen, Albertans will know from an independent analysis if we have achieved our goal.

    They will also know from industry action on reclamation going forward.

    – David Sands, for the Government of Alberta

  3. Alastair

    Hi David,

    You said “With respect to the Pembina liability numbers, we will have actual numbers from the industry, submitted as part of their Mine Financial Security Program Annual Reports, which will provide a grounded starting point for discussions on what the potential liability is, each year.”

    Pardon my ignorance on these issues, but are you saying that the governments estimate of the liability is going to be based off of a companies estimate? If so, is this not a huge conflict of interest?

  4. David Sands

    Alastair, that may be addressed in the two documents I linked to above, and to be sure I need to return your question to smarter people than me.

    However, I’m also going to (perhaps foolishly) venture this one my own as well: We have the numbers. If costs of current reclamation have an impact on royalties due (and the operator is now measured on reclamation activity under eight standards instead of the previous three) to game the system they’d have to understate what they’re spending on reclamation and thus pay more in royalties. That’s to attempt to unfairly reduce a far-future book liability – against the odds of either Government (or the Auditor General, or their own auditor) or other operators noticing their numbers are wonky.

    I am sure my program colleagues will have a much more sophisticated explanation, and perhaps a killer app, but I’m saying we’ll have everyone’s numbers: Dollars, acres, level of reclamation, in front of us. If anyone sticks out sorethumb-wise, we either have a new BATEA or a cheat, no? (I’m hoping for a BATEA, they make better headlines than the latter.)

    I stress, I’ll put your question to the people who know what they talk about and hope they’ll humour me again in a timely manner.

    – ds

  5. David Sands

    And now I see I could have just said: “What Andrew said, more succinctly.”
    – ds

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