Meeting the need to decommission the ever-growing number of end-of-life, abandoned or orphaned mines, oil and gas wells is proving an increasingly costly and technical problem for companies, regulators and policymakers.
The Scale of the problem
Taking just Australia, the US and Canada’s decommissioning requirements, for example, gives an indication of the scale of decommissioning activities needed now and in the future. According to the Australia Institute, the country has 3,000 operational mines but over 60,000 abandoned or orphaned mines, of which only a handful, have had some form of rehabilitation.[i]The US has around 560,000 abandoned mines sitting on public and privately owned land according to an estimate by the Mineral Policy Centre [ii] as against over 13,000 mining operations in 2016.[iii]The energy renaissance of the last decade has produced more than 900,000 active oil and gas wells[iv] but Texas alone had approximately 118,000 inactive wells in April 2017.
Canada also has a significant oil and gas industry. For example, the province of Alberta has, according to Canadian Broadcaster CBC, some 468,000 wells of which around 30 percent (90,000) are inactive, one percent (3,200) is abandoned, and202,000 wells are operational. In total Alberta alone has 305,124 wells needingto be decommissioned and reclaimed.[v]See Table 1 of the well inventory for the Province of Alberta.
Source 1 Quatre Legacy Funds A Sustainable Solution Report October 2017.
In countries with weak regulatory regimes, once coal,ore, oil or gas extracting activities have ended the facilities are simply leftto rot.[vi][vii]However, in developed countries, mines must be closed and decommissioned according to the original mining licence to avoid and or prevent ground water pollution, the development of water ingress and sinkhole formation often causedby mine shaft roofs collapsing. However, where operators, regulators, do not carry out decommissioning and reclamation governments and society are left to pay the price.
As Lee Foote, Professor and Director, University of Alberta Botanic Garden University of Alberta points out,“there are reportedly over 100 hard rock mines in the far north of Canada that have altered lake systems only to see the companies dissolve without reclaiming, thereby, externalizing the costs of clean-up to the Federal Government. It has been a cost-effective strategy for shareholders over many decades and in some ways of viewing it is the “right” financial decision to make, though it may fly in the face of social good.” Also, in a typical year, several people die in accidents in and around abandoned mines across the United States.[viii]Decommissioning of a mine involves removal of any potential environmental, health and safety hazards such as pollution of the water table, unstable land, or open shafts for people to fall into and to make the land capable of future productive use known as Greenfield.
As for the numerous abandoned oil and gas wells, scientists are beginning to view them as a major source of methane emissions[ix] and, given the findings of the latest UN Intergovernmental Panel on Climate Change, it is imperative that methane gas emissions are minimised in order to restrict global warming to 1.5C.
Learning from experience, many regulators today require companies and developers to accompany their application for a new mining or well operation with a decommissioning and reclamation plan. Usually mine reclamation restores the land to a natural even enhanced landscape or restores land for industrial or municipal usage. In Europe and North America,[x] mine reclamation minimizes and mitigates the negative environmental effects of mining.[xi]
Reforestation with a range of local tree varieties toencourage wildlife is a popular approach. The OSMRE Pittsburgh Botanic Gardenis the result of slow reclamation of some 460 acres of deep and open cast coalmining in the Pittsburgh area. [xii] In the Far East, scientists are evaluating the use of bamboo in reforestation efforts following mine closures in the Philippines, since it is fast growing and has many uses.[xiii]Alternatively, where the local environment does not favour reforestation, reclamation may be better accomplished by establishing rangeland instead.
Extracting coal, gold, iron, rare earths or mineralsunderground or with open cast mining results in different decommissioning andreclamation cost structures according to the size of the site, the degree ofreclamation to be undertaken and its speed. The following examples from the UK, the US and Canada indicate the diversity of projects and costs.
Kellingley, the last deep coal mine in Yorkshire, Englandclosed in 2016. The decommissioning process included filling the two deepmine shafts with concrete, inserting a pipe to exhaust any methane gas to supplyan onsite gas power plant and demolition of existing mine-related buildings andto make the site fit for redevelopment as a new housing development. Decommissioningcosts are estimated at some £40 million.[xiv]The 151 acre site is currently being reclaimed and redeveloped as a 1.45million square feet of manufacturing and distribution space by former operatorUK Coal, with financial contributions from the EU and the UK taxpayers, whichcould bring as much as £200m to thelocal economy in new jobs.[xv]
In contrast, reclaiming and renovating open cast mining land is pro-rata much cheaper. For example, reclamation of 22 giant voids left from open cast mining by operators in East Ayrshire, Scotland will cost an estimated £161 million.[xvi]
Across the Atlantic, the estimated cost of reclaiming a gold mine near Winnemucca, in Humboldt County, Nevada is just $32,417,400. However,there is no consensus or minimum standard for what reclamation should entail.Of Alberta’s oil sands ,Lee Foote notes, “at the Oil Sands operations I have seen reclamation ranging from passive (do nothing over time, allow naturalprocesses to operate with plant colonization and pollutant volatilization) up to around $750,000 per hectare (my rough estimate) for heavily manipulated and researched wetlands up to 17 hectares in size. Interestingly, none of thosehave been certified as “reclaimed” yet.”
Oil and gas field decommissioning
It is difficult to provide a benchmark industry-wide figure for oil and gas decommissioning, since the actual cost of a well’s decommissioning can vary according to location, water depth, degree of removal of installations, regulatory climate etc. For example, the UK has strictregulations for decommissioning Britain’s North Sea oil and gas installations. For example, Shell had to submit its decommissioning programme for the Brent Field for approval [xvii]to the UK Government’s Department for Business, Energy, and Industrial Strategy.
As a rule, decommissioning is a costly liability for oil and gas operators and a country’s taxpayers. For example, decommissioning the UK’s deep-water oil and gas wells in the North Sea is estimated to cost at least £55.7 billion.[xviii] [xix] Estimates suggest decommissioning the Brent oil and gas field will cost £1.2 billion[xx] and the Viking gas field £1 billion.[xxi] By contrast, decommissioning of oil and gas installations in the shallow waters of the Gulf of Mexico is said to cost between $4 to $10 million on average.[xxii] Some newer, deeper water wells may cost as much as $17 million per well.[xxiii]
Onshore decommissioning of an oil well involves the safe plugging of the hole in the earth’s surface and disposal of the equipment. The decommissioning process involves two main stages. First wells are “abandoned” and safely sealed shut. Then they are “reclaimed” meaning contaminants are removed and the land is restored. A study of reclamation costs in Wyoming found that the average cost to reclaim a single well ranged from $569 to $527,829.
Paying for decommissioning
Companies can pay for necessary decommissioning costs by directly self-insuring with the purchase of specialist insurance products, or indirectly by creating a licensed insurance company to provide coverage for itself. Alternatively companies can self-pay by contributing to designated reclamation bonds or common bond pools held by states or regulators or, more directly, with letters of credit and escrow accounts.
In the US, State reclamation bonds and bond pools are atypical means of contributing to decommissioning costs. Most States require companiesto put up a designated amount into a reclamation bond for each acre of miningland they hold or, in the six states that use pooled risk, mining companies putup just a fraction of the total cost of decommissioning and reclamation intoState bonds.
Theoretically this means that it is the energy company, ratherthan taxpayers, who are on the hook for well or mine decommissioning. [xxiv] However, States vary greatly in the amountthey require from mining companies. For example, a Climate Home Newsinvestigation in March 2018, found that bonds held by Appalachian states variedfrom $2,373 per acre in Ohio to near double that of $4,604 in Maryland. As for Colorado, one of the best-protected mining states holds $10,732 for every mining acre and Texas bonds are $7,655 per acre. For more on this see Figure 1.
In practice, the funds held in bonds are proving insufficient to cover the costs of decommissioning and making good. For example, the average estimated clean-up costs in West Virginia ranged from $7,840 per acre for surface mines to $28,460 per acre for an underground mine according to a 2017 report commissioned by the West Virginia Department of Environmental Protection Office of Reclamation.[xxv]
As for oil, a blanket bond should theoretically cover thecost of reclaiming all of an operator’s wells within a state. For instance, inthe state of New Mexico the blanket bond is valued at $50,000 for just one well, [xxvi] whilst a similar amount covers between 11 and99 wells in Texas and in Oregon it is around$150,000.
In the case of Canada’s, Alberta oil sands, Lee Footenotes, “as for the bonding, a few years back, there was just over $2 Billion CND in the reclamation fund for all of oil sands. My rough calculations put the basic cost at $12+ Billion. If something untoward happened (alternative fuels,oil sand boycott, etc.) it might be hard to get the extra $10 Billion to appearfor clean-up of what needs it already.” Indeed, 12 oil and gas companies wentbankrupt in Alberta during 2017 causing some 1,628 licensed oil and gas sites to be abandoned. This enabled the operators of such companies to avoidliabilities on those sites of more than $100 million leaving a massive bill for the taxpayer to sort out.[xxvii] Alberta’s Energy Regulator currently estimates the cost of reclaiming inactive oil and gas wells and abandoned facilities at more than $30.6 billion.[xxviii]
In essence, current regulations and the energy company’s financial contributions by way of bonds and other means are proving inadequate to meet future decommissioning and reinstatement costs. However, there is a potential solution now available on the market, which is designed to meet the needs of operators, regulatory authorities, and governments.
Quatre legacy fund solution
London based Quatre Ltd, has created a special purposetrust based in the Channel Islands and regulated by the Guernsey FinancialService Commission. The Quatre Legacy Fund allows extractive businesses tosecurely and efficiently set aside an amount each year to fund future liabilities, providing stakeholders with the assurance that future decommissioning and reinstatement liabilities will be met.
The special purpose trust model permits the build-up of funds through asset cash flow. In effect it acts as a pension plan for the mine or well’s eventual decommissioning. Moreover, this trust model allows for significant investment growth of trust funds (capital is tied up but not unproductive). Quatre as trustee would target growth of 2.5- 3.5% NAV (net asset value) per year according to the formula outlined in Figure 2 below. Given an estimated anticipated cost and date of decommissioning of a mine or well, it is possible to calculate, based on an assumed real rate of return, the required payments to be made into the trust on an annual basis in order to achieve the target saving at the relevant date. That calculation does not need to be cast in stone, but can and should be, reviewed over the life of the trust to reflect the actual performance of the trust’s investments, and any variations in (i) expected rates of return and (ii) expected decommissioning costs.
Source 3 Quatre Ltd
Initially, the trust can be funded by way of regular payments of a percentage of cash flow and subsequently, the trust model’s flexibility permits for contributions to be adjusted as the quantum of the relevant decommissioning obligations becomes clear.
Although the setting up and maintenance of a purpose trust comes at a cost, this is considerably lower than alternative security methods. For example, letters of credit cost considerably more. A letter of credit for £200 million with an annual renewal charge of 1.5% (if available at this rate) gives rise to a cost of £60 million over 20 years, and does not generate any form of return or benefit. Letters of credit tie up company capital and liquidity in a way, which would usually be entirely unproductive. Moreover, letters of credit, security bonds, and similar solutions are lost or ‘sunk’ costs compared to the build-up of a secure fund into the trust set up by Quatre Ltd.
This special purpose trust model also allows for regular reporting by the trustee, to the senior management of the company and to the relevant regulator, in respect of the funding of the company’s decommissioning abilities. Moreover, the purpose trust model creates the opportunity to encourage partner contributions to decommissioning throughout the life of a project. Furthermore, the existence of an enforcer gives licensees andregulators additional comfort that the trust fund will only be utilised for the specified purpose for which it was established. From the regulators point of view, the Quatre Legacy solution encourages the extractive industry to put regular sums of money aside from the income they earn from such projects, rather than expecting future projects profits or the taxpayer to pay the bill.
One thing is clear, current traditional methods of funding the decommissioning of mines and wells are not only costly but also notfit for purpose. A new approach is needed. The Quatre Legacy Fund solution ticks all the right boxes for clients, regulators and policymakers.