Alberta oilsands cleanup securities inadequate: Auditor General

Alberta oilsands cleanup securities inadequate:  Auditor General
Bitumen is mined from Shell Canada’s Jackpine oilsands mine near Fort McMurray in northeastern Alberta. The province’s auditor general questions whether existing security deposits will be adequate to pay for the cleanup of Alberta’s currently operating mines.Courtesy of Shell.

Taxpayers may be on the hook for billions of dollars in oilsands cleanup costs due to a risky system of calculating and collecting securities from companies, the province’s auditor general warned earlier this month.

“We have concluded that improvements are needed to both how security is calculated and how security amounts are monitored. Without these improvements, if a mine operator cannot fulfill its reclamation obligations and no other private operator assumes the liability, the province is at risk of having to pay substantial amounts of public money,” states a report released July 6 by Alberta Auditor General Merwan Saher.

The audit, which looked at the province’s Mine Financial Security Program (MFSP), found that as of Dec. 31, 2014, just $1.57 billion in securities were being held for coal and oilsands mine cleanup, compared to the total estimated reclamation liabilities of $20.8 billion.

Saher said much of the problem centres on the way the government calculates financial securities for companies, which uses an assets-to-liability approach rather than requiring companies to pay full securities up front.

Mining operators are required to pay a base deposit and to provide yearly plans for reclamation to the Alberta Energy Regulator (AER). For all work planned but not completed, companies then owe $75,000 per hectare in future securities. Companies start paying those securities when there are fewer than 15 years left of reserves; those payments gradually increase until they are fully paid with less than six years left on a project.

But due to flaws in the calculation and the ability for companies to find other ways to extend their mine life, Saher said not a single company has paid additional financial securities to date.

“Presently, no oil sands mining operator has posted more than the base amount of security. In other words, no security is currently required under the various other forms of deposit based on data submitted by oil sands mine operators,” he wrote.

The problem with the assets-to-liability calculation, Saher said, is that it overestimates the amount of assets in comparison to liabilities. Currently the formula counts both proven and probable resources as equally valuable assets, and uses a “price forward factor” to account for fluctuations in the market that Saher said “underestimates the impact of future price declines.”

“The department (of Environment) has accepted the risk of not protecting against the risk of a broad based and rapid structural decline in the oilsands sector,” the report notes.

Saher said companies are able to avoid posting securities by extending their mine life through in situ oilsands extraction processes and by combining numerous projects into one.

Furthermore, there is a disincentive for companies to plan and complete early reclamation, since the more they plan and fail to complete, the more they will owe in the end. Instead, mine operators can defer cleanup until the end of the project, placing a greater risk on taxpayers.

“If incentives are not in place to reclaim lands as soon as reclamation is possible, mine sites may remain disturbed for longer than necessary and Albertans face a larger risk that they will end up having to pay the eventual reclamation costs,” the report warns.
Saher also found a lack of auditing of the MFSP by the AER. Though two Level 4 audits are supposed to take place each year – one for coal mines and the other for oilsands mines – only two have taken place for oil and one for coal since 2011.

“There presently is no evidence that the level of audit activity is commensurate with the risks that exist,” according to the report, which noted that the lack of verification has been insufficient especially for coal, given the amount of risk posed by a sector where the price of the resource is in steep decline.

Saher recommended the AER develop a plan for sound auditing.

“Without an effective and timely monitoring program, necessary adjustments to security amounts may not be promptly identified, which increases the risk that Albertans will end up having to pay for the conservation and reclamation of mine sites,” the report concluded.

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