Alberta and Oil, or Subsidies Forever!

On April 9th of this year [2019], the Toronto Star reported on the estimated future costs of cleaning up decommissioned and abandoned oil and gas wells in Alberta. The Alberta Liabilities Disclosure Project estimated between $40 and $70 billion, based on data supplied by the Alberta Energy Regulator (AER). The AER’s official public estimate is about $30 billion. But internal (leaked) documents suggest including the oils sands cleanup costs could boost the bill to $260 billion.

There is very little incentive or pressure on the oil industry to clean up after themselves, In fact, a couple of loopholes encourage well-owners to abandon them. So far, the Alberta government has collected about $1.6 billion from the oil and gas industry to be applied to the clean-up.

Big Question #1: How much is that in real money? In other words, how much will it cost me, the average Canadian?

Let’s start with the $40 billion figure. There are about 33,000,000 of us. So that comes to about $1,200 per person in Canada. There are about 140,000 direct jobs in oil and natural gas extraction in Alberta. That means the clean-up cost per job is about $285,000. If the $260 billion is more realistic as a total clean-up cost figure, the cost per person is about $7,150, and the cost per job is $1,850,000. [1]

Big Question #2: Who will pay this cost?
The Alberta NDP and Liberals want to put timelines in place to force timely clean-up by the industry. The United Conservatives want Ottawa to provide tax incentives and financial support.

Of course in  the end we will all pay the total cost, one way or another. It will be paid in direct and indirect subsidies, and in the cost of everything we buy. [2] [3]

So should we pay up front, in the price of gas and oil? Or should it be back-end expense, after the oil and gas are consumed?

If we pay up front, the price of oil and gas will increase. That will make Alberta oil and gas more expensive and harder to sell. If we pay after the wells are dry, we will either pay higher taxes, or spend less on government services, or both. The bill would likely be financed by borrowing, so debt servicing would increase, too. Any pressure on the industry to pay a higher share will lead to more abandoned wells.

And some combination of these things will happen, along with the inevitable unintended consequences.

[1] The job numbers count people directly employed by the oil and gas industry. The median pay for Alberta oil industry workers is about $80,000/year. The average length of time worked in the oil patch is about 7 years. Thus, the average total earnings of an oil-patch worker is about $560,000. So the possible clean-up cost per job could be higher than 3 times the total average earnings per worker. So we could end up subsidising the average oil patch job at three times what the average worker actually earns.


[2] We pay directly at the pump, of course, but any tax rebate or government financial incentive for clean-up is a subsidy. We also pay in other ways, because all prices include the energy costs of the goods or services we buy. A large part of those costs are for gas and oil.

[3] Canada exports a large chunk of the oil and gas it produces. If the prices charged include the clean-up costs, one could argue that foreigners will be paying a large chunk of the total bill. This is unlikely to happen, since the higher prices would reduce exports. Besides, foreigners pay for our exports by selling us goods and services in return. Their prices would have to include the cost of the oil we sell them, else they couldn’t afford to buy the oil from us. So one way or another, we pay.

Update 1 May 2019: Jason Kenney, leader of the United Conservative Party of Alberta and its new Premier since yesterday, has already indicated where his heart lies: as promised, he loves the oil and gas industry. He's threatened to cut oil and gas shipments to B.C, since that Province has opposed the extension of the Transmountain Pipeline. IOW, he's already shown that he wants the Rest of Canada to subsidise Alberta's lifestyle. This will not end well.