August 6, 2007

Saskatchewan orphan well cleanup program to be funded by oil and gas industry

The Saskatchewan government has introduced a new program for the cleanup of orphan oil and gas wells and facilities in the province. Developed in consultation with industry, the regulatory program authorizes the government to establish a fund, paid for by oil and gas companies, to cover the cost of cleaning up orphan wells and facilities.

"This program, designed with the input of our oil and gas industry, provides clarity and transparency to operators on their responsibilities and also recognizes the dynamic of the many small, independent operators who make up such a large part of our top industry," said Saskatchewan Industry and Resources Minister Maynard Sonntag. "Managing orphan wells and facilities has been a challenge for regulators in balancing the need to protect the environment with the significant cost of cleaning up these abandoned wells and facilities," he added.

The new program has two key components, a security deposit and an annual levy. The security deposit will be based on a formula that weighs the assets of the well and facility licensee against the estimated cost of decommissioning the well and facility once it is no longer producing (i.e. the liability). The security amount is the difference between the two.

The security deposit serves two purposes: it prevents an individual who does not have sufficient economic means from acquiring oil and gas wells or facilities; and, if a company goes bankrupt, the security deposit will cover the cost of decommissioning and reclaiming the orphan property.

In the event that the security deposit amount is not enough to cover the cost of the necessary work, all of the oil and gas companies operating in Saskatchewan will be levied a fee, called the Orphan Fund Levy, to make up the shortfall.

The annual levy assessed to each licensee will provide funding to pay for the cleanup of a designated number of orphan wells and facilities every year, and is expected to be a reasonable amount that does not cause hardship for the industry.

An orphan well or facility is defined as one which is inactive, and where the company that owns the well or facility has either gone out of business or cannot be located.

The Saskatchewan Orphan Well and Facility Liability Management Program is the most significant in a series of significant changes to the provincial Oil and Gas Conservation Act and the Oil and Gas Conservation Regulations, 1985, which came into effect in late June. Other changes are intended to modernize a number of regulatory standards, the overall objective being the creation of a regulatory environment that is more relevant to the current oil and gas development practices and technologies currently employed in Saskatchewan.

The new program replaces the old Oil and Gas Environmental Fund, set up in 1989 to provide a mechanism to pay for the cost of abandoning orphaned wells and responding to major oil spills or other environmental disasters where a responsible operator could not be identified. The fund was created by assessing a one-time fee of $100 on each well drilled before May 1989, to a maximum contribution of $20,000 per company.

In 1999, the provincial government formed an advisory committee to review the effectiveness of this fund. Its members included experts from the oil and gas industry and government and represented the Canadian Association of Petroleum Producers (CAPP); the Small Explorers and Producers Association of Canada (SEPAC); the Saskatchewan Swab Producers Association (SSPA); Saskatchewan Environment (SE) and Saskatchewan Industry and Resources (SIR).

The advisory committee recommended replacing the Oil and Gas Environmental Fund with a more comprehensive orphan well and facility liability management program.

The new program incorporates elements that are carefully designed to ensure support for the long-term economic prosperity of the smaller oil and gas companies. These special elements make the Saskatchewan program unique and are designed specifically to accommodate the large number of small operations that make up most of the province's oil and gas industry. As a result, this program manages to strike a balance between protecting the economic interests of the upstream oil and gas industry and addressing the government's concerns, while managing risks associated with the growing number of orphan wells.

Another notable change in the amended regulations is the introduction of mandatory licensing of all upstream oil and gas facilities in Saskatchewan. The licensing of upstream facilities is necessary to ensure that the most current ownership and liability information is available to support

In order to ensure minimal disruption to the industry, all upstream oil and gas facilities that existed prior to the introduction of the amended regulations will be automatically assigned a facility licence free of charge. Any company building a new facility after the introduction of the amended regulations will be required to apply for a licence and pay a prescribed fee of $500.

In the coming months, all licensees will be provided with a detailed list of their licensed facilities, licensed wells and estimated security deposit amounts. Ample time will be provided to the licensees to review the information provided and make any necessary corrections or appeals before any security deposit is collected.

Other regulatory changes cover well licensing, safety signs, site reclamation, equipment spacing, setback distances, emergency response plans and spill reporting.

More information is available from Bob Ellis at Saskatchewan Industry and Resources, 306/787-1691, E-mail rellis@ir.gov.sk.ca, and on Industry and Resources Web site, www.ir.gov.sk.ca (click on Saskatchewan's Oil and Gas Resources, What's New section).

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