DAVID DODGE, PEMBINA INSTITUTE

Black Swans

Think oil sands companies are certain to clean up after themselves? Think again. How citizens could be stuck with the $15-billion bill.

By Jeff Gailus

A heartbeat off Highway 63 north of Fort McMurray, a boardwalk leads you through a quiet grove of aspen and jack pine, where songbirds fill the air with their tweets and twitters. It was too early for flowers when I was there, but stumps whittled to coarse points made it clear that an army of beavers was busy turning poplars into dams and dens. You’d never know that just 30 years ago, this very spot was at the bottom of a Syncrude strip mine. Now Gateway Hill is the poster child for the oil sands industry’s efforts to reclaim the land.

Just the other side of the great green wall of trees are two tailings ponds, graveyards of the toxic slurry separated from the venerable bitumen. The one to the east looks like the vestiges of a great salt lake. Sand (known to the industry as “fine tails”) has piled in heaps along the banks, and the retreating water has left white stains on the cracked surface of what was, not so long ago, underwater. It’s impossible to tell from here, but the dark water is full of heavy metals and other carcinogens deadly to wildlife and humans alike.

Gateway Hill is one of the first steps in what government and industry claim will be the total reclamation of the land affected by oil sands development. But what reclamation will look like, how long it will take and how much it will cost—even whether it will happen at all—is much less certain than the ugly, industrialized landscape that sweeps away to the horizon. Although both the federal and Alberta governments assure us that every oil sands company must fulfill its legal obligation to reclaim 100 per cent of the land it disturbs, roughly 70,000 hectares as of late 2011, their assertions don’t inspire the reassurance that comes, say, when your broker tells you that you do have fire insurance and that, yes, it will cover the catastrophic wildfire that just incinerated your home.

Lest our expectations exceed any hope of attainment, it’s important to differentiate “reclamation” from “restoration.” According to the Society for Ecological Restoration, reclamation has more to do with stabilizing terrain, assuring public safety, and “aesthetic improvement.” Restoration, on the other hand, recovers a damaged ecosystem, returning it to “its historic trajectory.” SER defines a restored ecosystem as one that contains “sufficient biotic and abiotic resources to continue its development without further assistance,” so that it can “sustain itself structurally and functionally” and become resilient to “normal ranges of environmental stress and disturbance.”

What’s envisioned for the oil sands region is rather more vague than either of these terms suggests, an elusive and infinitely interpretable target that’s somewhere between shopping mall and alpine meadow. Alberta’s Conservation & Reclamation Regulation says that post-mining landscapes must be returned to “an equivalent land capability”; the land must be capable of supporting one or more uses that require an ability “similar” to that which “existed prior to any activity being conducted on the land,” even though “the individual land uses will not necessarily be identical.”

Why such concern? Because the citizens of Alberta—not oil companies—could ultimately be on the hook for the $15-billion bill to clean up the oil sands.

Once we’ve stick-handled our way through the bureaucratese, it’s clear the focus is anthro-, rather than bio-centric, concerned more with what can be engineered to support human-oriented ventures than with resurrecting an ecosystem to some former semblance of itself. This anthropocentric vagueness and resulting confusion, the Royal Society of Canada’s (RSC) 2010 oil sands report concluded, hinders “a critical collective agreement on the goal of oil sands reclamation; how, and over what time achievement of that goal should be assessed; what is biophysically possible; and who should be involved in determining targets and trajectories.”

Such reckless ambiguity, and the fact that “capability” is measured largely in the context of commercial forestry, has left many critics to wonder if, in the whirlwind of laissez-faire chaos that has come to define resource development in Alberta, the end product will be some patchwork, extemporaneous refurbishment resulting not in the forests and fenlands that once supported a rich diversity of life here, but in an expanse of tree farms and sporadic puddles. Given that a measly 104 hectares—less than one-fifth of 1 per cent of the total area impacted by oil sands mining—has been reclaimed to date, such a cynical view is not unwarranted.

But who knows what the difference between “reclamation” and “restoration” might actually mean 100 years from now? Better, some argue, to turn our attention from nature to money. Companies that want approval to mine oil sands in Alberta must provide financial security—cash deposits, bonds or letters of credit guarantees—before they proceed to turn boreal forest into bitumen. The Alberta government’s new Mine Financial Security Program was adopted in 2011 after more than a decade of quiet encouragement from Alberta’s auditor general, Merwan Saher, who had expressed his concern about the inadequacy of security arrangements four times since 1999. According to the government, the new MFSP “provides a responsible balance between protecting the people of Alberta from the costs associated with the liability of coal and oil sands development in the event an approval holder cannot meet their obligations,” while simultaneously “maximizing the opportunities for responsible and sustainable resource development.”

This sounds persuasive, but numbers tell a rather different story. As of December 31, 2011, the government had collected almost a billion dollars in reclamation security from eight oil sands mining projects, almost half of which ($405,674,233) was from Suncor. Alberta Environment & Sustainable Resource Development does not require security deposits for in situ projects, which are governed by the Energy Resources Conservation Board’s Licensee Liability Rating Program. For those of us hard pressed to qualify for a mortgage, one billion sounds like an extraordinary sum, but the inadequacy becomes apparent when one compares the security to the overall liability. According to the Pembina Institute, these security deposits represent just a fraction—less than 7 per cent—of the total cost of reclaiming oil sands development to date. Indeed, the institute pegs the overall liability at $15-billion, and notes that the gap is growing wider by the day. The RSC also says that “current practices for obtaining financial security for reclamation liability leave Albertans vulnerable to major financial risks.” Its report came out in December 2010, before the Alberta government’s new program, but the RSC’s conclusion still holds true. While the new MFSP does require marginally more security up front, it still inadequately addresses the Royal Society’s concerns.

And then there are the economists, one of whom is Andrew Leach, an associate professor of business at the University of Alberta. Leach is a recognized leader in the fields of environmental and energy economics and a regular public commentator who has taken a keen interest in the oil sands. Although he largely supports resource development, he agrees that the province’s decision to delay the collection of full financial security from the oil companies is, as he wrote on his blog in March 2011, “simply not an acceptable solution.”

Why such concern? Because the citizens of Alberta—not oil companies—could ultimately be on the hook for the $15-billion bill to clean up the oil sands. That’s $6,300 for every wage-earning taxpayer in the province. Indeed, if the status quo continues, Albertans could be responsible for an environmental liability of more than $33-billion by 2025.

The Alberta government seems to have a sanguine, almost religious faith in the corporations that turn our bitumen into crude, profits and tax and royalty revenue. Under the new MFSP, for instance, very little reclamation security is required from oil sands companies up front, and a full security deposit isn’t required until the last six years of projects, some of which can last decades. This means the accrued liability continues to grow.

The full security deposit isn’t due until companies already have liquidated most of the value in their projects. With only six years left of, say, a 30-year supply of bitumen, Oil Company X has realized most of its profits, and the value of the asset the government is depending on to secure the ballooning reclamation liability has vaporized. Of course, X may want to do the right thing, if only to maintain the regulatory and social licence to move on to the next mine. But what if something changes the context in which it operates, just as the belated deadline for the full security deposit looms on the horizon?

In a comment on Leach’s blog post about the MFSP, Dan Woynillowicz, Pembina’s director of strategy and communications, suggested that “one of the most likely scenarios in which a company would abandon an oil sands operation is when the asset, the oil sands 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 this approach may not be all it’s cracked up to be.”

The value of these projects is not set in stone; it is determined by the price of oil and by government regulations, both of which can and do change. What, for instance, might Oil Company X do if the price of oil plummets to $40 per barrel just when the company is supposed to invest a billion dollars in cleaning up its mine and tailings ponds? Or what happens to the entire industry if the global community—faced with the increasingly severe impacts of climate change—decides to tax carbon, pricing oil sands crude out the market? And what if a company’s environmental impact is far more extensive than anticipated—if one of the dikes holding back tens of millions of litres of toxic sludge breaches, releasing the whole carcinogenic mess into the Athabasca River? What if Alberta’s new monitoring program finds, 20 years on, that oil sands development is unequivocally cancerizing the people of Fort Chip and toxifying the whitefish and moose on which they depend? What then?

The Alberta government dismisses the likelihood that oil sands producers might bail out, or says that if they do, the market value of the companies themselves will provide adequate collateral. There’s no need for full-cost security deposits, implied David Sands, communications director for Alberta’s Ministry of International & Intergovernmental Relations, in a response to Leach’s blog post. “There’s operators on second mines, fourth decade,” he wrote. “They haven’t run away.” But as Leach responded, such an attitude “doesn’t cut it in terms of risk analysis for a multi-billion dollar unfunded liability.”

Canada’s history of assuming unsecured environmental debts of transitory corporations substantiates Leach’s position. Hundreds of bankruptcies and abandonments have already left Canadians with a multi-billion dollar liability managed with tens of millions of tax dollars every year. Scott Vaughan, Canada’s diligent federal commissioner of environment and sustainable development, recently audited the government’s management of its Federal Contaminated Sites Inventory. The numbers are staggering: of the 22,000 sites, 14,500 continue to put Canadians’ environmental health at risk. These don’t include the Sydney tar ponds, the Marwell tar pit in the Yukon and the Gunnar uranium mine in Saskatchewan, which have cost tens of millions of dollars to clean up.

One of the more infamous examples is the Faro Mine near Whitehorse. Once the world’s largest open-pit lead/zinc mine, it became Canada’s single biggest environmental albatross when Anvil Range Mining Corporation went bankrupt in 1998. This inconvenient insolvency left the federal government to clean up a sprawling open-pit mining complex covering 2,500 hectares, about 3.5 per cent the size of the area disturbed by oil sands mining. The site includes an estimated 64,000 hectares of contaminated soil and groundwater, 70 million tonnes of tailings and 376 million tonnes of waste rock. Cleanup will take at least 100 years, and the estimated cost to you and me, the taxpayers, is now estimated by Vaughan at $523-million. Other estimates put the cost at over $1-billion.

The truth is, no one knows exactly how much pollution these sites harbour or how much it will cost to finally reclaim them. In his report, Vaughan found that the government hadn’t even decided whether more than 8,000 (55 per cent) of the contaminated sites, many of them having sat vacant for decades, even needed remediation. Nevertheless, the federal government has spent about $2.8-billion on remediation since 2005. According to the Public Accounts of Canada, the remaining financial liability to remediate or otherwise manage the risks for just 2,200 of those sites is estimated at $4.3-billion. This left Vaughan to conclude that “the government does not know the full extent of its financial exposure.”

A former oil sands mine. Less than 1 per cent of disturbed land in the region has been reclaimed; citizens hold most of the liability.

A former oil sands mine. Less than 1 per cent of disturbed land in the region has been reclaimed; citizens hold most of the liability. (Garth Lenz)

It’s not just the federal government that has a backlog of environmental liabilities it can’t afford to clear. The Alberta government too has racked up a significant debt, this time on behalf of the conventional oil and gas industry. Like other industrial facilities, inactive and abandoned oil and gas wells present a risk of soil and groundwater contamination until they are reclaimed. Despite several attempts by provincial regulators to resolve the issue over the last 15 years, the number of inactive and abandoned wells has swelled to more than 107,000, and the numbers grow every year. This presents an estimated liability of $19-billion—$4-billion more than the accrued liability for oil sands mines.

Worse, the security payments collected to date for both conventional and in situ wells account for only approximately 0.2 per cent of this growing debt. “Clearly,” wrote Barry Robinson, a staff lawyer at Ecojustice, in 2010, “the legislative and policy framework for well abandonment and reclamation… is not effective in encouraging or requiring industry to address these financial and environmental liabilities in a timely manner.” These failures, of course, invite a question: If the Alberta government can’t make the conventional oil and gas industry clean up after itself, what makes it think the oil sands industry is going to do any better over the next century?

The Alberta government’s naive security plan dismisses a whole slew of possible catastrophes as highly improbable and therefore not worth worrying about. In fact, the real world seems governed more by Murphy’s Law. Just ask the people of Fukushima, Japan. Michael Schlesinger, an engineer and climate scientist at the University of Illinois, maintains that the Fukushima reactor behaved as designed, initializing an emergency shutdown during an earthquake. But the cooling system for both the reactor cores and the spent fuel rods was not designed to withstand a “once-in-a-millennium” tsunami. Looking back, it seems obvious that the plant was vulnerable to flooding.

BP, which owns a stake in three in-situ oil sands projects, knows all too well about the clarity of hindsight. On April 20, 2010, BP’s Deepwater Horizon well in the Gulf of Mexico exploded, causing the largest marine oil spill in history. When the smoke had cleared, 11 people were dead, hundreds of miles of coastline had been coated in oil and the region had been extensively damaged, probably for decades. The Gulf’s fishing and tourism industries were decimated, as were the livelihoods of thousands of people. The company didn’t come out unscathed either. BP’s credit default swap spreads (i.e., the cost of insuring against bad loans) soared from about 40 basis points—which made it a safer investment than most sovereign nations—to 1,100 points, giving it the same investment grade as a junk bond. BP estimates its costs will be on the order of $40-billion, though the total economic cost of the spill may never be known.

“The whole industry missed the probability of such a traumatic event,” said Nansen Saleri, CEO of Quantum Reservoir Impact and a former executive at Saudi Aramco, two months after the oil began to spew in the Gulf. “With the benefit of hindsight, it’s becoming very obvious that the safety systems and contingency plans in place were not commensurate with the true risks.”

In the wake of the Faro mine and Deepwater Horizon disasters, little comfort should be found in the fact that oil sands development has proceeded apace for four decades without a company having “run away,” as David Sands argued. Such logic does little to help assess the probability and severity of future risk. In the case of highly unlikely but devastating events—a tailings pond leak, a carbon tax, even the emergence of competitively priced alternative sources of energy—the past simply becomes a beguiling mirage.

“While it seems hardly likely today, many events could change the economics of oil sands mines and make the ongoing business model in northern Alberta a thing of the past,” wrote Leach a week after the tsunami drowned Fukushima. “In deferring a payment, there is always a risk that the holder of the liability will not be around or sufficiently solvent to cover the costs when the time comes. The companies operating in the oil sands are large and seemingly very stable, but the energy business is not known for long-term stability.”

So how does the Alberta government justify putting its citizens on the hook for a $15-billion-and-growing liability that they or more likely their children may have to make good on? “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,” says Sands. “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.”

To claim such a “balance,” however, belies the facts. With 2011 revenues of $453-billion, Exxon Mobil (which owns 30 per cent of the Kearl Oil Sands Project) topped this year’s Fortune 500 list. Chevron, with a 20 per cent stake in Athabasca Oil Sands Project’s Muskeg River mine, took third spot with revenues of $246-billion, while ConocoPhillips brought in $237-billion. How about Total SA, which has interests in several oil sands projects through its subsidiary Total E&P Canada? $206-billion. Suncor? $39-billion. Imperial Oil, which owns the other 70 per cent of Kearl, earned $30-billion last year. To put it another way: the companies whose cashflows the Alberta government is so concerned about boast greater average annual revenues than the government itself. The government’s position becomes even more inexplicable given the few downsides and little cost to demanding that the oil industry insure itself against the vicissitudes of politics, the market and fate. As government and industry are proud to tell us, Alberta is home to over half of the world’s investable oil. Where else is Big Oil going to go? Nigeria? Venezuela? Iran?

Oil companies are large and seem very stable—but the energy business is not known for long-term stability.

Besides, the government’s decision to defer payments for reclamation security does not appreciably affect whether or not corporations invest here, Leach reminds us, because “the net present value of [reclamation costs] should not be affected, assuming that the end-of-mine-life liability is fully secured by either up-front or deferred payments.” In other words, companies are expecting to be required to clean up, whether now or later. The outstanding issue is who should assume the risk of a surprise visit by an unlikely disaster—oil companies or the citizens of Alberta.

Asks Leach: “If the deferred payments are not a means to improve the investment environment in Alberta by limiting up-front expenditures, and there are no fiscal advantages from collecting later versus now, why not collect security letters-of-credit or escrow deposits to match the ongoing incurred liability?” Leach makes a strong case to revisit an issue the government bungled when it adopted its new Mine Security Financial Plan. It is, he says, time for an audit. Alberta’s auditor general, Merwan Saher, must take another look at a system that massively subsidizes oil companies while putting the citizens of Alberta at risk.

To expect companies to follow through with their obligations and best intentions is to ignore also what Oxford statistician Nassim Nicholas Taleb calls “black swan” events. He chose the term based on an ancient Latin expression, the oldest known usage of which was in the Roman poet Juvenal’s “rara avis in terris nigroque simillima cygno,” which translates roughly to “a rare bird in the lands, very much like a black swan.” When Juvenal was writing in the first and second centuries, no one believed black swans existed; all swans in the Occident had white feathers. But after black swans were discovered in the late 17th century in New Holland (now Australia), Juvenal’s cynical aphorism metamorphosed into a lesson about the arrival of the inconceivable.

Taleb’s black swan theory explains the disproportionate role of events beyond the realm of normal expectations in history, science, finance and technology. The most obvious example is the recent global economic collapse, which seemed to come out of nowhere. For Americans, both 9/11 and the attack on Pearl Harbour would also qualify. When they occurred, these events were unexpected and disastrous, but in hindsight, they seemed predictable, even inevitable. Owing to the very nature of small probabilities, it’s impossible to predict such events, so we tend not to worry about them thanks to psychological biases that make us individually and collectively blind to uncertainty and the significant role rare events play in history.

“I don’t particularly care about the usual,” writes Taleb. “Indeed the normal is often irrelevant. Almost everything in social life is produced by rare but consequential shocks and jumps; all the while almost everything studied about social life focuses on the ‘normal,’ particularly with ‘bell curve’ methods of inference that tell you close to nothing. Why? Because the bell curve ignores large deviations, cannot handle them, yet makes us confident that we have tamed uncertainty.”

By allowing companies to defer most of their cleanup costs for years, even decades, we ignore the potential consequences not only of improbable disasters, but also of inconceivable game-changers. Taleb writes that institutions are particularly vulnerable to black swan events when they become “too big to fail.” Recall Prime Minister Stephen Harper’s description of the oil sands as “an enterprise of epic proportions, akin to the building of the pyramids or China’s Great Wall, only bigger.”

Back north of Fort McMurray, on the other side of Highway 63 from Gateway Hill, sits a sight of another sort. This is Syncrude’s former West Mine pit, a commercial-scale experiment to discern whether toxic tailings ponds can be turned into healthy aquatic ecosystems, complete with rainbow trout and the clean water they need to survive.But for the sprawling industrial plant behind it, this pond looks like a freshwater lake one might find almost anywhere in Canada—the sun glitters on the surface of the water, and grass grows at the water’s edge. I can imagine a flock of white tundra swans bobbing on the surface as they take a break from their long journey to the Arctic Circle. The pond is a hopeful sign. But it shouldn’t distract Albertans from asking whether a swan of a different colour might visit us first.

Jeff Gailus has been writing about science, nature and culture for 15 years. He is the author of Little Black Lies (RMB, 2012).

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