Crisis of Confidence

A leadership scandal threatens the energy regulator’s essential work

By Michael Ganley

For more than 70 years,  ever since Imperial struck oil at Leduc No. 1 in 1947, Alberta has sought to both manage and benefit from what has proven to be the world’s third-largest store of hydrocarbons. For the last seven years, that task has fallen primarily to the Alberta Energy Regulator, which, according to its enabling legislation, is to oversee the efficient, safe, orderly and environmentally responsible development of the province’s energy resources, and to ensure that this is done in the public interest. In a place where oil and gas extraction—just extraction, not including refining and other “downstream” activities—typically accounts for more than a quarter of GDP and tens of thousands of jobs, this was never going to be an easy task.

Judging from the criticisms the AER has received over the years, from every direction, it hasn’t been.

On the one hand, industry (and the current provincial government) accuse the regulator of being a gusher of red tape, slow to approve projects and a hindrance to the oil and gas industry. On the other, many environmentalists, ranchers, community groups and academics accuse the AER of letting the industry run rampant, of failing to ensure that cleanup doesn’t fall to the public purse and of generally being captive to industry.

The truth, naturally, lies somewhere in between. The AER goes about its daily work— approving hundreds of routine applications, gathering data and ordering offending companies to clean up messes—mostly without controversy. In 2018 Alberta produced four million barrels of oil and 10 billion cubic feet of natural gas every day, generating $93-billion in wealth for individuals, companies and governments. All of this means many people feel strongly about the energy sector one way or another.

From a public interest perspective, some problems are well known. Alberta is facing serious unfunded liabilities, such as the roughly 3,400 orphan wells throughout the province (as of late 2019) that bankrupt companies have left behind. With cleanup costing an estimated $60,000 per well, that’s over $200-million, some of which could fall to the public. Pipelines, tanks and access roads have also been left unreclaimed. Oilsands operations have created massive tailings ponds and sand pits, with an estimated reclamation cost in the tens of billions, for which there is neither a credible plan of reclamation nor anywhere near enough money to fund one if there were.

Criticism grew to a crescendo in 2018, when it became clear that AER CEO Jim Ellis and a few co-conspirators had “grossly mismanaged” AER money and resources to support a private company that would further his and their interests. A whistleblower reported the wrongdoing, three public watchdog agencies wrote scathing reports, and Ellis quickly resigned. The AER has been in crisis ever since, with new executives, a new board, major cuts to funding and jobs, and the provincial government conducting an ongoing review. But as much as Ellis’s behaviour was abhorrent and possibly criminal, the central issue remains the need to effectively regulate the oil and gas industry in the public interest.

When the progressive conservative government of Premier Alison Redford created the AER in 2013, considerable optimism came from across the spectrum. The government said it wanted the AER to be a better regulator than its predecessor, the Energy Resources Conservation Board (ERCB), complete with extensive, verifiable data, greater transparency and more in-house expertise.

“There was excitement about the creation of an arm’s-length regulator that wanted to do good work,” says Nikki Way, a senior analyst for the Calgary-based Pembina Institute, which was involved in the visioning process for the AER. “A lot of the environmental community was willing to work with the regulator to increase the performance of industry and help put the right rules in place. The entire project of the AER had a lot of promising elements—even if there were outstanding concerns.”

Redford’s move received kudos for creating greater efficiency. Until the AER’s creation, companies had to go to Alberta Environment and Parks for applications having to do with environmental regulations and to the ERCB for approval of a production plan. The government brought those functions under a single body to reduce the administrative cost to energy companies.

The source of the AER’s funding, however, was a concern. The regulator’s revenue comes directly from industry, although the rates remain set by government. When oil companies fund a regulator’s activities, it can create the impression that he who pays the piper calls the tune.

The choice of leaders for the new body was also questionable. Redford appointed Gerry Protti, an oil and gas industry veteran and the founding president of industry’s primary lobbying organization, the Canadian Association of Petroleum Producers (CAPP), to be the inaugural board chair. For CEO, Redford chose Ellis, a former colonel in the Canadian Army and former chairperson of the Alberta Petroleum Marketing Commission. He had worked for the provincial government since 2006, holding the roles of both deputy minister of environment and deputy minister of energy.

A 2013 letter signed by three-dozen groups including landowner, labour, Indigenous and environmental organizations asked that Protti resign. “I’ve seen biased appointments before, but this one tops the list,” Don Bester of Alberta Surface Rights Group, which represents landowners, told Canadian Press. “His main theme throughout his life is oil and gas. You can’t change a person’s way of thinking by appointing him to a board and saying ‘Be neutral. Don’t be biased.’” Then-opposition MLA Rachel Notley said Ellis had a troubling record that included criticizing environmental groups for publishing “negative media on the oil sands” and trying to bar them from participating in oilsands hearings.

For a couple of years, however, it looked like Ellis and the AER were taking the right steps to meet Redford’s mandate. Ellis brought in experienced people with a variety of backgrounds, such as Monique Dubé, a well-respected toxicologist and Canada Research Chair in aquatic ecosystem health. The regulator developed new ideas and programs to gather and disseminate data, train personnel, and measure and address the cumulative effects of oil and gas development.

Richard Dixon was one of the experts Ellis brought to AER from academia. For almost 20 years, Dixon had been a professor of energy, economics and regulation at the University of Alberta. Looking back on Alberta’s 70-year history of energy regulation, he says, “We’ve been innovative. We’ve done some really good work. Have we made mistakes? Absolutely.” The two he cites off the top of his head are the lack of a fixed timeline for the reclamation of abandoned oil and gas wells and the fact the AER isn’t collecting enough security from energy companies to ensure post-production cleanup, in part because it confuses public with private assets.

“The AER’s financial security program allows companies to use the value of the resource in the ground to count towards the bond it has to put up,” Dixon says. “The trouble with that argument is that the resource is not the industry’s, it’s the public’s.”

That system, known as the Mine Financial Security Program (MFSP), primarily covers the oilsands. As of June 2019, the MFSP reported liabilities of $31-billion and security of only $1.5-billion, or less than 5 per cent. And even that small percentage likely skews high, because liability is based on reports from oilsands companies, reports that do not require supporting documentation and are rarely audited. The AER has publicly estimated the total unfunded liability resulting from oil and gas activity in the province (including conventional oil and gas) to be as high as $260-billion, although the regulator later said this number is a worst-case scenario and the best estimate is closer to $60-billion.

Determined to put research and study into practice, Dixon left the university and worked for the AER from July 2014 to March 2016 as Chief of Strategic Foresight. His job was to provide advice, knowledge and analysis to senior leadership to help improve the AER’s regulatory actions. He, among others, wanted the AER to produce better data and to make it more easily available to the public; he wanted the regulator to produce more original research and to publish in peer-reviewed journals to establish authority; and he wanted to see more training and education for AER staff.

In short, he wanted to see the AER be a credible regulator. “The question was how to operationalize regulatory excellence in serving the public interest,” he says. “How do we deal with reclamation data, which was all over the map? This kind of thing.” At the time, he says, the AER was receiving between 40 and 100 delegations every year—from across the country and around the world—to see how the AER managed the industry. “They came from Colombia and Brazil and Quebec, and we would walk them through how we regulate,” he says.

The initiatives started under Ellis’s leadership culminated in the creation of the Centre of Regulatory Excellence (CORE) within the regulator. The Centre focused on “empathetic engagement, competency and integrity”—which is ironic, considering where the effort wound up.

The election of Rachel Notley’s NDP government in May 2015 brought a shift in the relationship between government and industry, although not as profound as might have been expected. The new government brought in a carbon tax and capped emissions from the oilsands at 100 Mt per year, but it left the existing royalty regime in place and generally championed the industry nationally and internationally. Notley, despite having criticized Ellis’s and Protti’s appointments to the AER because of their close connections to industry, allowed both to stay.

But the Notley government did announce its intention to significantly reduce executive compensation at nearly two-dozen Alberta agencies, boards and commissions. Under PC governments, Ellis had been paid $700,000 annually. By early 2016 Ellis knew of this coming pay cut and he began to plot his exit strategy. He first approached accounting firm Deloitte Canada to help him develop a company that would offer regulatory training to international clients. Ellis would join it after retiring from the AER. That effort failed and the relationship disintegrated into litigation, but Ellis didn’t give up on his central idea.

He and the AER’s vice-president of international relations, Zeeshan Syed, founded ICORE Energy Services NFP (ICORE NFP). ICORE NFP had no employees to support the development of courses, so Ellis arranged for a memorandum of understanding with the AER whereby the regulator would provide human resources and technical expertise. Despite being president and CEO of the AER, Ellis signed the MOU on behalf of ICORE NFP, and the AER’s lawyer at the time, Patricia Johnston, signed on behalf of the regulator. Even before ICORE had employees or anything to sell, text messages between Ellis and Syed discussed salaries of $650,000 for the former and $500,000 for the latter.

Ellis also created a project within the AER called the ICORE Development Project (IDP). He reassigned 12 AER employees from their regular duties and dedicated them to the IDP. Eleven others delivered courses on behalf of ICORE NFP in Mexico. The AER’s executive vice-president, Jennifer Steber, became the executive lead for ICORE, and Ellis’s chief of staff, Martin Krezalek, became lead for the IDP. From the beginning, the AER did not track the time and resources spent on behalf of ICORE NFP, nor did it recover associated costs. This includes Ellis’s own time and expenses. Calendar entries indicate that team members invited Ellis to more than 30 internal meetings relating to ICORE between August 2016 and December 2018, and approximately two-dozen meetings with external parties. The AER did not record his costs, nor were any recovered.

Various people within the AER, including the regulator’s own lawyers, put up some resistance to Ellis’s directions. In early 2018, lawyers were raising objections to doing legal work for ICORE NFP. By April, Johnston was doing the work herself, as her staff would not, and she expressed her exasperation to Ellis in a text: “Jim after today I cannot continue to dedicate the same level of time I have to this file. As you know this has consumed many many hours of my time. I have tried to delegate down ICORE project related tasks only to have it delegated back up for reasons I will share in person.”

But Ellis persisted.

Then, in mid 2018, a whistleblower from within the AER filed complaints with the provincial Auditor General, the Ethics Commissioner and the Public Interest Commissioner. Between them, the three interviewed dozens of people and reviewed thousands of records. The overarching conclusion was, as the Public Interest Commissioner put it, that Ellis “demonstrated a reckless and wilful disregard for the proper management of public funds, public assets and the delivery of a public service.”

As part of her investigation, the Ethics Commissioner, former judge Marguerite Trussler, obtained Ellis’s cellphone. The text messages found there remove any doubt of Ellis’s intentions and those of his co-conspirators.

When it came time to discuss his expenses, Ellis was clear that their true nature was to be kept from the AER’s board and from then-Minister of Energy Margaret McCuaig-Boyd. Texting to Syed and Krezalek on June 1, 2017, Ellis wrote: “Re: my expenses, they are all clean, there is no mention of CORE or Icore, we had changed to AER reputation meetings.”

Ellis also sought to uncover the name of the whistleblower. At one point, in November 2018, he and Krezalek thought it might be Corey Froese, a senior engineer who worked on IDP. On November 2, 2018, Krezalek texted Ellis: “If it is Corey I will crucify him on the private side with everything in my possession in response to this.” Ellis replied: “Thanks … Tyson thinks this is Corey…” Trussler concluded that Ellis expected absolute loyalty and that if he had known the whistleblower’s identity, there would have been retribution.

“Those texts were crucial to my findings, as they show a different scenario than that espoused publicly and under oath by Jim Ellis and others,” wrote Trussler. “In my view, the candid texts portray the truth more than the position taken by Mr. Ellis.”

The AER board of governors and Minister McCuaig-Boyd, tasked with overseeing Ellis and the AER, came in for criticism in the public reports. Protti received some particularly harsh words from Trussler. “[He] was out looking for people of significance to sit on the ICORE board, first as a governance board for the ‘for profit’ corporation and then as an advisory board for the ‘not for profit,’ ” she wrote. “It appears from the texts that Mr. Protti was initially fully engaged with creating ICORE, but at some time in 2018, he seems to have fallen into Mr. Ellis’s disfavour. I interviewed Mr. Protti but he was not very forthcoming.” Protti resigned from the board in March 2018.

The Auditor General found that board oversight was lacking and its processes ignored, and that ministerial oversight was ineffective. Ellis, however, had gone out of his way to mislead both. When he first introduced the CORE concept to the board, it was as a training initiative for AER staff. By then, however, Ellis was already meeting with Mexican officials about delivering training in that country. When questioned by the board about the propriety of the relationship between the AER and ICORE NFP, Ellis reassured them that an external law firm had vetted and approved the arrangement. In fact, Ellis had retained the firm to act on his behalf and that of ICORE NFP, not the AER.

In the end, the Auditor General estimated that ICORE NFP consumed $5.4-million of AER resources. The regulator recovered about $3.1-million of that from ICORE NFP. It’s unclear whether the RCMP have considered criminal charges for breach of trust by a public official against Ellis and his co-conspirators. The Auditor General does not have the authority to refer the matter to the RCMP. The Ethics Commissioner has the authority to do so, but is not allowed to say whether she has done so or not. The AER has hired outside legal counsel to look at its options, but says it has not made a decision on the issue. The current ministers of Justice and Energy could certainly do so, but neither responded to questions on this or any other matter.

Whatever Ellis’s fate or the cost to the public purse, the greater damage has been done to the notion of a regulator that is acting in the public interest. While Ellis and others were consumed with ICORE, other AER initiatives faltered or stalled outright. The public fairly questions whether the AER knows the true amount of unfunded oil and gas liability in Alberta. Talented people, including Dubé and Dixon, have fled the AER or been fired.

The UCP government has seized the opportunity to replace the entire AER board and senior management, to reduce the AER’s staff by 200 full-time employees, or one in six staff, and to reduce AER’s budget by $147-million over four years. It also launched a review of the regulator. Critics say Kenney is taking advantage of the Ellis scandal to inculcate a stronger bias toward industry at the AER, especially to speed up project approvals.

In October 2019 interim AER CEO Gord Lambert, a former Suncor executive who was on the AER board while ICORE was being created, apologized to regulator employees. “I will not sugarcoat unpleasant facts,” he said. “The reality here is that several previous leaders took actions that were in their self-interests but not in the organization’s interests, and hid these intentions very deliberately from the board and [executive leadership team].”

Since last fall the AER has insisted that it’s working to uphold public safety and environmental protection. It points to ongoing efforts to improve the financial reporting it receives from companies and to introduce an “area-based closure program,” which would see companies with inactive oil and gas infrastructure in close proximity work together to remediate all of it at once, theoretically saving time and money. The regulator is also reviewing the liability management rating program, through which it assesses the financial health of operators to ensure they can deal with end-of-life obligations for their wells.

In fairness, much of the environmental debt that has accumulated over the years is not the result of any decision taken or not taken by the AER. The regulator does not decide the level of security required from operators or the timelines for reclamation, nor does it define the public interest. Those things are left to government. The current government not only supports industry but is its biggest cheerleader, going so far as to fund a $30-million “War Room” to defend oil and gas from perceived enemies. However, the interests of the oil and gas industry are not synonymous with those of Alberta’s citizens. Former Progressive Conservative premier Peter Lougheed knew this well. He used to encourage Albertans to “think like owners” when it came to their oil and gas.

Ways for the regulator to earn greater legitimacy in the eyes of the public are the same things the AER was working on before Ellis took everything off the rails. “Get peer-reviewed research published,” Dixon says. “Get data out there around issues like environmental debt. Where is the peer-reviewed data on that?” Pembina’s Nikki Way questions the current government’s emphasis on the “efficient and orderly” aspect of the AER’s mandate rather than on the safe and environmentally responsible one. She would like to see better data and more work done to ensure that energy companies are complying with the rules. She says the regulator needs the resources and clarity to ensure it can grapple with the changes facing the industry.

“The regulator has to prove that it has high standards so it can actually assure Albertans it can deliver,” she says. “Right now we don’t have a regulator that can provide that confidence.”

Michael Ganley is a writer in Edmonton and the former editor of Alberta Venture magazine.

 

 

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