No end in sight: End-of-life management of oil wells in Alberta

Abstract

The development of oil and gas resources while maximizing production has been the primary objective of policymakers and regulators in Alberta, Canada for many decades. When oil prices were sufficiently high, environmental risks and other concerns received little attention. When oil prices collapsed in 2014, Alberta’s inventory of inactive, decommissioned, and orphaned wells grew dramatically. It is now a complex problem for operators, regulators, and policymakers and the return of high oil prices has not resolved the issue. This article uses a real options model to evaluate firms’ end-of-life decisions for oil wells in Alberta subject to mean-reverting oil prices, to understand the factors that affect a firm’s decision to reclaim an oil well at the end of its useful life versus leaving it unreclaimed. We focus on a firm’s optimal management of a representative oil well in response to different policy decisions, rather than a socially optimal outcome that internalizes the negative externalities of oil and gas development. Results under our baseline parameters show that firms operating a representative oil well will extract over 95 per cent of the reserves in place and reclaim the well. When the cost to decommission or cost to reclaim a well is larger than the cost of maintaining an inactive well, the firm will still extract over 95 per cent of reserves but will leave the well in an inactive state (not able to produce) and never reclaim the well. This suggests that some of the unreclaimed oil and gas wells have high decommissioning or reclamation costs. If those cleanup are correlated with environmental risks (groundwater contamination, gas migration, etc.) then the inventory of inactive oil and gas wells could be populated with the riskiest wells, adding an additional level of complexity to the issue of unreclaimed oil and gas wells in Alberta. We examine the effect of a time limit on inactivity or a bond has on end-of-life decisions. Our results suggest that neither policy on its own ensure wells with high decommissioning or reclamation costs are reclaimed at the end of useful life. However, a combination of a time limit on inactivity and a bond could be useful policy instruments to help ensure high-cost oil and gas wells are reclaimed at the end of their life.