Finding the money for mine decommissioning and reclamation

Materials World magazine
,
28 Nov 2018

Decommissioning the ever-growing number of end-of-life abandoned or orphaned mines and oil and gas wells is proving an increasingly costly and technical problem for companies, regulators and policymakers. Nicholas Newman investigates.

The decommissioning requirements of mines and infrastructure in Australia, the USA and Canada give an indication of the scale of activities needed now and in the future. According to think tank, the Australia Institute, the country has 3,000 operational mines but over 60,000 abandoned or orphaned mines, of which only a handful have undergone any form of rehabilitation.

The USA has more than 500,000 abandoned mines on public and privately owned land, according to government figures, which is a significant rise above the 13,000 reported in 2016. The energy renaissance of the last decade has produced more than 900,000 active oil and gas wells in the USA – Texas alone had approximately 118,000 inactive wells in April 2017.

Canada also has a significant oil and gas industry. For example, the province of Alberta has, according to Canadian Broadcaster CBC, some 468,000 wells, of which around 30% (90,000) are inactive, 1% (3,200) are abandoned, and 202,000 wells are operational. In total, Alberta has 305,124 wells that need to be decommissioned and reclaimed.

Why decommission?

In countries with weak regulatory regimes, once coal, ore, oil or gas extracting activities have ended the facilities are simply left to rot. However, responsible countries require that mines are closed and decommissioned according to the original mining licence, to avoid and prevent groundwater pollution, the development of water ingress and sinkhole formation, often caused by mine shaft roofs collapsing. Where operators and regulators do not carry out decommissioning and reclamation, due to bankruptcy or other reasons, governments and taxpayers are left to pay the price.

As Lee Foote, Professor and Director, University of Alberta Botanic Garden, Canada, points out, ‘There are reportedly over 100 hard rock mines in the far north of Canada that have altered lake systems, only to see the companies dissolve without reclaiming, thereby externalising the costs of clean-up to the federal government. It has been a cost-effective strategy for shareholders over many decades and in some ways of viewing it is the right financial decision to make, though it may fly in the face of social good’. Also, each year several people die in accidents in and around abandoned mines across the USA. Decommissioning of a mine involves removal of any potential environmental, health and safety hazards such as pollution of the water table, unstable land, or open shafts for people to fall into, and aims to make the land capable of future productive use, known as greenfield.

As for the numerous abandoned oil and gas wells, scientists are beginning to view them as a major source of methane emissions and, given the findings of the latest UN Intergovernmental Panel on Climate Change, it is imperative that methane gas emissions are minimised in order to restrict global warming to 1.5oC.

Mine reclamation

Learning from experience, many regulators today require companies and developers to accompany their application for a new mining or well operation with a decommissioning and reclamation plan. Usually, mine reclamation restores the land to a natural landscape, or restores land for industrial or municipal usage. In Europe and North America, mine reclamation can minimise and mitigate the negative environmental effects of mining.

Reforestation with a range of local tree varieties to encourage wildlife is a popular approach. The OSMRE Pittsburgh Botanic Garden, USA, is the result of slow reclamation of some 460 acres of deep and open-cast coal mining in the Pittsburgh area. In the East, scientists are evaluating the use of bamboo in reforestation efforts following mine closures in the Philippines, since it is fast growing and has many uses. Alternatively, where the local environment does not favour reforestation, reclamation may be better accomplished by establishing rangeland instead.

Extracting coal, gold, iron, rare earths or minerals underground or with opencast mining results in different decommissioning and reclamation cost structures, according to the size of the site, the degree of reclamation to be undertaken and its speed. Examples from the UK,  USA and Canada indicate the diversity of projects and costs.

Kellingley, the last deep coal mine in Yorkshire, England closed in 2016. The decommissioning process included filling the two deep mineshafts with concrete, inserting a pipe to exhaust any methane gas – used to supply an onsite gas power plant – demolition of existing mine-related buildings, and work to make the site fit for redevelopment as a new housing development. Decommissioning costs are estimated at some £40m. The 151 acre site is currently being reclaimed and redeveloped as a 1.45 million square feet of manufacturing and distribution space by former operator UK Coal, with financial contributions from the EU and the UK taxpayers, which could bring as much as £200m to the local economy in the form of new jobs. In contrast, reclaiming and renovating open cast mining land is pro-rata much cheaper. For example, reclamation of 22 giant voids left from open cast mining by operators in East Ayrshire, Scotland will cost an estimated £161m.

Across the Atlantic, the estimated cost of reclaiming a gold mine near Winnemucca, in Humboldt County, Nevada is around US$32m. However, there is no consensus or minimum standard for what reclamation should entail. Of Alberta’s oil sands, Foote notes, ‘at the oil sands operations, I have seen reclamation ranging from passive, do nothing over time, allow natural processes to operate with plant colonisation and pollutant volatiliation, up to around US$750,000 per hectare – a rough estimate – for heavily manipulated and researched wetlands up to 17 hectares in size. Interestingly, none of those have been certified as reclaimed yet.’

Oil and gas field decommissioning

It is difficult to provide a benchmark industry-wide figure for oil and gas decommissioning, as the actual cost of a well’s decommissioning can vary according to location, water depth, degree of removal of installations and regulatory climate. For example, the UK has strict regulations for decommissioning its North Sea oil and gas installations. Shell had to submit its decommissioning programme for the Brent Field for approval to the UK government’s Department for Business, Energy and Industrial Strategy.

As a rule, decommissioning is a costly liability for oil and gas operators and a country’s taxpayers. Decommissioning the UK’s deep-water oil and gas wells in the North Sea is estimated to cost at least £55.7bln. Estimates suggest decommissioning the Brent oil and gas field will cost £1.2bln and the Viking gas field £1bln. By contrast, decommissioning of oil and gas installations in the shallow waters of the Gulf of Mexico is said to cost between US$4 to US$10m on average. Some newer, deeper water wells may cost as much as US$17m per well.

Onshore decommissioning of an oil well involves the safe plugging of the hole in the earth’s surface and disposal of the equipment. The decommissioning process involves two main stages. First wells are abandoned and safely sealed shut, then they are reclaimed, meaning contaminants are removed and the land is restored. Reclamation costs in Wyoming were found to range from US$569 to US$527,829 to reclaim a single well.

Paying for decommissioning

Companies can pay for necessary decommissioning costs by directly self-insuring with the purchase of specialist insurance products, or indirectly by creating a licensed insurance company to provide coverage for itself. Alternatively companies can self-pay by contributing to designated reclamation bonds or common bond pools held by states or regulators or, more directly, with letters of credit and escrow accounts.

In the USA, state reclamation bonds and bond pools are a typical means of contributing to decommissioning costs. Most states require companies to put up a designated amount into a reclamation bond for each acre of mining land they hold or, in the six states that use pooled risk, mining companies put up just a fraction of the total cost of decommissioning and reclamation into state bonds. Theoretically this means that it is the energy company, rather than taxpayers, who are on the hook for well or mine decommissioning. However, states vary greatly in the amount they require from mining companies. For example, a Climate Home News investigation in March 2018, found that bonds held by Appalachian states varied from US$2,373 per acre in Ohio to near double that of US$4,604 in Maryland. Colorado, one of the best-protected mining states holds US$10,732 for every mining acre and Texas bonds are US$7,655 per acre.

In practice, the funds held in bonds are proving insufficient to cover the costs of decommissioning and making good. For example, the average estimated clean-up costs in West Virginia ranged from US$7,840 per acre for surface mines to US$28,460 per acre for an underground mine, according to a 2017 report commissioned by the West Virginia Department of Environmental Protection Office of Reclamation.

As for oil, a blanket bond should theoretically cover the cost of reclaiming all of an operator’s wells within a state. The state of New Mexico’s blanket bond is valued at US$50,000 for just one well, and in Oregon it is around US$150,000, while a similar amount covers 11–99 wells in Texas.

In the case of Canada’s Alberta oil sands, Foote notes, ‘as for the bonding, a few years back, there was just over US$2bln in the reclamation fund for all of oil sands. My rough calculations put the basic cost for cleanup at US$12bln. If something untoward happened, such as alternative fuels, oil sand boycott, it might be hard to get the extra US$10bln to appear for clean-up of what needs it already.’ Indeed, 12 oil and gas companies went bankrupt in Alberta during 2017 causing some 1,628 licensed oil and gas sites to be abandoned. This enabled the operators of such companies to avoid liabilities on those sites of more than US$100m leaving a massive bill for the taxpayer to sort out. Alberta’s Energy Regulator currently estimates the cost of reclaiming inactive oil and gas wells and abandoned facilities at more than US$30.6bln.

In essence, current regulations and the energy company’s financial contributions, by way of bonds and other means are proving inadequate to meet future decommissioning and reinstatement costs. However, there is a potential solution now available on the market that is designed to meet the needs of operators, regulatory authorities and governments.

Finding fund solutions

There are alternative reclamation funding schemes available. For instance, London-based Quatre Ltd has created a special purpose, trust based in the Channel Islands and regulated by the Guernsey Financial Service Commission. In the Quatre Legacy Fund extractive businesses set aside an amount each year to fund future liabilities, providing stakeholders with the assurance that future decommissioning and reinstatement liabilities will be met.

The model permits the build-up of funds through asset cashflow. In effect, it acts as a pension plan for the mine or well’s eventual decommissioning. Given an estimated cost and date of decommissioning of a mine or well, it is possible to calculate, based on an assumed real rate of return, the required payments to be made into the trust on an annual basis, in order to achieve the target saving at the relevant date. That calculation does not need to be cast in stone, but can and should be, reviewed over the life of the trust to reflect the actual performance of the trust’s investments, and any variations in expected rates of return and expected decommissioning costs.

From the regulator’s point of view, the solution encourages the extractive industry to put regular sums of money aside from the income they earn from such projects, rather than expecting future projects profits or the taxpayer to pay the bill.

One thing is clear, current traditional methods of funding the decommissioning of mines and wells are not only costly but also not fit for purpose. A new approach is needed.