Danielle Smith has a big idea to clean up oil and gas wells. It's all kinds of messy
CBC
This column is an opinion from Andrew Leach, an energy and environmental economist, and professor at the University of Albrta. For more information about CBC's Opinion section, please see the FAQ.
In a July 2021 op-ed in the Calgary Herald, Danielle Smith, then a business lobbyist with the Alberta Enterprise Group, advocated for a program called R-Star. It would provide royalty credits to oil and gas companies completing cleanup activities already required of them.
While it appeared for a long time to be dead, R-Star has new life.
Smith is now Alberta premier, and continues to champion the idea. Peter Guthrie, her new energy minister, promised to make a pilot of the scheme one of his first priorities.
This should never happen.
So, what is R-Star?
It's a free lunch. Or, more properly, a lunch paid for by Albertans. It's a wealth transfer to the oil and gas industry. Instead of ensuring the polluter pays, R-Star would have us paying the polluter.
R-Star, initially proposed by oil sector advocates, would reward firms with tradable credits to be used against future well royalty obligations, with one credit issued for each dollar spent on regulator-mandated clean-up.
Companies then apply R-Star credits to future production to get discounted royalty rates. Royalties increase with oil prices so, at today's $110-per-barrel (Cdn) price, $1 million worth of required cleanup would net R-Star credits that reduce royalties by roughly $280,000. The same credits would be worth about $115,000 if oil prices dropped by half.
This raises the first of many issues with R-Star. It provides more help when less is needed.
In periods of low prices, we should worry that companies might struggle to meet reclamation obligations. R-Star does little for producers when prices are low, but offers big rewards when prices and profits are high. It's backward.
The second issue with R-Star is that it carries a massive, unnecessary cost to Albertans.
In a letter to then energy minister Sonya Savage last year, Smith (still as a lobbyist at the time) proposes giving companies $20 billion of R-Star credits. R-Star's proponents claim that "no government funds are required," to speed reclamation.
But when oil and gas companies use these credits, government royalty revenues could decline by more than $6 billion. Perhaps, in time, Smith will see R-Star's impact on government funds in a different light, now that she's premier and those funds could otherwise fund programs and balance budgets.
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