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Thomas E. Valentine and KayLynn G. Litton
Macleod Dixon LLP

In recent years, Alberta’s oilsands have come under increasing scrutiny, particularly by those who maintain that environmental concerns are being ignored in favour of development opportunities. An important element in the debate about environmental stewardship relates to the reclamation obligations which presently exist under Alberta law.  Environmental advocates argue that Alberta’s present regulatory regime is woefully inadequate as it fails to ensure that sufficient funding is being set aside to satisfy reclamation obligations.  The energy industry has also expressed concerns that the current regime lacks certainty and is unnecessarily complicated.

In response to these concerns, over the past five years the Province of Alberta has expended considerable resources and has engaged in extensive consultations with stakeholders with a view toward redesigning the reclamation process applicable to oil sand operations.  Early this year, the Government of Alberta announced its new reclamation strategy for oilsands.  This article examines the law as it currently exists in Alberta, the concerns being voiced in respect to the current regulatory process and the way in which the proposed new reclamation program is expected to operate.

Alberta’s Reclamation Scheme

Alberta’s current oilsands reclamation security program was established in 1993.  Reclamation obligations imposed upon oilsands operators in Alberta are primarily based upon provisions found in Alberta’s Environmental Protection and Enhancement Act (“EPEA”) and the Conservation and Reclamation Regulation.  Amongst other requirements, EPEA and the applicable regulations establish the mechanisms utilized to ensure that sufficient funds are set aside by the owners of oilsands operations to provide for the remediation of oilsands leases at the conclusion of production.  The Province requires that operators post a security deposit with the Province of Alberta which is held by the Environmental Protection Security Fund.  As of March 31, 2010 more than CDN$1.2 billion was on deposit in the fund.

Critics have long argued that there are a number of serious flaws in the methodology that  has been used by the Government of Alberta to determine the amount of security required in respect of an oilsands operation.  They maintain that the determination of the deposit amount is too subjective.  The amount of the security deposit required was largely determined based upon the operator’s own estimates, which were either accepted or rejected by Alberta Environment.  A rejection was typically accompanied by a direction that the estimate be subject to further clarification by the operator.  Alberta Environment policy indicated what was expected to be included in each estimate: the operator is required to submit cost estimates for their reclamation of the lease including: (i) an analysis of geology; (ii) an examination of hydrology; (iii) a re-vegetation proposal; (iv) a soils analysis; and (v) a topographical occurrences assessment.  All of this was to be included in a general plan regarding the proposed nature and extent of the reclamation plan.  The operator’s estimates were then increased by a 10% contingency figure.  These reclamation estimates were only required for surface mining operations; in-situ operations are subject to a very different mechanism under the Licensee Liability Rating program administered by Alberta’s Energy Resources Conservation Board (the “ERCB”).

Under the current mine financial security program, security required pursuant to EPEA is held as letters of credit posted on an annual basis based upon the estimated disturbance to occur in the following year and the estimated cost to the Government of Alberta to have a third party remediate such disturbance if the operator does not do so.  These security deposits required under the provisions of EPEA may be supplemented by a further security deposit if required by the ERCB.  The ERCB’s mandate extends to directing security deposits, performance bonds or parent company guarantees to be posted.

In the fall of 2010, a report by the Pembina Institute, an environmental advocacy group, argued that the total oilsands mine security posted with the Province was woefully inadequate, given that current oilsands operations are underway on more than 68,000 hectares.  The paper advocated that the sum of approximately CDN$12,000 per hectare was insufficient to ensure the proper remediation of disturbed lands.

In addition to concerns expressed about underfunding, the Pembina report argued that the definition of “environmental liability” under the existing regulations is too narrow and that the existing reclamation policies lack sufficient transparency.  Critics also expressed concerns regarding the lack of clarity around the roles of various Government departments and regulatory authorities, particularly Alberta Environment, Alberta Energy and the ERCB, in the reclamation process.  In addition to being difficult for operators to manage, the oilsands reclamation process was difficult for the public to understand; and even more difficult for the public to monitor. Limited publicly available information made status enquiries difficult and the imprecise nature of the three reclamation milestones (disturbed lands, reclaimed lands and certified lands) added to this frustration.

The Provincial Government had heard many of these criticisms and concerns before.  Indeed, the Provincial Auditor General had expressed similar concerns about the mine security program since as early as 1998.  In response to these concerns, in 2004 the Government of Alberta directed Alberta Environment and Alberta Energy to work together to develop a proposal for a new reclamation security program.  In 2005, the Government initiated a consultation program designed to work with industry stakeholders in the development of a new reclamation program.  Recommendations regarding the new program were submitted to the Government in 2010 and a new reclamation program was unveiled to the public in March 2011.

Alberta’s New Progressive Reclamation Strategy

The new “progressive reclamation strategy”, which was unveiled by the Government of Alberta in March, 2011, comprises four initiatives: (1) an improved reclamation certificate process; (2) an enhanced and transparent public reporting of reclamation performance; (3) the new Mine Financial Security Program (“MFSP”); and (4) a new tailings management framework.

The Government acknowledged the concerns expressed in the past that increased clarity was required regarding the roles of the various governmental departments and the application process.  In addition, the new reclamation certification program is intended to provide clarity around the criteria and indicators of reclamation success.  The Government indicates that implementation of this new program will be complete by 2012.

The Government also recognized the need to enhance clarity and transparency in the reclamation program. In responding to these concerns, the Government of Alberta has created an enhanced reclamation status system, increasing the number of milestones from three to eight in order to better reflect, and report on, the reclamation process. Transparency will be significantly improved with the status of reclamation projects being posted on the Government of Alberta’s website, with lands categorized into the following eight classes:  cleared lands, disturbed lands, lands ready for reclamation, soils placed on land, temporary reclamation in place, permanent reclamation (terrestrial), permanent reclamation (wetlands/aquatic) and certified lands.

In addition to increased reclamation specificity and improved transparency, the new reclamation strategy also significantly changes the security that approval holders are required to provide in respect of oilsands mining projects.  Effective April 1, 2011, the MFSP requires that security be posted for all oilsands mining projects, with no grandfathering of security amounts for existing projects.  The new program is largely based on an asset-to-liability (“ATL”) mechanism, with assets and liabilities calculated based upon engineering and accounting standards and independently audited by third parties.  In comparison to the old mining reclamation security program, the MFSP requires a lesser amount of security to be placed during the early and mid-life period of a project, while increased security amounts are required during the later years of the project.  Importantly, the total amount of the security required to be provided for each project is now considerably higher than under the old regime, in response to the concerns of many critics who felt that the existing program was dramatically underfunded.

The newly proposed program includes four types of security deposits, which are intended to address potential risks over the life cycle of a mine:

• The Base Security Deposit is to be collected early in a mine’s life, when the risk of closure or abandonment is minimal.  The deposit amounts currently held by the Government under the current reclamation security system will be rolled into the Base Security Deposit.  The interim amounts required in respect of the Base Security Deposit will be CDN$60 million for oilsands mining projects that include an onsite upgrader and about CDN$30 million for projects that do not include upgraders.
• The Operating Life Deposit will be collected in respect of oilsands mines with 15 or fewer years of remaining reserve life. The Operating Life Deposit will be calculated and paid on an annual basis such that a deposit equal to the estimated third party costs to suspend, abandon, remediate and reclaim all land disturbed by an oilsands mine will have been collected prior to the point when the oilsands mine is estimated to have 6 or fewer years of reserves life remaining.  The amount of the Base Security Deposit will be applied in determining the amount of the Operating Life Deposit for a mine.
• The Asset Safety Factor Deposit is a security amount that will be required from an approval holder when its net revenue falls below a level that the Government of Alberta deems adequate to ensure that all of its liabilities can be fully funded.  This deposit is intended by the Government to operate as a long-term incentive to prevent approval-holders from deferring reclamation to the end of a project’s life.
• Finally, the Outstanding Reclamation Deposit is required when an approval holder fails to achieve reclamation targets or defers reclamation obligations.  The Government has indicated that the Outstanding Reclamation Deposit is intended to make the cost of deferring reclamation higher than the cost of reclaiming on a timely basis.

The nature of the security is likely to continue to be by Letter of Credit, although the Government has indicated that it is prepared to consider alternative forms of security on a case by case basis.  The security calculations are to be determined annually, and at any time that an application has been made to Alberta Environment to transfer all or any portion of an approval from one approval holder to another.  In addition, Alberta Environment retains an overall discretion to require that calculations be re-determined at any time that the Director believes it is in the public interest to do so.  Under the new program, public access to materials is considerably broader.  A newly established MFSP website will report the financial security amounts as well as reclamation progress on a site by site basis.

The final component of the Government of Alberta’s new oilsands reclamation strategy is the new tailings management framework.  The Government of Alberta has acknowledged that tailings management remains one of the most difficult environmental challenges for the oilsands mining sector. There are currently more than 170 square kilometres of tailings ponds in Alberta.  Tailings are made up of water, fine silts, left-over bitumen, salts, soluble organic compounds and solvents that are added to bitumen during the separation process.  Tailings are discharged into ponds to allow the heavier materials to settle and the water to be reused in the mining process.  In 2009, the ERCB issued a directive requiring operators of oilsands mines to reduce tailings and to provide target dates for closure and reclamation of tailings ponds.  After 2016, operators will also be required to process tailings at the same rate at which they are produced in order to eliminate the growth of tailings ponds.  The Government of Alberta has indicated that it is working on a Tailings Management Framework which will provide further directions to operators in the management and reclamation of tailings ponds.

Alberta’s new progressive reclamation strategy is seen by both industry and environmental groups as a dramatic improvement to the existing uncertainty and lack of transparency of the old reclamation rules.  However, some critics remain concerned that the new MFSP is risky for taxpayers since significant development will occur, and thus significant reclamation will be required, before full financial security for reclamation will be collected by the Government.  Alberta’s Environment Minister, however, maintains that under the new system, “Albertans will never have to foot the bill for the cleanup of affected lands.”

** Thomas E. Valentine and KayLynn G. Litton are Partners at Macleod Dixon LLP in Calgary, Alberta, Canada.  Macleod Dixon LLP was established in 1912 and is a global law firm known for excellence in natural resources and energy law.