Shareholders of Canada’s largest oil and gas companies could be left with a shortfall of tens of billions of dollars for future environmental liabilities tied to spent wells and oil sands mines, and insufficient disclosure and auditing are obscuring the problem, an investor advocacy group warns in a new report.

Investors for Paris Compliance (I4PC) has estimated a $113-billion gap between a figure that a senior Alberta regulator official had tallied for total decommissioning liabilities in 2018, and what the top 15 energy companies carry on their books for abandonment and reclamation obligations.

The estimate stems from an analysis of the financial statements of the companies, which show wide variations in how they account for future cleanup, making comparisons difficult for investors.

The issue of underfunded environmental liabilities from tens of thousands of inactive wells and aging oil sands mines has been a years-long public-policy headache for successive Alberta governments, the energy industry and rural landowners. But to date it has seldom been seen as influential determiner of market value of such companies as Suncor Energy Inc. SU-T, Cenovus Energy Inc. CVE-T, Imperial Oil Ltd. IMO-T and Canadian Natural Resources Ltd. CNQ-T – the largest of the 15 listed in the study.

However, it is key for institutional investors to gauge how the transition to a low-carbon economy could affect the scale and timing of environmental cleanup, said Jessica Carradine, senior analyst at I4PC and author of the report. “They need full transparency from companies in order to be able to make investment decisions,” she said in an interview.

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I4PC is an advocacy group that works to hold Canadian publicly traded companies accountable to climate and environmental commitments.

To reach the $113-billion shortfall figure, I4PC took an estimate of total industry liabilities of $260-billion quoted in 2018 by a senior Alberta Energy Regulator official as a worst-case scenario. The amount, which was revealed in a presentation that media outlets obtained in a Freedom of Information request, took Albertans aback, as it was about $200-billion more than had been previously quoted in the regulator’s public communications.

The report acknowledges some of those spent wells and equipment have been cleaned up, but the industry has increased production significantly since then, resulting in more future decommissioning obligations. Hence, it kept the figure constant in the study, and adjusted it to 2025 dollars, for a total of $282.4-billion.

The 15 largest oil producers, representing 64 per cent of Canadian production, collectively report $67-billion in liabilities on their books at today’s market prices versus their proportional share of the AER estimate. The gap is 2.7 times the amount in their financial reports, the study says.

Though seven years old, the overall liability estimate is credible, said Martin Olszynski, associate professor and Chair in Energy, Resources and Sustainability at the University of Calgary Faculty of Law. He has researched the issue extensively and pegs the cleanup costs for wells and associated facilities at around $100-billion. And he says the oil sands and tailings decommissioning that will be required may add up to more than $160-billion, but there is much uncertainty around that figure.

“It’s another report that confirms that there’s something very wrong with the way that we are tracking and managing closure liabilities in the energy sector,” Prof. Olszynski said. “It’s not being done rigorously and it’s not being done transparently, and yet we know enough that the risks appear to be unprecedented in terms of the cost.”

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As fossil fuel demand plateaus or contracts in the coming years, the need to decommission production facilities and reclaim lands will become increasingly important in company valuations, since the ability to fund the cleanup is based on future cash flows, the report says.

Clouding the picture is a lack of standardization in how oil and gas producers account for and disclose the liabilities, with wide differences in such factors as the timing of cleanup and discount rates – used to calculate present value – applied to costs.

For example, Suncor Energy Inc. and Cenovus Energy Inc. report current cleanup cost estimates – the cost if all the work was done today – of $21.5-billion and $7.68-billion respectively, while Imperial Oil and CNRL do not disclose that figure in their statements, according to the study. Among these four, discount rates vary, ranging from 4.8 per cent to 6 per cent. The highest among the 15 companies is 10 per cent.

Suncor reports its asset lives that can extend past 50 years, while Cenovus provides detail for just the next five years. CNRL extends its liabilities up to 60 years, while Imperial does not provide a timeline.

Suncor reports present value of liabilities – costs expected over many years with the discount rates applied – of $12.3-billion. Cenovus lists $4.53-billion, CNRL $4.78-billion (for North American operations), and Imperial $2.83-billion. None discloses an energy-transition-related sensitivity analysis.

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Officials with Suncor, Cenovus, CNRL and Imperial did not respond to requests to comment.

Companies report different assumptions based on a host of variables, including the price of oil, the operations they run, the expected useful lives of their wells, and when they expect decommissioning to begin, said Elizabeth Demers, professor at the University of Waterloo’s School of Accounting and Finance.

“It’s okay that one company makes a different estimate from another. We just need a lot of transparency, because then if I look at any different company’s assumptions along those lines, I can say ‘These are unrealistic based on what I think as an investor,’ then I can adjust their numbers and price things accordingly,” she said. “But right now it’s way too much of a black box.”

Prof. Demers also said Canadian auditors, meanwhile, should be more diligent in digging into these assumptions and estimates, as they are included in financial statements and have material impact on the long-term value of the enterprises.

Despite its ramifications, institutional investors do not often grill executives about the liabilities issue, said Menno Hulshof, energy analyst with TD Cowen, though there are exceptions, such as companies that have aging oil sands operations. Some of that likely has to do with the fact they may not expect to own the shares for years into the future, he said.

The variability in the data and the huge differences in timelines for cleanup could also be keeping investors from zeroing in on the issue, Mr. Hulshof said.

“I think it should matter more than it does,” he said.