Fracking and Financial Assurance
My name is Matthew Starnes. I was born in Nova Scotia and have a house in
Luneburg county. I am an extractive resources lawyer, currently practicing in Japan.
I have previously practiced as the general counsel of a $7B mining project in Africa and
as acting general counsel of a $4B project in Chile. In each of these roles I have had
extensive experience with environmental issues and in particular closure costs. I am
making this submission to share my personal experience in current best practice
regarding financial assurance and the need for regulatory authorities to ensure this
practice is followed.
If fracking is allowed to proceed, which I do not think it should, the companies involved
in the fracking should from the beginning of their projects be required to provide
financial assurance to pay to remediate environmental and public impacts from their
projects. The concept is that extractive resource companies (mining, conventional
drilling or fracking) have to put aside money up front to pay for all the costs they
impose on the public, including the cost to repair environmental damage and restore
impacted environment. This is done to ensure that regardless of the economic success
or failure of the project enough money is available to the government and affected
public to pay for all the costs imposed by the extractive industry.
now a standard concept in extractive industries.
Financial surety is
Environmental impacts and public costs can be divided into two categories: intended
impacts and accidental impacts. Intended impacts are those that are caused by the
project as part of its plan. In mining the most obvious example is the mine pit. In
fracking intended impacts include things like wastewater ponds and increased wear and
tear on roads. Accidental impacts, as the name implies, are impacts from accidents.
In mining this can include pipeline leakage or hazardous chemical spills. In fracking
the most prevalent accidental impact is groundwater contamination from ruptured
casing tubes; it can also include air pollution, waste water spills or leakage, associated
illness, and earthquakes among others.1
The financial surety posted by the fracking company needs to be sufficient to cover all
the impacts, though intended and accidental impacts are often dealt with differently. In
1
There is substantial evidence that groundwater contamination and earthquakes are in fact more than
accidental impacts of fracking.
my experience, accidental impacts are most often dealt with by requiring adequate
insurance, or less commonly, by financial tests.2 The public can also be protected
against accidental impacts by posting a surety or bond, as discussed in the succeeding
paragraph. In fracking providing mitigation for accidental impacts can be problematic
as the potential accidental impacts - contaminated drinking water, destroying local
farms - can be very high in comparison to the size of the fracking operation.
Nonetheless it is important that the resource companies be required to post sufficient
insurance or bond to cover the worst case impacts, otherwise once the impact has
occurred the company will often not have the financial resources (or in some cases even
still exist) to conduct the necessary clean up and rectify the impact and so this burden
will fall on the tax payers and the affected public. Requiring the resource company to
provide adequate insurance is fair practice as it is cheaper than a bond for the companies
but ensures the public is protected. Further, companies that operate in a safe and
environmentally sound manner will be rewarded with lower premiums so this
encourages good behavior.
Intended impacts are most often dealt with through a closure bond or trust fund put up
by the operating company to pay the closure costs to remediate the impacts. In either
case it is important to ensure that the bond or trust fund is adequate to deal with all the
closure costs associated with the intended impact from the start of the project. There
are two ways to pay a closure costs: putting aside enough money up front to pay the
closure costs or, agreeing to put aside money (out of profits or otherwise) as the project
goes along. The second method is inadequate and is no-longer accepted in
international best practice as if the company or the project runs in to difficulty the
money may not be available. The bond or trust fund must be sufficient to pay
everything needed to be done from the start of the project. This is necessary as it is
possible, and often happens, that a project will close earlier than expected for economic
or technical reasons. It is not sufficient to assume a rate of return on the money in a
trust as that may not materialize or the project may run into issues and face closure costs
sooner than expected.
2
Financial tests are requirements that a company meet certain pre-established requirements to show
that it has sufficient economic health to deal with a worst case impact. This is becoming less common
in the extractive industries as it leaves the financial resources in the companies hands and so requires
the impacted public or government to sue the company to get access to compensation. It also does not
take account of sudden changes in the company’s financial situation, a not uncommon situation in the
current resource sector.
The closure costs need to be properly estimated and have to be enough to cover all
impacts and not just the obvious ones. I am not an expert in fracking but obvious
closure costs include restoring well heads and wastewater ponds and paying for
resurfacing roads damaged by heavy traffic. It is standard practice is to hire
independent experts in the field, in this case fracking impacts and costs, to estimate the
closure costs. It is also worth noting that closure is typically dealt with on a rolling
basis, so in this case as one wastewater pond or well head is exhausted it would be
cleaned up immediately and not only at the end of the entire project.
On a personal note, in my experience extractive resource projects always go over budget
and unexpected contingencies occur. This is why it is important for regulatory
authorities to require adequate protection for the worst case from the start of a project.
As the impacts of resource projects are often front loaded and occur even if the project
shuts down pre-maturely the only sure and fair way to respond to the risks of these
projects is to build in adequate financial surety at the start by requiring insurance to
cover all the impacts of a worst case scenario and a performance bond or trust fund to
cover the closure costs. Reliable extractive resource companies now accept this
practice. If a company is not able to provide for these costs up front as part of their
business plan they are either unreliable, overly optimistic or operating with no margin
for contingencies and those are not companies that should be allowed to operate.
I also note that the International Finance Corporation (IFC) has performance standards
that set out the requirements to do projects properly and safely; to minimize, mitigate
and offset all impacts. These standards include a closure element and a requirement to
fully fund closure costs. Though the IFC standards do not apply in Canada as we are a
listed country (one that is developed enough that our standards and legislation replace
the IFC standards) these standards are the current world class standards and Nova Scotia
should not contemplate allowing extractive resource projects that do not meet these
standards.
I hope this is helpful and I would be happy to discuss these matters and my experience
further.