Systems to Ensure Sufficient Financial Security for Land Disturbances from Mining
What we examined
We followed up our recommendation, originally made to the former Department of Environment in 1999, to implement a system for obtaining sufficient financial security to ensure that the conservation and reclamation of mine sites is completed. We have repeated the recommendation three times.
Since the time of our last follow-up audit, the Department of Environment and Parks developed and implemented the Mine Financial Security Program (MFSP). The focus of our current audit was on this program, and whether it constitutes an approach that provides for sufficient financial security. Our audit approach included assessing whether the methodology is logical and in agreement with the stated objectives of the MFSP and whether adequate ongoing monitoring of the security being provided is taking place. The design of the MFSP resides with the department and the administration was transferred to the Alberta Energy Regulator, effective March 2014. Therefore, our audit was conducted at both organizations.
As of December 31, 2014, $1.57 billion of security is currently being held in comparison to estimated reclamation liabilities of $20.8 billion. Because the MFSP applies an “asset to liability approach,” both the security held and the value of the resource in the ground are considered assets in the program, which is designed to offset liabilities. As the resources are depleted, the security requirements increase to reflect greater liability exposure. The security required is reduced as reclamation takes place and the liability is reduced.
Implementing the MFSP was an important step towards a system that obtains sufficient financial security for mining related land disturbances. However, for the design and operation of the MFSP to fully reflect the intended objectives of the program, improvements are needed to both how security is calculated and how security amounts are monitored.
What we found
There is a significant risk that asset values calculated by the department are overstated within the MFSP asset calculation, which could result in security amounts inconsistent with the MFSP objectives. The MFSP asset calculations do not incorporate a discount factor to reflect risk, use a forward price factor that underestimates the impact of future price declines, and treat proven and probable reserves as equally valuable.
Why this is important to Albertans
In the event that a mine operator cannot fulfill its reclamation obligations, and no other private operator assumes the liability, the province may have to pay a potentially substantial cost for this work to be completed. Thus, a robust and responsive system to calculate and collect security from mine operators is essential.