The polluter-pay approach isn’t working in British Columbia’s oil and gas patch.

The province’s energy regulator hasn’t secured enough money from companies to cover the estimated $3-billion cleanup costs for 10,672 inactive oil and gas sites, says a new report by B.C. auditor’s general.

But that’s only the beginning of a long list of deficiencies in the B.C. Oil and Gas Commission’s approach to managing the rising environmental and financial risks posed by inactive wells, pipelines and other industry infrastructure, according to the report by Auditor General Carol Bellringer.

In addition to not collecting enough security deposits, the regulator has failed to demand that operators decommission inactive wells in a timely fashion due to “gaps” in legislation.

With no legal requirement to clean up old wells, the industry has predictably let the number of inactive wells grow from 3,800 to 7,474 between 2007 and 2018.

“The increase in the numbers is significant,” Bellringer said during a Vancouver news conference.

Unlike North Dakota where industry has two years to clean up a well once it stops producing, B.C. has no defined time limits.

The government has promised to introduce changes shortly.

The report noted that the province’s Orphan Site Reclamation Fund is effectively bankrupt.

The number of orphaned sites abandoned by insolvent operators has grown from 45 wells in 2015 to 326 wells today.

According to the regulator estimates, it costs an average $370,000 to cement and reclaim a well.

As a result the agency could face more than $120 million in cleanup costs for the 326 orphaned wells. The fund’s operating budget for 2017/18 was $5.3 million.

The Narwhal recently reported that the bankruptcy of Ranch Energy could result in another 300 to 500 orphaned wells.

The province’s overall program for managing industry liabilities, which supposedly follows the polluter-pay approach, has also failed to perform as advertised, says the auditor general’s report.

Under the Liability Management Rating (LMR) system, companies aren’t required to set aside money for cleanup costs until their liabilities exceed the value of their assets. But companies’ financial positions can change rapidly in the volatile oil and gas industry.

A similar system in Alberta has failed to secure adequate cleanup funds for $30-billion worth of oil and gas liabilities because, as one senior Alberta regulator said last year, the program doesn’t try to collect money for well decommissioning until the companies are “already showing declining financial capacity.”

Although the auditor general documented how badly the program is failing in B.C., she only asked the Oil and Gas Commission to “review” it.

The report cited the example of five fracking companies that recently went bankrupt, leaving about $86 million in cleanup and remediation costs. The OGC had collected just $3.2 million in security deposits from the companies under the Liability Management Rating system, leaving an $82-million shortfall.

“The OGC’s calculation of assets did not keep pace with operators that were experiencing rapidly declining financial health,” the report found. “By the time their LMR rating triggered action from the OGC, some operators could not pay the required security because of their poor financial status, and became non-compliant.”

“The OGC has not effectively managed the environmental and financial risks of non-operating oil and gas sites,” the report concluded, because operators were not required to decommission inactive wells and because the OGC has collected inadequate funds for the required cleanup efforts.

In addition the OGC has failed to identify “significant environment risks” posed by 3,721 “legacy sites” restored prior to 2004 that could be leaking methane or hydrocarbons into groundwater and the atmosphere, the report found.

More than 27,526 oil and gas wells now dot northeastern B.C. and many are on First Nations land.

Approximately 7,474 inactive wells have not been properly plugged and sealed while another 3,198 decommissioned wells have not been properly reclaimed and restored.

“This means that 10,672 non-operating well sites in B.C. had not been restored to mitigate environmental risks,” says the report.

“I think the report pretty much speaks to a massive problem,” said David Suzuki Foundation researcher John Werring, who has monitored oil and gas well sites. “The OGC has known about this problem for years but instead of taking steps to protect the public interest, they have been bending to the will of industry.”

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Regan Boychuk, an Alberta industry critic and advocate for accountable cleanup programs, says the auditor general’s report identified many flaws in the system but “did not get at the root of the problem.”

That root is a liability management system which overvalues assets so companies never have to set aside adequate amounts for eventual decommissioning, he said.

Boychuk said that B.C.’s program assumes every barrel of oil or equivalent quantity of gas produced resulted in $48 in profit to the operator.

“That’s just a fraudulent number. Industry designed the program so the polluter doesn’t pay,” he said. “And that is why the OGC has failed to collect tens of millions of dollars to ensure taxpayers don’t have to pay the cost of clean-ups. Why didn’t the auditor general identify that flaw?”

The report also didn’t address the elephant in the room — the fiscal health of the continent’s fracking industry and its future ability to fund cleanup liabilities given volatile oil and gas prices.

Bellringer did acknowledge that the issue was a concern during her press conference.

According to the Wall Street Journal, the shale gas industry has consistently spent more than it has earned in the last decade due to the high cost of hydraulic fracturing, a technology with much greater environmental liabilities than conventional drilling.

During that period, the 29 biggest shale producers in North America spent $112 billion more than they generated from fracking operations, according to data from FactSet, a financial-information firm, the paper used in its analysis.