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Federal and Provincial Government assistance for Canada’s oil and natural gas industry

Energy Bulletin
28.04.20
By Brendan Downey, Robyn Finley, Yang Guo (Student-at-Law), Mike Chernos (Student-at-Law) and Mike Henry (Student-at-Law)

On April 17, 2020, the federal government announced financial relief measures for Canada's oil and natural gas industry, which has been suffering due to reduced demand brought about by the COVID-19 pandemic and the associated drop in oil prices. The new relief falls across three categories:

  1. assistance to abandon and reclaim orphaned and inactive well sites in western Canada;
  2. financial support to oil and natural gas industry participants whose liquidity has been affected by the pandemic; and
  3. initiatives to curb greenhouse gas emissions with a focus on methane emission reduction.

The federal government expects that its actions will retain and create approximately 10,000 jobs. Limited details are available about the federal programs and the extent to which they will require federal and provincial coordination. However, the Government of Alberta recently provided some guidance regarding its plans for the abandonment and reclamation initiatives that the federal government's funding will support.

Federal assistance to abandon and reclaim orphaned and inactive well sites in western Canada

As part of the federal government's response to COVID-19, it has pledged to invest up to $1.72 billion to clean up orphan and inactive wells in Alberta, Saskatchewan and British Columbia, an initiative which the Prime Minister said will maintain 5,200 jobs in Alberta alone. This funding includes:

  • up to $1 billion to the Government of Alberta to support work to clean up inactive oil and gas wells across the province;
  • a $200 million, fully repayable loan to the Alberta Orphan Wells Association (OWA) to support its work to clean up orphan oil and gas wells and well sites across Alberta;
  • up to $400 million to the Government of Saskatchewan to support work to clean up orphan and inactive oil and gas wells across the province; and
  • up to $120 million to the Government of British Columbia to support work to clean up orphan and inactive oil and gas wells across the province.

Federal liquidity support for oil and natural gas industry participants

The federal government announced that it aims to address the oil and natural gas industry's concerns over liquidity by working with the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) to strengthen credit support for exploration and production, midstream, and oilfield services companies whose solvency has been affected by the COVID-19 pandemic. Such companies will be offered support through rapid access to financing which will allow them to maintain operations.

On April 20, 2020, EDC confirmed that its assistance to the oil and natural gas industry will include:

  • providing guarantees in collaboration with bank syndicates under a risk-sharing structure to provide guarantees for exploration and production companies based on the value of their reserves;
  • guaranteeing a portion of any loans for amounts that may be in excess of revised borrowing bases that have been re-determined in light of current oil price curves, with guarantees capped at $100 million per borrower; and
  • considering additional insurance coverage for any transportation letters of credit exploration and production companies are required to post.

BDC followed the federal government's announcement with a news release specifying that BDC will make available commercial loans, ranging in size between $15 million and $60 million to provide higher risk financing for Canada’s oil and gas sector, to strengthen companies’ financial position and complement financing available from EDC and other financial institutions. The loans are meant to be used to fund borrowers' operations for a 12-month period, allowing for continuity of operations during the pandemic and the months that follow. BDC indicated that the purpose of the credit support is to "provide a range of energy companies that were financially viable before the COVID-19 crisis with several options to meet individual credit needs", suggesting that BDC's commercial loans will only be available to provide funding to companies whose present liquidity problems are the direct result of COVID-19, and not companies that were otherwise struggling. However, the test for "financially viable" has not been articulated.

Initiatives to curb greenhouse gas emissions with a focus on methane emission reduction

The federal government also announced the creation of a $750 million Emission Reduction Fund (ERF) intended to create and maintain jobs through pollution reduction initiatives, with a focus on the reduction of methane emissions. The Prime Minister's announcement indicated that $75 million dollars of the ERF will be allocated to help the offshore oil and natural gas industry cut emissions in Newfoundland and Labrador, and funds through the ERF will primarily be made available as loans which may be convertible to grants. Since its initial announcement, the federal government has indicated that the ERF could support investments in capital equipment that will reduce methane emissions and address methane leaks. However, the federal government has not yet announced how it will make these funds available, nor has it established a clear funding timeline.

Provincial plans for the use of federal funds

On April 24, 2020 the Government of Alberta announced its plans for the $1 billion that the federal government allocated to the abandonment and reclamation of Alberta's orphaned and inactive well sites. The funding will be distributed to companies through the Site Rehabilitation Program. The Site Rehabilitation Program will launch May 1, 2020 and, in its initial stages, oilfield service companies will be able to access grants to perform well, pipeline, and oil and gas site reclamation work. Permissible activities include closure work, Phase 1 and 2 environmental site assessments, remediation, reclamation, and the preparatory work necessary to apply for remediation and reclamation certificates.

Grants disbursed under the Site Rehabilitation Program will be for 25-100% of the cost of each project, depending on the financial health of the company responsible for the site clean up. Grants will be available in stages. The first two stages of this funding protocol will each make $100 million available to applicants and will take place in accordance with the following timelines:

  • From May 1 – 31, service companies that have been significantly impacted by 2020's economic downturn can apply for contracts of up to $30,000 per application. This $100-million increment will focus on projects that are eligible for 100% funding through the Site Rehabilitation Program.
  • From May 15 – June 15, service companies can apply for contracts of up to $30,000, and may also be eligible for 100% funding through the Site Rehabilitation Program. This $100-million increment will focus on sites where some operators have failed to abandon and reclaim sites and where the Government of Alberta is paying compensation to landowners as required under the Surface Rights Act.

Grants are only available to "eligible contractors" that perform abandonment and environmental work, and funds will only be made available to such contractors, not licensees. In performing abandonment and remediation work under the Site Rehabilitation Program, contractors must continue to comply with all laws, regulations and applicable directives. In addition, contractors must obtain valid contracts with licensees in Alberta and any contracts entered must be fully executed, with no 'subject to' clauses. It has not yet been announced whether obtaining a contract is a pre-condition for funding under the Program.

Contractors with approved applications will receive 10% of the awarded amount upon approval of their application, up to 60% after submitting interim invoicing and reports, and the balance once the subject work is completed and officially attested.

The Government of Alberta plans to make additional increments available for larger projects or to incentivize work in specific regions within the province. The Government of Alberta expects that the Site Rehabilitation Program will create 5,300 direct jobs, and lead to the cleanup of thousands of orphaned and inactive wells, pipelines, and oil and gas sites.

Information on eligibility requirements and eligible activities can be found here.

Complementary provincial relief

Alberta

In Alberta, the $1.2 billion that the federal government has made available to support well and facility clean-up is in addition to similar financial support that the Government of Alberta previously announced in March 2020. This includes a $100 million loan expansion to an existing $235 million loan to the OWA, earmarked for decommissioning approximately 1,000 wells and initiating reclamation on 1,000 sites. The Government of Alberta has also covered approximately $113 million of levy payments that licensees would otherwise owe to the OWA, corresponding to the first six months of the Alberta Energy Regulator's fiscal year, which began April 1, 2020.

In terms of administrative relief, both Alberta Energy and Alberta Environment and Parks have suspended a number of routine reporting obligations and extended the expiration of mineral leases that would otherwise expire in 2020. For more information, please see our previous article on pandemic-related relief in Alberta here.

Saskatchewan

In Saskatchewan, the Government provided similar financial and administrative relief to oil and gas companies. In terms of financial relief, the Government of Saskatchewan has reduced the industry portion of the Oil and Gas Administrative Levy by 50% for the current fiscal year and will delay invoicing the balance until October 1, 2020. It is expected that this will result in approximately $11.4 million in savings.

From an administrative perspective, the Government of Saskatchewan has extended filing deadlines for routine reporting obligations. As in Alberta, these extensions do not apply to health or environmental safety reporting obligations. The Government has also extended the compliance deadline for measurement and reporting obligations under Directive PNG017: Measurement Requirements for Oil and Gas Operations and Directive PNG076: Enhanced Production Audit Program to April 1, 2021. Finally, mineral rights granted under the terms of an oil and gas lease, exploration license or permit that are scheduled to expire in 2020 have been extended by one year.

British Columbia

The British Columbia Ministry of Energy, Mines and Petroleum Resources has paused all ongoing referral processes and engagement relating to Petroleum and Natural Gas tenure disposition. Until further notice, the Ministry will not accept posting requests, and will not dispose of new Petroleum and Nature Gas tenures.

We will continue to update this bulletin as additional information becomes available