On April 17, 2020, Prime Minister Justin Trudeau announced a Federal relief package totaling approximately C$2.5B for the oil and gas sector, consisting of C$1.7B to clean up orphan and inactive wells in Alberta, Saskatchewan and British Columbia, and approximately C$750M in loans to companies through an emissions reduction fund focused on reducing methane emissions. Details on the relief package posted on the Federal Government's website outlines that up to C$1B will go to the Government of Alberta; up to C$400M to the Government of Saskatchewan; up to C$120M to the Government of British Columbia; and up to C$200M in loans to the Alberta Orphan Wells Association (OWA). The funds included in these relief measures will support the cleanup of inactive oil and gas wells in each province.
The additional relief, on top of the previously announced measures, are expected to create or maintain approximately 5,200 jobs in Alberta and 10,000 jobs across Canada.
The announcement also expands the Business Credit Availability Program which will support medium-sized businesses credit needs, allowing them to maintain operations through the Business Development Bank of Canada and Export Development Canada.
While the relief falls short of the Government of Alberta's initial expectations - Alberta Premier Jason Kenney had previously estimated that the province's energy sector would require between C$20B to C$30B in liquidity to assist the industry in the current extremely depressed price environment – the Government of Alberta's reaction to today's announcement was decidedly positive, describing the job-creating measures as a significant "first-step" to deal with the crisis in the Canadian energy sector.
The Federal relief measures serve to promote a number of legislative and policy initiatives to reduce growing inventories of orphan and inactive wells and to reduce fugitive methane emissions from oil and gas operations.
Orphan and Inactive Wells
The announcement noted that the relief measures balance environmental concerns and helping oil and gas companies, by targeting funding at reclaiming orphaned and inactive wells - whose numbers have swelled amongst the recent downturn in commodity prices. The Prime Minister stated the purpose of the relief as follows:
"Our goal is to create immediate jobs in these provinces, while helping companies avoid bankruptcy and supporting our environmental targets"
Abandonment obligations for oil and gas wells have recently been the subject of increased scrutiny, with the Supreme Court of Canada's ruling in Orphan Well Association v. Grant Thornton Limited (which overturned the Alberta Court of Appeal's decision, previously discussed here) that insolvent estates can no longer disclaim assets of a bankrupt licensee that have reached the end of their productive lives.
The relief measures are intended to dovetail with existing programs to help companies avoid bankruptcy and meet ongoing abandonment obligations, such as the Alberta Energy Regulator's (AER) Inactive Well Compliance Program, and Alberta's OWA, which currently holds approximately 10,300 wells, pipeline segments and sites in inventory awaiting decommissioning, abandonment and reclamation.
The C$1.7B package is expected to assist companies in addressing ongoing provincial abandonment liabilities, such as under the AER's Liability Management Rating (LMR) program, which is currently being reviewed by the Alberta Department of Energy. LMR values are calculated based on the ratio of deemed assets derived from historical netback pricing and deemed liabilities based on the cost of abandoning and reclaiming wells. The recent collapse in commodity prices driven by both the COVID-19 pandemic and increased supply of oil from Russia and Saudi Arabia amidst declining global demand has placed downward pressure on LMR values, requiring licensees to either complete abandonment work on inactive wells and pipelines, or place new and/or additional security with the AER to maintain and LMR value above 1.0. This need to increase security is happening when the industry is facing a destructive commodity price environment - with prices well below the break-even cost – and corresponding liquidity issues.
It is unclear at this time whether any additional measures, such as temporarily relaxing or reducing security requirements under the LMR, may be enacted by the Alberta Government in response to, or in conjunction with, the Federal relief package.
Methane Emissions Reductions
The C$750M emissions reduction fund relief package is framed as jumpstarting efforts to cut methane emissions, including those enacted under the Federal Regulations Respecting Reduction in the Release of Methane and Certain Volatile Organic Compounds which came into effect on April 26, 2018, and Alberta's Methane Emission Reduction Regulation, which came into force on January 1, 2020. These regulations respectively set targets for reducing methane emissions by approximately 20 megatonnes by 2030, and by 45% relative to 2014 levels by 2025.
The emissions reduction fund provides repayable loans to companies to invest in cleaner technologies or to fix methane leaks. Approximately 10%, or C$75M, of the funds are slated to go toward investments in offshore energy companies in Newfoundland and Labrador to cut methane emissions.
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