Belated Announcement
On Friday, 17 April, the anxiously awaited federal program to support the oil and gas industry was announced by Natural Resources Minister Seamus O’Regan (pictured). Details were minimal despite weeks of waiting. As anticipated, much of the money was directed at orphan well clean up in Alberta, Saskatchewan and British Columbia. The amount- $1.75 billion was substantial and included $75 million for the offshore sector. In addition, $750 million was allocated to “create a new Emissions Reduction Fund to support workers and reduce emissions in Canada’s oil and gas sector, with a focus on methane.” The announcement noted that the measure will maintain about 5,200 jobs in Alberta alone.
In addition, loans would be provided through the Business Development Bank to qualifying energy businesses that “have been financially viable prior to the current economic environment.” Loans of between $15 million and $60 million would be offered at “commercial rates,” and repayable within 4 years. This does not appear to be the “bail-out” of the energy industry that was being sought. Critically, for taxpayers, how the BDC interprets financial viability before the COVID crisis will probably mean that a number of junior and intermediate companies will fail as banks and ATB withdraw their support. Certainly, assistance directed at executive bonuses or share buy-backs will be a non-starter.
Financial support for energy companies through the Export Development Corporation (EDC) will occur over the next twelve months and provided through “EDC’s lending, bonding and accounts receivable insurance products.” The intention of the support is to help bring liquidity to companies suffering the twin effects of the oil price collapse and COVID-19.
Reaction
Reaction was mixed to what must be considered a fiscally prudent measure. The Alberta Liabilities Disclosure Project (ALDP) estimates the Alberta conventional clean-up bill to be in the range of $50 to $70 billion. ALDP spokesman and founder Regan Boychuk, in a release stated while the funding was something to “finally celebrate,” federal taxpayers, not the polluters, were to pay for this program. Boychuk noted : “If these funds are not repaid by industry once the cleanup work is done, today’s announcement will become another public subsidy to oil and gas, and undermine the crucial principle that polluters are responsible for cleaning up their mess.”
Premier Kenney was tactful in thanking the federal government “for taking this important first step to support the folks who work in our energy sector.” The Premier noted the “$1 billion partnership,” (presumably the amount allocated Alberta) aligned with “Alberta’s commitment to ensuring our resources are developed in an environmentally sustainable fashion.” He then went on to plead for more support, observing the announcement is a “great first step.” The so-called partnership represents $200 million of Alberta taxpayers’ money “loaned” to the Orphan Well Association and $1 billion of Canadian taxpayers’ money with apparently no industry commitment.
Predictably, Kenney’s release reiterated familiar talking points of CAPP and the Energy War Room about the enormous significance of the energy sector to the Canadian economy. The Premier asked for more support, noting “Our energy sector is facing its biggest challenge ever.” He alluded to the help granted the auto sector in 2009, implying it was Alberta’s turn to share in the support from the federal government. Fair enough.
The Canadian Association of Petroleum Producers (CAPP) “appreciated” the initiatives to protect 10,000 industry jobs. The Association also was “encouraged” by prospective support from the Business Development Bank and the Export Development Corporation. “Liquidity is a real and immediate challenge for oil and natural gas producers and CAPP has been working with the federal government to identify urgent action needed to address the dire situation.”
Support from the Canadian Association of Oil Drilling Contractors (CAODC) was more positive since the aid is directed at service companies rather than explorers and producers. CAODC was “pleased” with the federal commitment and “is great news for service rig companies.”
Assessment
The fact that a fiscally prudent plan took nearly a month to emerge suggests considerable policy differences between Alberta and Ottawa on how to deal with industry concerns. Reports emerging from federal cabinet and caucus discussions, including inter-party debate, produced a modest package with a green orientation. The $750 million emissions fund responds, in part, to CAPP complaints about “onerous” new regulations on methane emissions.
Given the Province’s difficult financial position, anything to maintain 5,200 jobs, paid for by Canadian taxpayers, is better than nothing. The conditions placed on the liquidity loans to financially viable oil and gas producers – conditions recommended by the C.D. Howe’s working group- should protect Canadian (and Alberta) taxpayers. This is not a repeat of the 2009 auto bailout. Rather, it means non-viable producers and drillers will not be bailed out. This measure means a massive wave of consolidation will take place in the energy industry over the next couple years.
This consolidation process will be a boon to investment bankers, lawyers, and trustee-receivers. Hopefully the Alberta Energy Regulator will be more vigilant in ensuring when productive and unproductive wells are transferred sufficient, real security is posted. This policy ought to assure taxpayers and landowners that current and future orphan wells can be appropriately remediated. Particular vigilance will also be required when allowing major oil sands producers’, with massive environmental liabilities, to take-over conventional pools ensuring existing tailings ponds liabilities are addressed now, rather than later.
With May 2020 oil prices improbably trading in negative territory, one wonders what will be the next tragedy to befall Alberta’s paramount industry. Another lesson that too many eggs in one basket is not a viable economic or financial strategy.