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Fighting on two fronts: Arrival of Canadian energy sector relief

Author(s): Paula Olexiuk, Carson Wetter

Apr 21, 2020

Last updated: August 25, 2020

For further information on the changes below or other energy matters, please contact one of the authors above or any member of our Energy Group.

Both the federal and provincial governments have provided targeted support for the energy sector in response to the COVID-19 crisis and the crash of energy commodity prices. On April 17, 2020, the federal government announced new targeted actions totalling more than $2 billion, with dedicated funding for the clean up of orphan wells in Western Canada and the creation of an emissions reduction fund, as well as expanded credit support for small and medium-sized energy companies through the Business Development Bank of Canada (BDC) and Export Development Canada (EDC). The Alberta government is also implementing similar targeted relief measures to support Alberta’s energy sector, including certain levy and reporting relief.

Federal government measures

The federal government has announced that it will be supplying $1.7 billion to clean up orphan and inactive wells in Western Canada, including: $1 billion to the government of Alberta, $400 million to the government of Saskatchewan and $120 million to the government of British Columbia. The federal government states that this measure should provide 5,200 jobs in the province of Alberta alone. $200 million of the $1.7 billion dollars dedicated will be directed to Alberta’s Orphan Well Association. The government of Alberta has also provided a $100 million loan to the Orphan Well Association. Alberta Premier Jason Kenney has stated that there will be strict criteria on the use of the funds and that the money can only be used for actual work -  “folks in the field doing the actual work and not armies of consultants issuing endless reports”.[1]

The federal government has also announced that $750 million will be dedicated to a new repayable loan program to work with conventional and offshore oil and gas companies. The focus of this program will be to support eligible energy firms making capital investments to reduce methane and other greenhouse gas emissions. The federal government has confirmed that $75 million of the funds will be dedicated to help the offshore oil and gas industry cut emissions and that a portion of the loans under the program will be convertible to grants, but no other details have been provided.

Finally, the federal government is also working with BDC and EDC to expand credit support being made available for viable energy sector companies. BDC is providing loans between $15 million and $60 million at commercial rates, which are repayable within four years. While the government has not provided further details on the credit liquidity relief, companies are encouraged to contact BDC and EDC for more information on how this initiative can assist their business.

Alberta Premier Jason Kenney has expressed his gratitude for the federal measures to protect Alberta’s energy sector but suggested that they do not go far enough and reiterated the need for $15 billion to $30 billion of support to allow for credit liquidity.[2]

Alberta government measures

In March 2020, the government of Alberta announced a number of measures intended to provide relief to Alberta’s energy sector, including:

  • $113 million in relief by covering six months of the 2020 Alberta Energy Regulator (AER) industry levy (it is expected that the levy relief will cover the first six months of the AER’s fiscal year which commenced April 1, 2020);
  • $100 million loan to Alberta’s Orphan Well Association to assist immediate reclamation efforts and the decommissioning of roughly 1,000 wells; and
  • extending the term of mineral agreements expiring in 2020 by 1 year to provide for increased certainty for industry.

Alberta Energy and Alberta Environment and Parks have also suspended a number of reporting requirements – more information can be found on AER’s website. However, the AER notes that industry must continue to record and retain complete documentation and make it available upon request. The AER has also confirmed that “[l]icensees remain responsible to pay any remaining balances for the 2019/2020 orphan levy” but that the “timing for collection of the 2020/2021 orphan fund levy is under review.”[3]

Site rehabilitation program[4]

On April 24, 2020, the government of Alberta announced the launch of the Site Rehabilitation Program (the “Program”) to become effective May 1, 2020, which will provide grants to oil field service contractors to perform well, pipeline and oil and gas site closure and reclamation work. The Program has up to $1 billion in available funding under the federal government’s COVID-19 Economic Response Plan and is expected to create around 5,300 jobs and clean up thousands of sites across the province.

The Program is expected to provide funds in $100 million increments and will provide grants of between 25 and 100% of the total project costs – depending on the ability of the company responsible for the site to help pay for clean up – to be paid directly to the oilfield service company completing the work. From May 1  to 31 service companies “significantly impacted” by the economic downturn can apply under the Program for contracts of up to $30,000 per application. This first $100-million tranche will focus on projects that are eligible for 100% government funding. From May 15 to June 15 service companies can apply for contracts of up to $30,000 and that are eligible for 100% funding, but this second $100-million increment will focus on sites where the operators have failed landowners and where government is paying compensation to landowners as required under the Surface Rights Act.[5] Future increments will be developed for larger projects.

Activities that are eligible for grant funding under the Program include:

  • closure work on inactive wells and pipelines;
  • environmental site assessments (Phase 1 and Phase 2);
  • remediation;
  • reclamation; and
  • preparation of applications for remediation and reclamation certificates.

Work that is ineligible for grant funding under the Program include:

  • suspension (wells and facilities) and discontinuation (pipelines) costs that are not part of abandonment and reclamation projects;
  • work on producing sites (for example, spill remediation);
  • closure work outside of Alberta; and
  • work completed before the Program comes into effect on May 1, 2020.

To be eligible under the Program, the oil and gas sites must be located in Alberta, all laws, regulations and standards (including social distancing guidelines) must be followed in carrying out the work and the contractors must enter into a contract with an Alberta oil and gas licensee with no ‘subject to’ clauses (i.e., the contract must not be subject to conditions). Oilfield service companies will therefore need to work with licensees to identify appropriate sites and scopes of work to be included in applications under the Program.

All costs associated with completing the work, including materials and supplies, wages, equipment rentals, laboratory analyses and transportation of equipment and workers to and from site, are eligible for grant funding with all funding awarded directly to contractors doing the work and not the licensees. Contractors with approved grant applications will receive 10% of the grant amount once the application is approved, another 60% of the grant amount after submitting interim invoicing and reports and the remainder when the work is completed and professionally attested.

More information about how to apply as well as detailed program guidelines are available here [PDF].

Site Rehabilitation Program Period 3

On July 17, 2020 the Alberta Government opened applications for Period 3 of the Site Rehabilitation Program (Period 3), which will remain open until March 31, 2021 or until the application period is terminated. There is $100 million in grant funding for Period 3 and up to $139,000 in grant funding has been allocated to each active site licensee in Alberta. Projects are eligible for 100 per cent grant funding of the oil field service contract value. Eligible licensees are listed here; oil field service companies can contract with these licensees to do closure work and apply for a grant to do the work. Period 3 will enable licensees and contractors to strategically plan their closure projects and have funding available to sequence their work appropriately, from closure to reclamation.

Further, the Government is reassessing declined Period 1 applications for abandonment work. The reassessment of Period 1 applications will be performed automatically by the Government.

Period 3 Acceptance Criteria

The application acceptance criteria set out by the Government for Period 3 includes the following:

  1. Multiple applications (applications from multiple contractors or multiple applications from one contractor) are allowed up to the maximum allocation of $139,000 per licensee.
  2. Licensees must ensure that the sum of the grant amount requested for all submitted applications does not exceed the maximum approved allocation of $139,000 per licensee.
  3. Applications for the same site need to be sequenced and submitted in order, by date, as work progresses through the various stages of closure.
  4. A separate application for the same site is required for all stages of closure work: abandonment, phase 1 ESA, phase 2 ESA, remediation, and reclamation. A single application for all closure work on one inactive site will not be accepted.
  5. Applications for the same work activity by different oil field service companies will be accepted at the same time as long as the scope of work in each contract is clearly distinguishable from the other work being done for that activity. Conversely, a prime contractor may apply for all of the closure work required for one work activity on a site, however, they must demonstrate that their sub-contractors have been paid in full when submitting invoices for interim and final grant instalments.

Detailed Period 3 application acceptance criteria can be found here [PDF] and here [PDF].

Period 1 Reassessment (Period 1B)

Period 1 was open from May 1 to May 15, 2020. A large number of Period 1 applications were declined for various reasons, including the inclusion of “subject to” clauses and termination clauses shorter than 30 days in the oil field service contracts – clauses that were previously not permitted and which are now permitted. As a result, the Government will reassess applications for abandonment work that were declined in Period 1 (Period 1B). The Government will reassess Period 1 applications for Period 1B applicability automatically – applicants will not be required to reapply – and no new applications will be accepted for Period 1B. The grant funding for Period 1B will remain limited to $30,000 per application. Further details on Period 1B reassessment criteria can be found here.

Site Rehabilitation Program Period 4

On August 7, 2020, the Alberta government opened applications for Period 4 of the Site Rehabilitation Program (Period 4), which will remain open until March 31, 2021, or until the application period is terminated. The Government also provided further information regarding invoice reporting and Indigenous Company Criteria. $100 million in funding is available for licensees who have submitted confirmed and proposed Area-Based Closure plans with committed spend targets for 2020 to the AER, prior to the 2020 spend target being paused due to COVID-19. Eligible licensees are listed here [PDF].

Period 4 Acceptance Criteria

As in prior periods of the Site Rehabilitation Program, oil field service contractors can contract with licensees and apply for the Period 4 funding, however, licensees cannot apply for funding themselves. Period 4 projects are eligible for up to 50% grant funding (licensees are responsible for paying the remaining 50%). The Period 4 application acceptance criteria is similar to the Period 3 acceptance criteria set out above. Detailed Period 4 application acceptance criteria can be found here [PDF].

Indigenous Company Criteria

Period 4 grant funding will be increased up to 100% of the contract value if the licensee hires Indigenous contractors. An oil field service company must meet one the four following criteria to be considered Indigenous:

  1. At least 50% or more of the company is Indigenous-owned (sole proprietor, community-owned, or shareholders), and 50% or more of the employees carrying out the work are Indigenous.
  2. At least 50% or more of the company’s board of directors or executive officers are Indigenous, and 50% or more of the employees carrying out the work are Indigenous.
  3. The company is registered in Indigenous Services Canada’s Indigenous Business Directory.
  4. The company is a Certified Aboriginal Business with the Canadian Council for Aboriginal Business.

If a prime contractor is non-Indigenous, 100% of the sub-contractors working on all of the sites in the application must be Indigenous companies to qualify.

Interim Reporting

In conjunction with the commencement of Period 4, the Government has released additional information regarding the process for submitting interim invoices that contractors must submit in order to receive interim grant payments. An interim invoice report must be submitted with a copy of the invoice to the licensee for work completed to date which: (i) must be verified and signed by the licensee; (ii) must not include GST; (iii) must not include ineligible costs; further, a copy of the applicable grant agreement must be submitted with the invoice. Further details regarding grant invoicing and payment can be found here.

Alberta government invests in Keystone XL Pipeline

On March 31, 2020, after six months of negotiations, the Alberta government announced its decision to provide support for TC Energy Corporation’s Keystone XL Pipeline, including a $1.5 billion equity investment in 2020 and a $6 billion loan guarantee in 2021. The government is backstopping the project to enable TC Energy to begin immediate construction on the Alberta portion of the pipeline and ensure the earliest possible date of completion. The Keystone XL Pipeline is expected to create more than 1,400 direct and 5,400 indirect jobs in Alberta and will significantly increase Alberta’s takeaway capacity, making it an important component in protecting the value of Alberta’s energy resources.[6]