Alberta to pay levies, extend leases in first wave of aid for embattled oilpatch


CALGARY – The Alberta government said it’s granting extensions for oil and gas leases for one year and paying the industry’s regulatory levies as a first step in providing relief to the oilpatch.

The measures are part of the support package for the industry, which saw Canadian benchmark oil prices plunge below US$8 at one point this week.
The Financial Post had reported early on Friday that these measures were expected soon.

The government said it will pay $113 million in Alberta Energy Regulator levies for a period of six months and extend the mineral agreements by one year to give the industry additional time to raise capital and plan future activities.

The provincial government has already extended a $100 million loan to the Orphan Well Association to boost the association’s immediate efforts to reclaim land, decommission about 1,000 wells, and start more than 1,000 environmental assessments, that will create up to 500 direct and indirect jobs.

“Alberta’s energy sector supports more than 500,000 jobs across Canada,” the government statement noted. “These jobs are currently at risk and government must act to do everything it can to ensure energy sector firms remain operating and employing Albertans.”

Alberta Premier Jason Kenney also said economist Jack Mintz will chair its Economic Recovery Council, set up to provide advice on managing the crisis.

“This is the most significant and disruptive economic downturn in generations. It will get worse before it gets better,” Kenney said in a statement. “The council announced today, chaired by Dr. Jack Mintz, will provide advice and policy recommendations on how best to confront this unprecedented economic crisis, and recover from it in the long term. This will include strategies to accelerate economic diversification.”

The federal government is also reportedly eyeing a bailout for the industry.

“We will continue to work with the industry and other stakeholders on how best to support workers in the sector,” Finance Canada spokesperson Pierre-Olivier Herbert said in a statement. “This could include making significant investments in orphan wells remediation, to help both companies and workers in the province.”

As both levels of governments look to unveil aid packages for Alberta’s biggest industry, energy executives say they’re looking for worker support, cost reductions and liquidity to survive the unprecedented crisis.

“I don’t think the industry could survive like this for much more than several weeks or we’ll start to see significant changes in insolvency rates,” said Tristan Goodman, president of the Explorers and Producers Association of Canada, which represents small- and mid-sized oil and gas producers, and who is in discussions with the provincial government to arrange an aid package.

As coronavirus spreads around the world, causing major economies to shut their borders and quarantine their citizens, global oil demand has fallen sharply. Economists believe in the U.S., where commuters consume 9.2 million barrels of oil per day in gasoline, or almost 10 per cent of global oil demand, quarantines could dramatically affect demand.

At the same time, a price war between OPEC countries led by Saudi Arabia against Russia has created a glut of supply in major consuming markets, which has cratered crude prices in the past two weeks, creating a credit crunch for oil producers around the world.

We’re dealing with three or four issues culminating almost overnight

Tristan Goodman

“In the past, we were dealing with one issue at a time. Here we’re dealing with three or four issues culminating almost overnight,” Goodman said. “There isn’t a historical event that’s actually comparable.”

The Canadian oil and gas industry is looking for three things, Goodman said. Support for workers, sharp cost reductions in the form of tax breaks and regulator-fee holidays, and liquidity to weather the storm.

“For the liquidity, what we’re really looking for, there’s going to have to be some level of support provided into the industry. It’s really hard to do that without picking winners and losers,” Goodman said.

Pressed on what liquidity would look like, Goodman declined to provide specifics as discussions with the government are ongoing, but said that “many options can be looked at historically.”

One of the options that has already begun is new money available to the Export Development Canada and Business Development Bank of Canada to support oil and gas and other troubled industries.

“The federal government has already flowed funds into the EDC and BDC that are meant to buoy up the financial system,” said Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers.

“They are already in many of the lending syndicates and by taking this infusion of money, I believe it is $10 billion, that gives them the capacity to further bolster other financial partners,” he said.

McMillan said both levels of government have been highly receptive to the issues brought forward by the industry so far, but cautioned the current collapse is expected to be a long-term struggle for the industry.

“Saudi Arabia and Russia are using the health crisis to go after market share,” McMillan said.

But more debt may not be a long-term solution for the industry.

“In our view, we would prefer to see the federal government not intervene by providing more debt as we don’t believe the solution for too much debt is more debt,” Stifel FirstEnergy analyst Ian Gillies wrote in a research note Friday.

He noted that large-cap oil and gas producers are currently sitting on about $18.5 billion of net debt, mid-cap companies have $6.9 billion in net debt, small-cap have $2.6 billion and the oilfield services industry is sitting on a $7.3 billion debt pile.

As a result, the $15-billion package currently being considered by the federal government, according to a report in the Globe and Mail, would “help in smoothing out” credit issues in the energy industry, Gilles noted.

However, Gillies echoed the calls of some domestic players in saying that cost reductions in the form of tax breaks would be more helpful.

“If the government is looking to help companies in the interim, we believe a reduction or holiday from various taxes (payroll taxes, carbon taxes, power costs) would be more helpful,” Gillies wrote.

The Business Council of Alberta also released a letter to Prime Minister Justin Trudeau outlining specific policy proposals to address the current crisis, including immediate universal income supports to all Canadians, a suspension of income and property taxes for business in the short term and zero-interest loans and loan guarantees.

The letter was signed by the CEOs of 65 companies in the province, including Canadian Natural Resources Ltd. president Tim McKay, Cenovus Energy Inc. CEO Alex Pourbaix, Suncor Energy Inc. CEO Mark Little and TC Energy Corp. CEO Russ Girling.

With a file from Jesse Snyder

Financial Post

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