The energy sector is facing significant challenges in simultaneously managing social distancing at worksites and coping with low oil prices. Provincial and federal governments are providing financial stimulus packages to support the energy industry during the COVID-19 pandemic to ease the financial burden. A main focus by both Alberta and Canada has been increased funds to effectively maintain and manage orphan and inactive wells and associated infrastructure, while preserving jobs and ensuring environmental and public safety.
As part of Canada’s COVID-19 Economic Response Plan, on Friday, April 17, 2020, the federal government announced financial contributions up to $2 billion to support Canadians working in the energy sector. The funding program will have oversight from a federal-provincial committee, and the federal government will ensure municipal and Indigenous engagement. The tailored actions are targeted to abandoning and reclaiming orphan and inactive oil and gas wells and reducing greenhouse gas emissions.
The package includes up to $1 billion for the Government of Alberta to address inactive wells and a $200 million loan to the Alberta Orphan Well Association (OWA). The federal announcement also included reference to the Government of Alberta’s commitment to implement strengthened regulation to significantly reduce the future prospect of new orphan wells.
Saskatchewan and British Columbia will also receive funds to clean up orphan wells in their jurisdictions.
In March, the Government of Alberta announced its own energy stimulus package, including a $100 million loan to the OWA. This announcement was followed with changes to the Oil and Gas Conservation Act (OGCA) and Pipeline Act made through Bill 12 - Liabilities Management Statues Amendment Act, 2020, which received Royal Assent on April 2 and will become effective on proclamation.
While a practical effect of Bill 12 is the increase in the authority of the OWA to make various uses of the energy stimulus funds, industry has anticipated amendments since the Supreme Court of Canada released its decision over a year ago in Orphan Well Association et al v. Grant Thornton Limited et al (Redwater), finding that trustees and receivers of the estates of insolvent licensees can no longer disclaim assets that have reached the end of their productive lives in order to avoid abandonment and reclamation liabilities. When Bill 12 comes into effect, the Alberta Energy Regulator (AER) and the OWA will have more authority with respect to the management of orphan and inactive wells and also to manage sites that may become orphaned and to operate sites that might otherwise be abandoned prematurely. Below is a summary of some of the key changes, the effect of which is unclear as we will have to wait and see how they are implemented:
- New positive duty for licensees and approval holders to provide reasonable care and measures to prevent impairment or damage to facilities and sites that result in or could reasonably be expected to result in harm to the integrity of a well or facility or harm to the environment, human health or safety or property. Prior to the amendments, only operators’ obligations to suspend, abandon and reclaim wells, facilities and sites were included.
- Expanded liability where the AER concludes that the licensee or approval holder cannot fulfil the above duty. The AER may order a working interest participant to provide reasonable care and measures to prevent impairment or damage. Where an order is issued, a working interest participant is liable for its proportionate share of the costs of providing the care and measures required.
- New authority for the OWA to produce and sell oil and gas from orphan wells to operate associated pipelines until a buyer is found. Prior to the amendments, the OWA did not have the authority to produce oil and gas from orphan wells that were still viable, only to abandon such wells. The OWA’s jurisdiction regarding remediation has also been clarified.
- New receivership. The AER or its delegate may appoint a receiver, receiver-manager, trustee or liquidator over the property of a licensee, subject to the regulations (still to be drafted). This had previously been done by the AER and the OWA in reliance upon broad provisions under the Judicature Act.
- Broadened statutory lien for debts owing to the AER. The amendments include security deposits as a “debt” owing to the AER, which will rank in priority to any other security interests.
- Broadened regulation-making power granting the Government of Alberta more power over the management of the orphan fund and the purposes for which the orphan fund may be used.
For those among us watching with concern as the number of orphan wells ballooned in tandem with the plummeting price of a barrel (made worse by the unexpected and greatly reduced demand associated with COVID-19), the energy stimulus packages and the increased operational powers of the OWA are much-needed and welcome. Having said that, Bill 12 must not be understood as a comprehensive fix for the underlying issues that resulted in Alberta’s dramatically underfunded environmental liabilities. There is still much work to be done and it is a particularly challenging time to face those issues.
The Government of Alberta has committed to overhaul the liability management framework and has promised a “suite of new policies to be announced in the near future which will touch upon every stage in the life cycle of a well” and ensure that the oil and gas industry is able to meet their liability obligations in a manageable way. We will keep you apprised as we learn more.