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Bulletin | Covid-19

Putting COVID-19 Financial Stimulus Measures into Action: Details Emerge on Alberta’s Site Rehabilitation Program

Fasken
Reading Time 8 minute read
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On April 17, 2020 the Canadian federal government released details on its financial stimulus measures to help the Canadian oil and gas industry in response to the COVID-19 pandemic. Further details regarding the federal government’s aid package can be found in our previously released bulletins, Aid Package to the Canadian Oil and Gas Industry in Response to COVID-19 and Financial Stimulus for the Energy Sector and Legislative Changes to the Management of Alberta’s Inactive and Orphan Wells. This bulletin provides an update on steps being taken in Alberta to implement governmental funding for the abandonment and reclamation of inactive oil and gas wells.

Allocation of Funding

As announced in the federal government’s COVID-19 Economic Response Plan on April 21, 2020, the federal government’s funding of $1.7 billion to support work to clean up orphan and inactive oil and gas wells will be allocated as follows:
  • up to $1 billion to the government of Alberta;
  • up to $400 million to the government of Saskatchewan;
  • up to $120 million to the government of British Columbia; and
  • $200 million loan to the Alberta Orphan Wells Association.

As part of the funding process, local landowners will have the ability to nominate and prioritize wells to remediate, and funding will be prioritized to companies that are in good standing with respect to municipal taxes. Additionally, the funding program will have oversight from a federal-provincial committee, and the federal government will ensure municipal and Indigenous engagement. No substantive details on these aspects of the funding process have been provided to date.

The federal government has clarified that the well clean-up work will be considered an essential service under the government’s Guidance on Essential Services and Functions in Canada during the COVID-19 Pandemic.

Alberta’s Site Rehabilitation Program

Alberta’s first steps in the allocation of federal funding to support work to clean up inactive oil and gas wells [1] will be administered by the Alberta Department of Energy via the Site Rehabilitation Program (the “SRP”), announced on April 24th and launched May 1, 2020. The SRP is one of the new programs that the Government of Alberta has rolled out in support of its promise to address the management of the oil and gas industry’s liability obligations. It follows the royal assent of Bill 12 - Liabilities Management Statues Amendment Act on April 2, 2020. The SRP funding will not apply to an orphan well, as the Orphan Well Association (“OWA”) has received dedicated funding and is responsible for the cleaning up of these wells (details described in our previous bulletin).

Applications for the first SRP period opened on May 1, 2020

As the SRP is intended to get people back to work, it is targeted directly at the hard-hit oilfield services sector, with funding to be provided over a 23-month period in the form of grant payments to abandon and/or reclaim upstream oil and gas infrastructure. The funding will be provided directly to successful oilfield service company applicants (a “Contractor”) who have entered into an service contract (an “OFS Contract”) with an oil and gas company that has a business associate code with Alberta Energy (a “Licensee”). The SRP requires that site rehabilitation work be completed and invoiced no later than December 31, 2022.

Grants may cover all or part of the contracted amount of site rehabilitation work. Specifically, successful applicants will receive grants ranging from 25% to 100% of the value of the OFS Contract (excluding GST), with the amount of the grant being based on the ability, either financial or otherwise, of the Licensee to contribute to the costs of site rehabilitation work. The first two periods of the program will be focused on 100% value contracts in order to target work where there is the greatest need for support and the highest likelihood that the site might otherwise become an orphan without such support.

Contractors with approved grant applications will receive: (1) 10% of the grant amount once their application is approved (an additional 20% will be applied to the first installment if the Licensee’s municipal taxes are paid in full on the proposed site); (2) up to an additional 60% of the grant after submitting an interim invoicing report to the Alberta Department of Energy; and (3) the remainder of the grant after completing the work and submitting a final invoicing report to the Alberta Department of Energy.

While the SRP funding cap is set at $1 billion, grant payments will be distributed in $100 million increments by program periods with targeted priorities, currently described as follows:

SRP Application Acceptance Criteria

Program Period

Description

OFS Contract Limit Amount(1)

Proposed Timeline

Period 1

Province-wide program applications are accepted for projects that require 100% government funding.

$30,000

May 1 to May 31, 2020

Period 2

Applications are limited to Section 36 lands (i.e. lands for which the government has been left to pay compensation under section 36 of the Surface Rights Act due to a Licensee’s default) for projects that require 100% government funding. 

$30,000

May 15 to June 15, 2020

Future Periods TBD

SRP application acceptance criteria for future increments will be communicated on the SRP website.

 

June 15, 2020 to March 31, 2022

(1) OFS contract limit amount per application, per closure activity.

SRP Eligibility Criteria

To be eligible for a grant, the following criteria must be satisfied: 

SRP Eligibility Criteria

Site Location and Status

  • The site must be located in Alberta, and it must require abandonment and/or reclamation of the infrastructure.
  • Eligible sites may be active and require abandonment, inactive and not producing, or suspended.
  • The site must not be designated an orphan (the OWA receives dedicated funding and is responsible for cleaning up all orphan wells).

Energy Infrastructure

  • The infrastructure eligible for site rehabilitation work includes upstream oil and gas wells, pipelines and associated facilities.
  • Abandoned-in-place pipeline segments are eligible if the Licensee has received approval from the AER to remove the specific segments.

Scope of Proposed Activities

The following activities are within the scope of eligible site rehabilitation work:

  • Well abandonment (includes abandonment submission, re-entry and abandonment)
  • Facility Abandonment
  • Pipeline Abandonment
  • Environmental Site Assessments (Includes Phase 1 ESAs and Phase 2 ESAs)
  • Remediation
  • Progressive Reclamation leading to Reclamation Certification
  • Spend - Purchase of materials and supplies, equipment rentals, and transportation of equipment and workers to and from sites to support site rehabilitation work are within scope.

Ineligible site rehabilitation work includes:

  • Suspension (wells and facilities) and discontinuation (pipelines) costs that are not part of abandonment and reclamation projects
  • Non-closure work on producing sites (e.g. spills remediation)
  • Closure work done outside Alberta
  • Work already completed or in progress before the effective date of the grant program.

Contractor Location

  • The Contractor must be based in Alberta, with registration, an office and operations in Alberta.

Contractor Capacity

  • The Contractor must be prequalified (skills, experience, capability, health and safety requirements etc.) by the Licensee to perform the site rehabilitation work.

Licensee Contract

  • The OFS Contract relied upon in the application for SRP grant must be fully executed by the parties, without any “subject to” clauses, and the only remaining performance is the provision of the contracted services by the Contractor.
  • The OFS Contract must include the scope of services, value of contract including cost breakdown by work activity, schedule for completion of work including milestones, and deliverables.
  • If the OFS Contract is not with the Licensee or operator, then authorization is required by the Licensee as part of the application for SRP grant.

Timing of Site Rehabilitation Work

  • The OFS Contract submitted as part of the application for SRP grant must be dated on or after the effective date of the grant program.
  • All of the site rehabilitation work described in the OFS Contract must take place on or after the effective date of the grant program.

For more information regarding the SRP, please visit the government of Alberta’s SRP website or consult the SRP Application Information and Guidelines.

Our Thoughts on Noteworthy Aspects of the SRP

There are a number of interesting details worth noting in the structure and approach to the SRP.  In particular, the SRP is being administered by the Alberta Department of Energy and not the OWA, which, by virtue of its governance structure, is perceived to be controlled by industry. Indeed, Alberta scholars have challenged the aptness of the OWA’s governance structure now that its funding structure has shifted from being entirely industry-funded to one that is now the beneficiary of significant public funds (see here). With Alberta Energy at the helm, perceived conflicts can be better managed. This may have been a requirement of the federal government and may also facilitate the federal-provincial committee that is apparently to have oversight of the use of the funds provided by the federal government.

It is also interesting that the grant funds will be paid directly to oilfield service companies and not to the producers who actually bear the liability associated with ensuring the completion of abandonment and reclamation work. This approach makes sense from a job-creation perspective as oilfield service companies tend to be hit the earliest and the hardest by depressed oil and gas prices. Interestingly, the Alberta government has stated that this approach is being taken to honour the “polluter pays principle”, that is, that cleanup is the responsibility of the owner of the well. This approach should, at least to some extent, assuage the concerns of those critical of federal funding for the oil and gas sector. While an indirect benefit of course accrues to the Licensee, the public funds are actually being directly paid into the hands of the employers of those who conduct the abandonment and reclamation work. The approach has met with favourable reactions as several environmental NGOs (such as Greenpeace and Stand.Earth) have issued press releases in support of the aid program.

There are also interesting gaps in the SRP details. In particular, it is not yet clear how a Licensee’s financial ability to contribute to costs will be determined and how that might impact participation in the program. For those who do not qualify for complete coverage, it will be interesting to see whether they will participate in the program given the limited capital spending programs that Licensees will be facing for some time to come.

We will continue to monitor and update as additional information about Alberta’s policies and programs roll out.

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