Bleak Friday – Tougher Monday

Severely normal Albertans should be a bit wary of government press releases on Fridays.  Governments usually make announcements of things they are less proud of on Fridays.  The hope is that any bad news will receive less coverage on the weekend.  Those announcements are called “taking out the trash”.

In Canada’s climate change world, it is the energy companies not cars or people that bear responsibility for pollution. Apparently 109 climate activist organizations took up a lobby campaign with the Liberal government demanding that no pandemic support be provided to the energy industry.  

And it seemed to have worked!  Compared to the scale of the problems the energy sector faces this support program is the absolute minimum the federal government could come up with.  

The announcement of federal government support for Alberta’s energy industry qualifies as taking out the trash.  The announcements were:

  • $1.7 billion in assistance to deal with oil and gas wells that have been abandoned when companies went broke.  Alberta will get $1 billion, Saskatchewan $400 million BC $120 million. An industry group will get a loan of $200 million.
  • $750 million fund for projects that will reduce methane emissions.  Details are skimpy but the idea seems to be to offer repayable loans to buy equipment to meet the new federal standards for capturing methane.
  • Debt financing via the Business Development Bank and Export Development Canada will be available for struggling midsized energy service businesses.

The federal government has little appetite to intervene and ruin their “green” credentials. But the economic wreckage in Alberta is hard to ignore.  The Alberta government describes the problem as a crisis in liquidity for many companies both large and small. The Premier has estimated that a program of $15 to $30 billion in loan guarantees will be needed.  

For comparison, in 2009, the federal and Ontario governments bailed out General Motors and Chrysler with $13.7 billion in loans and stock purchases.  Governments ended up losing $3.4 billion plus interest to support Eastern Canada’s auto sector.  

For further reference, the energy sector’s contribution is $200 billion to GDP compared to the auto sector’s $90 billion. Direct employment in the energy sector (282,000 jobs) is more than twice the size of the auto manufacturing sector (125,000 jobs).

Alberta and the Double Whammy

The energy economy has been hit by a price war between OPEC and Russia.  And demand for oil during the pandemic has fallen dramatically.  Even recent agreements to reduce output by the world’s major players is not enough to balance the market.  

Conventional crude oil (WTI) is selling for $18 a barrel not seen since 2002

Bitumen based crude (WCS) sank to a paltry $4.27 the day of the federal announcement.  And by Monday, the price has gone into negative territory.  That means companies have to pay someone to take WCS. 

Energy companies have recently slashed their capital spending by an estimated $4.0 billion.  That spending often goes to small and midsized contractors to carry out construction projects.

And the future doesn’t look great.  Alberta’s storage capacity is nearly fully occupied. The International Energy Agency estimates the global storage will be full by June.

Alberta’s Regulatory Disaster

But it wasn’t just a bleak day because the federal government chose to do the bare minimum.  The scale of the orphan wells problem shines a spotlight on the Alberta Energy Regulator’s (AER) ineffective management of inactive and abandoned wells.  The regulatory framework doesn’t accurately calculate the cost of reclamation. Nor are companies obliged to remediate well sites if they declare them to be “inactive” even for decades.

There are about 450,000 wells in the province and about 185,000 of those are productive. There are about 150,000 wells classified as inactive and most are likely un-economic to reactivate. The C. D. Howe Institute estimates the clean-up price tag at about $8.0 billion. Low energy prices and marginal assets led companies delay reclamation or to abandon their liabilities.  Where once there were just a few hundred formally abandoned wells, now there are 3,400 orphaned wells.

The Alberta government has launched a review aimed at improving the regulatory environment but the problem of the past weak regulatory regime will not go away quickly.

But the health of the industry remains the central issue: 

So … what now?  Will the federal government step forward… or stare at their shoes while businesses and fail in Alberta?