Oil & Gas Law encompasses all manner of upstream and downstream work including exploration and drilling agreements; infrastructure, engineering, and service contracts; production, licensing, leasing, operation, and royalty agreements; joint ventures and syndications; taxation; environmental approvals, compliance, and site abandonment; federal and provincial regulatory applications; financing including project financing, structured financing, debt and secured financings, capital markets, and private placement financing; storage, processing, refining, marketing, pipelines, and distribution; acquisitions, mergers, and takeovers; international concessions, exploration, and development.
A Challenging Year
In June 2020, the Canadian Association of Petroleum Producers estimated that C$23.3 billion would be spent in the oil and gas production sector in Canada for the year, down from the roughly C$37 billion they forecasted at the beginning of the year.
The first hurdle the sector faced came in early March 2020, when OPEC and Russia failed to reach an agreement on production quotas. With oil prices already low, then came a dramatic reduction in demand from the COVID-19 pandemic as economies started to shut down all around the world soon after. The result has been capital budgets cut substantially by nearly all participants in the industry and a significant fall in M&A activity.
In an interview with Lexpert® Magazine, Robert Froehlich, head of the Canadian oil and gas practice for Norton Rose Fulbright Canada LLP, identified some bright spots on the horizon. From July, there has been at least a start in demand for oil and gas products as economies are reopening, Froehlich said, with a stabilization in oil prices and stronger natural gas prices this year than last, as well as potential outlets for some of the gas supply including petrochemical developments. There has been some renewed interest in the oil and gas sector from private equity in the United States and from sovereign wealth funds.
“I’m optimistic that there’ll be more deal activity over the coming months and toward the end of the year,” he said. “A few transactions have been announced, and there’s more interest. So, there are definitely some bright spots.”1
Mitigating Environmental Impacts
In the oil-rich province of Alberta, the industry has tried to stay ahead of the game by employing new technologies to reduce emissions from their operations, said Vivek Warrier, co-lead of the National Energy Industry Team for Bennett Jones LLP, based in Calgary. “There’s been a massive emphasis on environmental performances and making sure that any environmental impacts are mitigated.” That is starting to move the needle a little on public opinion, where the public is starting to appreciate how much effort and money are being expended and research being done by
In April, the federal government gave C$1 billion to Alberta to clean up and do abandonment and reclamation work and C$200 million as a loan to Alberta’s Orphan Well Association to clean up abandoned wells. This comes after the Supreme Court of Canada’s January 2019 decision in Orphan Well Association v. Grant Thornton Ltd., also known as the Redwater decision after the oil and gas company that was not able to meet its end-of-life obligations to its abandoned wells, gave the provincial regulator and the public priority over lenders in Redwater’s bankruptcy.
“I think it was the right decision because banks can make a judgment call when lending, and the public shouldn’t take second priority,” said Sean Korney, a partner at Burnet Duckworth & Palmer LLP in Calgary, to Lexpert® Magazine.
As a result of that change in priority, Korney said, the banks re-examined what they would lend to oil and gas companies. Their reserves-based lending supports loans that are a percentage of the estimated value of the company’s commercially producible oil and gas. When abandonment costs took priority, the banks had to then deduct the value of the abandonment costs from the asset base before they would lend. It meant that oil companies could borrow less.
Support for the Oil Sector
The Canadian Government’s assistance to and impact on the energy industry follows a green approach, Korney said, with money for the cleanup of assets, policies to reduce methane production, carbon taxation, and even the investment in the Trans Mountain Pipeline “because it’s much more carbon-efficient to move oil by pipeline.” The Large Employer Emergency Financing Facility announced by the federal government in May 2020 offers bridge financing to large employers to cover operational needs during COVID-19, but it requires environmental, social, and governance commitments.
A novel program that the Alberta government announced in late August 2020 will provide a framework for incentivizing value-added petrochemical development in the province, Warrier said. The Alberta Petrochemicals Incentive Program is part of Alberta’s Recovery Plan, providing grants to companies to attract investment in new or expanded market-driven petrochemical facilities, and will launch in early fall. The program will stimulate investment “and take advantage of our very cheap natural gas feedstock,” he said. “It’s a very imaginative and logical program that the provincial government has put in place.”
- Raymer, Elizabeth. “The oil sector’s tough year.” Lexpert® Special Edition — Energy. October 27, 2020. https://lexpert.ca/article/the-oil-sectors-tough-year/.