Written by Brad Gilmour, Keely Cameron and Stephanie Ridge
On May 1, 2020, the Government of Alberta announced new information regarding how the Alberta Site Rehabilitation Program will be administered. Since then details of the program have continued to evolve. As we noted in our blog describing the Program published last week, the Program will distribute funds from the federal COVID-19 Economic Response Plan for the Canada's Energy Sector by issuing grants directly to oil field service (OFS) contractors to conduct specified closure and reclamation activities.
The May 1 update also included the publication of the "Application Information and Guidelines" and a Site Rehabilitation Program Fact Sheet (Fact Sheet), which clarify a number of important points on the Program's operation but also create a number of additional questions.
In this blog, we provide a brief overview of the additional details that have been announced, and some of the remaining questions and challenges to be addressed as the Program continues to evolve.
The Government of Alberta has confirmed that the Program cannot be used to fund work on orphan wells in the Orphan Well Program (Guidelines, page 6, "Program Eligibility Criteria"). The province explains that the Orphan Well Association receives dedicated funding separately for orphan wells.
Site and Application Eligibility
Applications for the first increment of $100 million (Period 1) will be accepted between May 1 to 31, 2020, for contracts of up to $30,000 for oil and gas sites needing abandonment and/or reclamation. These funds will be directed to "zero-contribution contracts", which the Guidelines describe as "sites held by licensees for work done on licensed sites held by licensees with limited ability, either financial or otherwise, to contribute to costs of site rehabilitation work" (Guidelines, page 5).
Recent comments by the Department of Energy have flagged four interesting considerations at this early stage of the Program:
- First, the Department of Energy has stated sites held by licensees in insolvency proceedings are eligible for Program grants, so long as the receiver—in its capacity as licensee—enters into the contract with the OFS contractor and is willing to agree to the Program in their capacity as licensee. However, it remains to be seen whether the terms of the agreement will be something that receivers will be prepared to sign.
- Second, the Department of Energy also stated that given the volume of applications and the Program's purpose of getting OFS contractors back to work, applications are currently being judged on the reasonableness of the applied-for costs alone, without consideration of the licensee's ability to pay. It is not immediately clear how long this approach will continue.
- Third, applications are currently being assessed on a first-come, first-serve basis.
- Fourth, the Department of Energy indicated that it is currently rejecting applications where the total cost of the work exceeds $30,000, even if the amount to be paid for using the Program Grant is equal to or less than $30,000. This will limit the program to low-cost, low-risk sites.
Applications for the second increment of $100 million (Period 2) will be accepted between May 15 and June 15, 2020. In Period 2, the Program will consider applications relating to sites where the licensee has defaulted on lease payments and, as a result, the Minister of Environment of Parks is paying compensation pursuant to section 36 lands of the Surface Rights Act (Guidelines, page 4). Sites eligible for grants during Period 2 must also be "zero-contribution contracts" limited to work that costs $30,000 or less.
The scope of applications to be accepted in future increments remains to be determined.
The Program website and Fact Sheet indicate that a contractor's application and contract with the oil and gas site licensee will be verified within five business days. High demand for application approval—compounded with the general expectation that the contractor doing the work must be the applicant for grant funding (Fact Sheet, PDF page 5, thereby increasing the number of total applications to be processed)—means that the processing time has been lengthened. In recent comments, the Department of Energy noted that they have received over 18,000 applications, and their response time is likely to be delayed.
With regard to the disbursement of funds, the Fact Sheet also notes that the Program is currently targeting an average of up to 30 days for disbursement of the first instalment after the signed Program Grant Agreement is submitted (Fact Sheet at PDF page 6).
Cooperation Between Contractors and Licensees Required
The Guidelines elaborate on the information the OFS contractor must provide as part of their application. They stress that the contract between the licensee and the OFS contractor must be fully-executed and capable of immediate action, without any “subject to” clauses (Fact Sheet at PDF pages 5-6). By "subject to" clauses, it appears that the intention is that the agreement cannot be conditional, for example, it cannot be contingent on the receipt of grant funding. Commitment letters will not suffice. In preparing the agreement, if considering use of standard form agreements, it is important to ensure that specific requirements of the Program are addressed such as provisions to ensure that the work is carried out in accordance with social distancing and COVID-19 related health guidelines.
Licensees that are abandoning their own wells (i.e., without the assistance of a third-party oil field services company) are not eligible for the grant (Fact Sheet at Related FAQ No. 3).
While prime contractors may apply for a grant with the intention of using subcontractors to assist with completion of the work, applications involving subcontractors are expected to be very precise about who is doing what work. Prime contractors should be aware that administrative fees are not acceptable as eligible costs. It is unclear as to what the Department of Energy would deem to be an administrative fee and whether it would capture industry standard mark ups charged on subcontractors work.
Multiple Grants and Staged Work Permitted on a Single Site
According to the Guidelines, the Program will be offered over a 23-month period, allowing companies to complete staged work such as Phase 1 and Phase 2 Environmental Site Assessments, re-applying at each stage when site conditions are better understood (Guidelines, page 4). Site rehabilitation work must be completed and invoiced by December 31, 2022.
Landowners may nominate an inactive site on their land by completing a Landowner Nomination Form, however the final decision on whether the work is executed remains with the licensee.
Receipt of grant funds for closure work is contingent on and subject to the terms and conditions of a Program Grant Agreement with the Government of Alberta, which will be issued in accordance with the Energy Grants Regulation, Alta Reg 103/2003. The Department of Energy has confirmed that parties that do not wish to proceed with work that was applied for or approved for a Program grant may simply decline to enter the Program Grant Agreement. It is currently unclear whether licensees are to be party to the Program Grant Agreement.
Picking Winners and Losers
While the purpose of the Program is to provide support to OFS contractors, the structure of the Program means that some classes of licensees will benefit from the Program over others. Should the government apply the capacity test suggested in its materials, licensees in healthy financial shape are unlikely to qualify for the Program—either by choice, or by the Department of Energy's assessment of their ability to pay—from the first two Periods of the Program, which will only accept applications for "zero-contribution contracts" and later, in Period 2, applications where the licensee has defaulted on surface lease payments.
As a result, the Program appears likely to benefit licensees most weakened by recent market conditions.
Use of Grant Application Information
Amounts paid to each contractor will be publicly disclosed (Guidelines, page 11, "Confidentiality"), which raises the question of the impacts of the success—or failure—of different contractors at obtaining grants on their business. The applicant's name, licensee, grant amount, facility location, and aggregate data on payment and performance measures may all be published (Guidelines, page 13, "Program Administration"). If the government employs an ability to pay test, licensees will want to be mindful of how their satisfaction of that test is perceived by stakeholders.
Liability for Poor Performance Remains with Licensees
The Guidelines note that the Department of Energy may terminate a Program grant if it is not satisfied with the contractor's performance (Guidelines, page 12, "Compliance"). In such cases, liability to complete or repair the unsatisfactory work is not set out by the Program, but it likely falls to the licensee subject to any agreements as between the licensee and OFS. Licensees should keep such a scenario in mind when contracting with OFS contractors to apply for grants.