Money for orphan wells welcome, but it doesn’t begin to address the real crisis

orphan
Orphan well near Carstairs, Alberta

Ottawa’s decision to spend $1.7 billion to clean up abandoned wells is better than a kick in the head, but it is by no means the leg up the energy sector was seeking.

 

Alberta Premier Jason Kenney welcomed the federal money, but added it is just a start.

“More support is needed to deal with the crisis in Canada’s energy sector, but this is a great first step. Our energy sector is facing its biggest challenge ever, and we need to be sure that industry can access the capital it needs to survive and thrive in future years. When the auto sector and the banks were threatened during the global financial crisis a decade ago, the economic strength of Alberta, powered by the energy industry, ensured that Canada was able to provide the urgent support they needed.”

It’s hoped Kenney’s call for reciprocity is heeded by the Liberal government, but it is more likely to fall on deaf ears.

In any event, the Orphan Well Association, which is receiving a $200 million loan from Ottawa, was established to deal with wells that were abandoned by companies forced into bankruptcy in the wake of previous downturns.

The OWA is funded through the annual Orphan Fund Levy which is paid by the oil and gas industry in Alberta. In 2017, the province loaned the organization $235 million which is scheduled to be repaid by 2027.

There is little question that the federal money for this project and money to reduce methane emissions will be of assistance and will create thousands of jobs, but it’s also evidence that the Liberal government does not understand the depth of the crisis facing the sector.

Oil and gas companies are dealing with two simultaneous problems. One, is the price shock induced by the Russia- Saudi Arabia price war, which drove prices producers are paid here to below $5 a barrel. Two, is the SARS-CoV-2 pandemic which has drastically reduced demand for oil.

The sector, in other words, is facing a liquidity crisis. It simply cannot generate enough cash to maintain operations.

That, in turn, has led to massive layoffs, bankruptcies and the flight of investment capital.

There are no doubt many within the ranks of the Liberals who hold the view that all of these threats simply accelerate the inevitable decline of an industry that contributes to CO2 emissions and that we would be better off using this decline as an opportunity to move to a renewable based economy.

That is a specious argument. While demand for oil is currently low, that will not always be the case. Even the most pessimistic projections have demand growing in excess of two per cent per year for decades to come once the global economy recovers.

In other words, there will be a market for Canadian oil and oil prices will recover.

What the industry needs now are bridging loans. Industry experts say about $20 billion in loans would see companies through this bad patch.

Given the Liberals antipathy toward the West and its energy sector, it’s doubtful those loans will be forthcoming.

And that for the 800,000 workers employed in the sector is bad news indeed.


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