Torys Business Brief focuses on key issues and actionable knowledge for businesses to emerge from the COVID-19 crisis resilient and well-positioned for the future. Each episode of Torys Business Brief features in-depth, accessible interviews with Torys lawyers, moderated by Munk Debates convener Rudyard Griffiths. These episodes are accredited for CPD purposes.

Canada's oil and gas industry continues to face unique challenges during the pandemic crisis. In this episode, Calgary partners Stephanie Stimpson and Chris Christopher offer their candid perspectives on the current state of the sector, its prospects for recovery and the silver linings for industry players. From issues top of mind for boards and sustainable project development to the M&A outlook for oil and gas, our Calgary partners discuss where the industry is headed, including the future of oil in Canada's energy mix.

A full episode transcript follows.

Rudyard Griffiths (00:02): Hello, and welcome to Torys Business Brief, I'm Rudyard Griffiths. You may know me as the convener of the Munk Debates, where we bring together the world's sharpest minds and brightest thinkers to debate the top issues of the day.

RG (00:15): As the host of Torys Business Brief, my role is to provide you, the listener, with compelling conversation about the legal challenges the COVID-19 pandemic presents for businesses and business leaders. We're all taking stock of the ongoing effects of the pandemic. As the world continues to respond, businesses have wide ranging issues to consider. This podcast will equip you with actionable knowledge your business can use to emerge from the current crisis resilient and ready to thrive. To do this, I'll be drawing on the expertise and insights of the lawyers working at the firm named corporate law firm of the year by Chambers and Partners, Torys LLP.

RG (01:26): On today's Torys Business Brief, we talk with Torys Calgary partners Stephanie Stimpson and Chris Christopher. We dive into a conversation about how the oil and gas industry has been affected by the COVID-19 pandemic.

RG (01:44): Stephanie Stimpson manages a diverse corporate and transactional practice, working with oil and gas companies in Canada and internationally. She advises on all aspects of their business, including board and governance matters, regulatory compliance, M&A financing, and commercial arrangements.

RG (02:02): Chris Christopher advises oil and gas and power companies on a variety of commercial projects and transactions, including the purchase and sale of energy assets, energy project development, joint ventures, and operation maintenance and processing arrangements as they relate to LNG, oil sands, shale gas, and power projects.

RG (02:22): Stephanie, Chris, welcome to Torys Business Brief.

Chris Christopher (02:27): Hi, it's good to be here.

Stephanie Stimpson (02:28): Good morning, Rudyard. It's great to be here with you and Chris.

RG (02:30): I'm really looking forward to this conversation. I think what you're experiencing in Alberta, it's a big national story and we all kind of need to wrap our heads around what's happening to Canada's energy sector as this crisis unfolds, what the prospects are for recovery, and how we as a country can kind of move forward to understand ways to use these resources responsibly for the public good, to drive the kind of economic growth, the economic resurgence that we are going to need in the months and years to come. Let me start off with you, Chris, just to talk a little bit about perspective here. I want you to just quickly give us a sense of how this particular crisis is different from the other cycles that we know that this industry has periodically faced. How is COVID an especially acute challenge?

CC (03:33): I don't think it's any secret that the golden age for the oil and gas industry was losing its shine before the coronavirus shut down society. After years of burning through cash without generating a matching reward for investors, the oil and gas industry was increasingly cut off from capital. The industry was also beset with a scarcity of pipelines that was partly due to political and regulatory hurdles, and this resulted in an infrastructural bottleneck and an inability of producers to access markets other than the U.S. With a single buyer, producers have been forced to give away their products to the U.S. at a discount rate. Market discounts as high as $2 billion per month. This is due to the expense to transport and refine Canadian heavy crude, which is generally inferior to higher quality oil extracted from shale formations in the U.S.

CC (04:28): The industry's response has been push for major infrastructural projects designed to obtain access to markets other than U.S., so that they can obtain world pricing for its commodity. Now, these have been heavily scrutinized and have either died on the vine, I'm talking about Energy East and Northern Gateway, or slated to proceed only due to direct government investment. Prime examples of this are the Federal Government's purchase of the Trans Mountain project from Kinder Morgan and the Alberta government's $1.1 billion equity investment and $4.2 billion guarantee to help smooth the path forward for TC Energy's long-postponed Keystone XL project. Life as a Canadian-based oil producer was hard, and then came the Russia-Saudi price war, further destabilizing commodity prices. Then, as a coup de grâce, the whole unexpected blow from COVID-19. Where does that leave us now?

CC (05:23): Well, COVID-19 has amplified these challenges that I just talked about by almost instantly obliterating 20 to 30 million barrels per day of oil demand. That's created an oversupplied market that ultimately saw commodity prices drop precipitously. People stayed at home and travel and entire industries ground to a halt. What we've been witnessing these last weeks and almost two months now is the greatest demand drops since World War II. Commodity pricing, stunningly, went negative for a short spell and is now in the low to mid $20 range. These are prices not seen in nearly two decades and represent a significant blow to the liquidity for every player in the industry.

CC (06:09): The biggest concern for the Canadian oil patch is how long this will last and whether or not investment will return in a meaningful way. The downturn of the last five years was too tough for many companies who went bankrupt. Those that remain are going to be asking themselves why an investor would risk dollars in an industry where its main commodity can go below breakeven costs of around $40 per barrel for extended periods of time.

CC (06:33): A quick rebound in oil and gas prices and result in improved cashflow and operating metrics could bring investment back, but industry analysts expect a sluggish recovery and the industry may be more negatively impacted than other sectors once the health crisis subsides and the economy begins to recover.

CC (06:53): That's where we are now. There's definitely a long road ahead in terms of getting a recovery on the economy, which first requires a recovery in pricing.

RG (07:06): Thanks, Chris. That's a great scene-setter, just to kind of situate this conversation, so we understand both the challenges, but then also potentially some of the opportunities that could present itself to oil and gas in the energy space more generally.

RG (07:23): Stephanie, to come over to you, because part of your practice is working with boards and CEOs directly. I want to kind of use you here for a moment, somewhat selfishly, to give us a sense of the top of mind concern for the board members and CEOs that you're talking to.

SS (07:41): Rudyard, what's top of mind for boards and CEOs right now is really survival. As Chris said, the pandemic hit when the industry was already very stressed and facing a lot of pressures on the pricing side. We're seeing commentary after prices went negative in April. The commentary around is, is this industry facing an existential crisis? While I think the industry will certainly survive, it is possible that companies, and particularly those with a lot of debt, they may not survive.

SS (08:14): On priorities for boards and management in the face of COVID, the first priority was and remains protection of the health and safety of workers. The oil and gas business is very safety-conscious. They operate in high risk environments. Protecting the workers was first and foremost.

SS (08:37): Then, as I just said, next really is protecting the business itself in the face of this credit crisis, in the face of liquidity issues in many companies. We saw boards and management teams react very quickly in terms of making capital cuts and really paring back budgets as much as possible. There were dividend cuts across the board. We've seen executive compensation cuts. But the reality in Alberta is that we had already faced six years of stress in the industry here and there had already been cost-cutting measures taken over time, many rounds of layoffs. There wasn't a lot of fat on the bone in terms of ability to make a lot more cuts.

SS (09:25): On the other side, on the revenue and production side, we've seen massive shut-ins of production happening. This is happening globally, but in Canada we've had... The last number I saw was around 650,000 barrels of oil that has been shut in to date. The expectation is that there will be more shut in production. Until companies can make money and we resolve the oversupply issue, that production will likely remain shut in. Management teams have to determine what production should be cut and what will be able to be brought back online later, and then what the implications are on supply agreements and other impacts of shutting in that production. That's certainly a big part of what companies are looking at right now.

SS (10:20): Then going forward, trying to make predictions about what recovery might look like and the different phases we might see for recovery. That is really crystal ball gazing. That is not easy to do in the face of this pandemic. Really, a lot of time and attention right now is being put to the capital structures and borrowing facilities, what will the lending capacity be for these companies, and then how to layer in some of the government programs that are being made available, and what will all of that look like? How will it fit together? So that is really my perception of what's top of mind right now.

RG (11:09): Thanks, Stephanie. That's a great segue to come back to you, Chris, to talk a little bit about the news of the last a week or so, which is the introduction of this new federal loan program. It's got an acronym, they all seem to have acronyms. The Large Employer Emergency Financing Facility, LEEFF, I guess I pronounce it. Give us your sense, Chris, of how this program is being received by industry. What is the view there on the ground in Alberta in terms of how this program could make a difference, or maybe some of the challenges and concerns that people may have?

CC (11:50): Well, in short, it's welcomed. Stephanie just outlined—I think pretty clearly—that there's liquidity concerns. There's difficulty getting access to capital when you have commodity prices as low as they are and resulting shut in of production because you don't want to give your barrels away or at a loss. So, where's the cash going to be had for purposes of meeting payroll obligations and other short term and long-term payables? So, to be able to survive and come out of this crisis on the opposite side with an oil and gas industry intact, and then able to move forward in a meaningful way, as I said, this is viewed very positively.

CC (12:45): Now, I know that some of the details are a bit sketchy at the present time on what conditions there are on the funding. But a couple of important factors, I think. One, these are bridge loans and you get access to cash, hopefully, right away. We don't know the timing, but this kind of mirrors what the Alberta government was requesting, so that's positive. And second, I think there are some conditions that I've read about that are linked to this package of aid, and that's more kind of environmental reporting, or abiding by increased environmental standards. I think we'll see what that fully entails in the coming days. But these aren't things that the oil and gas industry would be fearful of or would shrink in the face of. These are things that they've been encountering with investors and different areas of society for many years now. So, I think they're actually very well-positioned to respond to the government requests that are tied to these bridged financing arrangements.

RG (14:09): Stephanie, what are you hearing? Is this potentially transformative, or one size shoe doesn't fit all, and some companies can take advantage of this, but for others, it won't be material? And maybe more specifically, let's put it on the table, what is your sense of the potential here for outright insolvencies within the industry in the coming months?

SS (14:39): Yeah, so this is the time of year when oil and gas companies are renegotiating their credit lines with their bankers. And as we said, this is, in many cases, a highly-leveraged business. So, the oil and gas companies talking to their lenders right now, when all of the pricing and production has decreased, for smaller borrowers, this would immediately result in a borrowing base shortfall. For larger lenders, even with ... sorry, borrowers with covenant-based facilities, there will be issues in meeting those covenants. So, there is the prospect of most of these companies being in default at some level on their facilities for those that have a leveraged balance sheet.

SS (15:26): These programs from the government, we had already seen some announced for the smaller business levels, are welcome in terms of trying to address that credit crisis. And the EDC has announced that on situations where there would otherwise be a borrowing base shortfall and no credit available, it will backstop some of those loans and provide guarantees that will then allow the banks to keep credit available to these companies to get through this. What we expect to see when the negotiations happen, and likely in the form of amendments to the credit facilities, will be that there will be controls on leakage and controls on spending that will protect the banks and make sure that any credit going out is being done for the purposes of survival and getting through this until there's an environment where it makes economic sense to start allowing more liberal spending on capital programs, etc. But there will be controls, as you've seen, with the government programs on dividends, on share buybacks, and even, in the case of these federal programs, on executive compensation.

SS (16:48): So, the programs I think were necessary and are welcome. The large employer program announced on Monday was a big gap to date. So, this is a very important piece of the puzzle. You're correct that there still are others who will not fit within any of these. And the terms of the loans, the pricing, and who will actually take advantage of them, that does remain to be seen. So, it's too soon to predict the ultimate impact, but industry has been awaiting these programs for a long time, so that has been helpful. To your second question on are we going to see a wave of insolvencies? Without the banks working as partners with these oil and gas companies, and without some of the federal relief programs, that would certainly be a possibility. But the reality is there's no buyers right now out there on the other side of these insolvencies, so there's very little incentive for lenders to put companies into that situation. And rather, and this has been the case through many oil and gas cycles, the lenders want to work with these companies and help them through this.

RG (18:10): Hi, thanks for listening to Torys Business Brief. For more information on how organizations and business leaders should be addressing the challenges of the COVID-19 pandemic, visit Here, you'll find a wealth of in-depth resources featuring cutting edge analysis and insights. Again, that website is

RG (18:35): I want to take advantage of the fact that both of you have kind of lived and breathed this industry for a while now, and you've got some muscle memory for us to draw on. The challenges just seem immense. We've talked about the financial challenges. There's also political challenges in terms of the backdrop in Canada, and a fairly fierce national debate over the future of these resources and how they should be utilized or not. So, Chris, what is your view here in terms of the fate and future of this industry once, let's say, we get through the acute phase of this crisis and hopefully out the back end to higher energy prices? But what type of industry are we going to have when we get to that point, having kind of walked through the Valley of Tears here, so to speak, for the last number of months, if not years?

CC (19:32): Well, the industry is certainly going to be different looking from what it is today. There's no doubt about that. We've seen already trends of investment dollars flowing away from the industry as I spoke about earlier. It's actually kind of shocking when you look at some of the numbers, and I had an opportunity to do this. I noted that in 1980, seven of the 10 largest stocks on the S&P 500 were oil and gas companies, and that was 29% of the index. In 2009, that was 10% of the S&P 500, a big drop. Today, it's less than 3%. For the first time in history, there are no oil and gas companies in the top 10. So, it's going to be different. We were already seeing a significant drop in investment in the oil sands: $34 billion in 2014, last year, it was just over $10 billion.

CC (20:31): Now, there's a number of reasons for this. And we can't overlook societal and climate pressures. That's on the floor, most certainly. And when you look at public policy discussions, societal discussions, concern over carbon-intensive industries is at the heart of what we're talking about. So, what does that mean when we go forward? How do you square that circle is really the issue? Now, we don't have the magic-ball answer to that question.

CC (21:07): However, it strikes me that in some of the pronouncements in investment aid that we've seen to date from the government in this short-term kind of context, it recognizes that the oil and gas industry is important to the economy of Canada. If we're going to pay for some of these programs that have been announced and move forward in a prosperous way, you're probably going to have to pull on all the different levers that you can. And so, I think what we'll probably see is an indication of what we saw in the government pronouncements, which was support for the industry, but it's a balanced support. It also takes into account environmental and climate concerns. And so I think as we move forward here, you're going to likely see those similar levers being pulled and the investment trends will be clear that the companies that can attract investment and which are able to survive moving forward will be those with specific plans to address environmental concerns. And ultimately, in some period of time to transition to renewable sources.

CC (22:22): But in the short term, we can't avoid oil and gas. Our society right now is based on it. There isn't enough renewables to support our energy supply. There's only about 17% of our energy supply comes from renewable. So, oil and gas is a necessity in the short term. And with the impacts of COVID-19, I highly suspect and believe that the government will be supporting that industry moving forward, as I say, with these kinds of caveats and levers on the industry.

RG (23:00): Very interesting, Chris. So, Stephanie, you're having conversations with CEOs and boards of directors. What are they hoping for in terms of kind of bridging this divide in Canada that has pulled at our politics? That's pulled at our national fabric for the last number of years. Could there be something coming out of this crisis that helps us as a country understand how to form more of a consensus around the use of these resources? You've talked about sustainability, how the industry has been on that file for quite some time now.

SS (23:41): Rudyard, I'm so glad we're getting to talk about that question because if there is a silver lining to come from the pandemic, I'm hopeful that this is where we might see it show up, and that we'll be able to start bridging the divide between industry and public opposition to project development, which has been so polarized in this country.

SS (24:03): As you are well aware and alluded to at the beginning of the session, the oil and gas industry is critical to the overall economy of Canada. It supplies 10% of the GDP in this country. We have 500,000 jobs directly and indirectly associated with the industry. It is very powerful in terms of the impact that can be had on getting people back to work and supporting the finances of the country as a whole, if we can get through this. And I think that the oil and gas industry and its recovery is a linchpin to recovery in the country as a whole.

SS (24:46): And I think we have seen the government, the federal government show that in terms of the support it's trying to offer while at the same time adding in components that recognize the other criteria and environmental considerations that are so important. So, the other programs that we haven't talked about yet, the $1.7 billion the federal government has made available for abandonment and reclamation obligations. They've also put $750 million into loans for what is going to be made available for investments in GHG emissions and specifically targeted at methane. So those are ways in which we can start to get some investment happening that is helpful to the industry, but also recognizes that environmental considerations are very important in this country and trying to build some broader support in that manner.

SS (25:49): I think coming through the pandemic, job creation will be paramount. People will want jobs, they'll want to put food on the table. And I think the oil and gas industry offers a lot of opportunities for projects that can do that. As well as again, obviously then funding into provincial and federal programs. I think the other key thing here in terms of bridging the divide is that investors require this.

SS (26:23): ESG, for the last several years, has been top of mind for investors and you will see institutions pulling their investments if they are not comfortable with the ESG position of companies. And they are looking at the ratings and where companies sit in terms of their sustainability efforts and GHG emissions, reductions. So, we are seeing efforts from industry to recognize all of these things. Whereas 10 years ago, it was a very different dialogue. And at that time, we were talking about global warming, but industry has come a long way since then. And I'm hopeful that, as we said, a couple of minutes ago that this is an opportunity to bridge that divide and start working toward responsible development in this country, but in a manner where projects can actually be built.

RG (27:48): Chris, to begin with you and to play off some of the things that Stephanie was just talking about, the potential here to think about the economic restructuring and rebuilding that we're going to need to do after this crisis to, frankly, pay for what will be a somewhat deteriorated federal and provincial balance sheet when it comes to debt and deficits. What do you see as maybe first, the short-term steps that could play out here, vis-a-vis the industry and how those could impact the larger economy? And give us a focus on infrastructure, because I think that is a key part of this.

CC (28:29): Yeah. I mean, I think the most obvious first thing is to have a safe reopening of our society and economy. I mean, from an oil and gas perspective, and generally from a business perspective, this is going to be critical in a recovery and an economic recovery. And from an oil-specific perspective, it's critical in a recovery of the supply demand balance, which will positively influence commodity pricing.

CC (28:58): And with pricing increasing at or above break-even levels, which is the hope, then you can have an industry... let market forces play a role in the future investments, which is I think what you would typically expect, not without regard to responsible and sustainable development, but with the anticipation that there would be a general recovery. Then I think you could see a continued construction of announced projects like the Trans Mountain project. And there's progress to date on the construction of that project.

CC (29:40): And it will continue to make progress following spring breakup. There's the coastal gas link pipeline, which links gas reserves in British Columbia and Alberta to the LNG Canada project on the west coast. And with improved balance sheets as commodity prices and demand comes back, then I think you're going to see reengagement and other significant projects that have been deferred. And a prime example would be Pembina's petrochemical facility. It's a propane dehydrogenation and polypropylene facility—try saying that fast—but that's an important job-creating project, but it's also important from moving away from what we've seen as just straight oil and gas production.

CC (30:31): This is going to diversify Alberta's economy. It'll provide inputs to other industries. So, it's a value enhancement proposition as well. So, I think to get back on track, the first steps are going to be having demand recover, which is... And in order to do that, we're definitely going to need to see a bending of the curve and flat-lining of that curve. Once that happens, hopefully recovery in terms of demand and pricing, and then everything else will follow.

CC (31:10): And I'm hopeful that market forces will play a major role in terms of what's the first and initial steps to be taken in terms of drilling or major infrastructure projects.

SS (31:23): Yeah, just to pick up on Chris's comments about the infrastructure projects and what industry would like to see. I think it is critical that going forward, people get some confidence that we can build projects on time and on budget. And we need more regulatory certainty around the ability to get projects permitted and how our consultation processes will work with communities. Everyone recognizes that responsible, sustainable development of these projects is critical, but hopefully getting to a place where there is a more developed playbook for how you do this in a regulatory environment, because it not only affects foreign investment coming in, but of course, the ability for Canadian companies to want to invest these significant amount of capital in projects. So, I just wanted to link back to that regulatory point as well.

RG (32:24): So, Stephanie, just before we go, I want to give audiences the benefit of your surveillance and sentinel position, vis-a-vis, what's happening in the M&A space now. And whether that allows us to have any kind of predictive sense of where the industry could be headed over the next six, 12, 18 months.

SS (32:48): In terms of the type of deals we'll see, I think private equity and the pension funds will continue to invest in the right kinds of assets that they've been interested in and had an appetite for over the last several years, like the infrastructure and midstream assets. And then as among the oil and gas companies, I think we'll see companies getting more creative and trying to do deals that don't require a big cash outlay or increased debt levels. I think we'll see companies trying to do share deals and structure maybe joint ventures and asset deals.

SS (33:23): In terms of purchase price. We might see creativity around earn-outs and contingent payments to try to bridge the value gaps when there's so much uncertainty on what the recovery might look like. The other deals that would be possible in this type of an environment would be where one company is trying to get rid of some of its non-core legacy assets that have a lot of liabilities. And another buyer might be willing to take those on to have some synergies with its existing assets or feel that it's got ability to optimize assets and taking on the liabilities without the need to pay a lot of money for the assets.

SS (34:08): So those creative deal structures might be something that are on the horizon and will help, actually, companies transact without needing to go to the debt markets.

RG (34:20): Thanks, Stephanie. Chris, I'm going to give you the last order, maybe just again, to wrap up for us by looking forward. What are some of the key signs that you're keeping an eye out for to try to understand where this industry is headed next and just as advice to our audience. If they want to try to figure this out, what should they be keeping an eye on in the short and longer term to give a sense as to what the prospects of the energy space is in Canada in the years to come?

CC (34:56): I think there's a few things to look out for. I think obviously, as I said earlier, there needs to be flattening of the curve. People need to get back to work, industries back to doing what they do. That'll create the demand, that'll resolve some of the supply issues, the oversupply issues that Stephanie was just referring to. I think once that happens, continued support by the government to get through this period of time will also be critical.

CC (35:32): I think what you're really going to see here is a combination of measures for the industry to have to take place for it to, not only survive in the short term, but for it to work moving forward after the pandemic passes. Government support, cost cutting measures that we talked about earlier, working with stakeholders, including banks that we referred to, all of those things. If we're not seeing those things in the short term and then an attendant recovery in demand, then we're not sure—at least I'm not sure—what will remain of the oil and gas industry in 18 months or two years absent those companies who have qualified for support and were able to ride out the storm.

SS (36:31): Just to comment on oil and gas cycles and what you might see ahead. Chris has spent a lot of time talking about the demand side of the equation and uncertainties. It is really hard to predict when we might get through the built-up storage that is causing all the production shut-ins, but we have seen a massive amount of production get shut in. We've seen these massive amounts of capital spending cuts and in Canada that's been happening for the last six years.

SS (37:04): So, at the same time, there's all of the cuts on projects and building up inventories. We're also losing a large part of the skilled workforce and institutional knowledge associated with a vibrant oil and gas business. So, when demand does start to come back, and we've seen this in many cycles in the past, it is difficult to meet that demand. And as a result, the prices start to go back up.

SS (37:33): It is generally accepted that oil is going to remain part of the energy mix. There's a lot of initiatives toward energy transition and renewables, but for this foreseeable future oil will be part of the energy mix and there will be demand for oil. So hopefully our Canadian oil supplies, sitting on the third largest reserves in the world, will be the supplier of choice for Canada instead of us importing oil from other countries and for the United States, because we are held to these higher standards. We have security of supply, and ideally we'll be well positioned when demand does start to return.

RG (38:17): All right. Well, this has been a really fascinating conversation to have the opportunity of both of your perspectives as people on the ground there with both a tactical and a strategic view of what's happening in this industry today and the challenges and opportunities going forward. I've really enjoyed the time that we've been able to spend together. So, Chris, Stephanie, thank you for coming on Torys Business Brief.

CC (38:44): Good to be with you.

SS (38:45): Yes, our pleasure. And thanks for having us.

RG (38:50): Well, that wraps up this episode of Torys Business Brief. You can read more on some of these issues in the piece "What's next for Canada's oil and gas as COVID-19 adds to existing challenges". You can find this essay by visiting

RG (39:08): On our next podcast, we'll speak with chair of Torys Intellectual Property, and Food and Drug Regulatory practices, Eileen McMahon, and the practice leader of Torys' Life Sciences Group, Cheryl Reicin. Eileen and Cheryl will discuss the legal issues associated with fast-tracking development and testing of drugs, vaccines, and other devices during the course of this pandemic.

RG (39:58): Thank you for listening to Torys Business Brief. I'm your host Rudyard Griffiths.

Originally published 19 May, 2020

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