The combined effect of COVID-19 and the global oil supply glut have reduced the price of Western Canadian Select to historic lows. That has created an unprecedented level of uncertainty in the Canadian oil & gas industry, particularly in Alberta. The topics listed below may be important for players in the Canadian oil & gas industry to consider during these turbulent times.
What you need to know
- The Government of Alberta has committed to several initiatives to provide economic relief to the province's oil & gas industry, including offering one-year extensions of certain Crown agreements and permits that were otherwise set to expire from March 20, 2020 up to and including December 31, 2020.
- Both the Government of Canada and the Government of Alberta have introduced employment-related measures that are specifically targeted at COVID-19.
- Industry players may, in some cases, rely on force majeure clauses in the wake of COVID-19. The scope and availability of those clauses will vary depending on their language.
- Events related to COVID-19 may allow a tenant to rely on the force majeure clause in its commercial lease to temporarily suspend its obligations. The scope and availability of those clauses will vary depending on their language, and may not relieve the obligation to pay rent.
- COVID-19 will likely force corporations to hold annual shareholder meetings virtually, although a corporation should check its constating documents and governing corporate statute before doing so.
- Events related to COVID-19 may trigger coverage under business interruption insurance policies. The scope and availability of that coverage will depend on the specific language of the policy.
- COVID-19 will result in unique safety issues for employers, and operators of Oil & gas assets in particular, that have already been addressed through Alberta's Occupational Health & Safety and Workers' Compensation regimes.
- Directors of corporations operating in the Canadian oil & gas sector should be aware of their responsibilities, duties, and insurance coverage given the current level of uncertainty in the market.
- In the wake of COVID-19, Alternative Dispute Resolution processes, including and especially arbitration, may be more important than ever to help parties in the Canadian oil & gas industry resolve disputes promptly and efficiently outside the courts.
- The current level of uncertainty in the Canadian oil & gas sector means that industry players should be proactive in retaining insolvency and restructuring professionals to minimize liquidity issues moving forward.
Government initiatives to assist the Canadian oil & gas industry
The Government of Alberta has announced that it is taking a number of steps to provide economic relief to Alberta's oil & gas industry. Rumours of a looming federal bailout for the Canadian oil & gas industry have also been reported.
The Alberta Government has committed to the following initiatives:
- Funding the Alberta Energy Regulator industry levy for six months;
- Offering one-year extensions for Crown petroleum and natural gas agreements, oil sands agreements, and Metallic and Industrial Mineral permits that were otherwise set to expire from March 20, 2020 up to and including December 31, 2020; and
- Extending a $100 million loan to the Orphan Well Association.
- Further details of those initiatives have not been released. However, the Government of Alberta has clarified that industry players with Crown agreements or permits that fall within the scope of the extension offer must apply to Alberta Energy for an extension prior to the expiration of the agreement or permit at issue. Any parties that are are interested in applying for an extension should consider retaining legal counsel to review all agreements or permits to confirm eligibility and ensure that all extension applications are complete. For additional information see the Alberta Energy Operations Information Letter here.
Employment issues and managing layoffs
The drastic reduction in oil prices has caused many industry players to slash budgets, with a wave of employment issues and layoffs almost sure to follow.
- The Government of Canada has passed the Emergency Response Benefit Act to provide for the new Canada Emergency Response Benefit (CERB). The CERB is a taxable benefit that may be available to eligible workers who suffer a loss of income due to COVID-19. The Government of Canada has indicated that the CERB will be for up to $2,000 per month and is intended to cover a 16-week period, unless otherwise specified in the regulations. Access to the CERB is expected to commence in early April.
- The Alberta Government and the Workers' Compensation Board (WCB) have issued guidance regarding novel issues that employers may encounter as a result of COVID-19. BLG has previously summarized that guidance in our earlier article here.
- Many employers are struggling with novel logistical or practical issues in the wake of COVID-19, such as maintaining employee safety, temporary layoffs, and working from home arrangements. BLG has previously responded to a number of those questions in our earlier article here.
- Some employers may also be struggling to manage workplaces generally in the wake of COVID-19. BLG prepared a list of recommended steps before the widespread outbreak of COVID-19 that are still relevant to employers attempting to manage COVID-19 risks in the workplace. That list of steps were covered in our earlier article here.
Effect of force majeure clauses
The uncertainty created in the Canadian oil & gas industry may encourage parties to attempt to rely on force majeure clauses. BLG has summarized the general operation of force majeure clauses and the impact of COVID-19 in our article here.
- Force majeure clauses generally suspend contracting parties from their obligations when a supervening event beyond the control of either party makes performance impossible.
- Whether events relating to COVID-19 trigger a particular force majeure clause will depend on the wording of the clause and on the factual circumstances.
- Parties should carefully review any force majeure provisions in their contracts, attempt to mitigate the supervening event and its effect to the extent possible, document the effect of the supervening event on them, and strictly comply with notice or other conditions to claiming under the force majeure clause.
- For freehold mineral leases in particular, producers should review the terms of the lease to determine whether obligations to pay delay rentals or shut-in payments would be suspended as a result of the current situation. In the absence of specific lease language, lessees should assume that all freehold lease obligations continue, and that default notices or termination notices could be issued validly if obligations are not performed.
- If a contract is silent on force majeure, parties impacted by a supervening event may nevertheless consider whether they can seek relief under Material Adverse Change clauses, under the common law through the doctrine of frustration, or pursuant to statutes such as Alberta's Frustrated Contracts Act.
- The doctrine of frustration can be complicated and parties should seek legal advice before they rely on it. A supervening event that merely renders contractual performance difficult may not be sufficient to frustrate a contract. A party that refuses to perform a contract due to alleged frustration may be liable for damages if the supervening event did not actually constitute an event of frustration at common law.
COVID-19 may have significant ramifications on the landlord tenant relationship. Those ramifications may be particularly important to players in the Canadian oil & gas industry, many of whom may face cash flow shortages during the coming months. BLG has previously summarized the potential impact of COVID-19 on the landlord-tenant relationship in our article here.
- Depending on their specific terms, force majeure clauses in commercial leases typically excuse performance of obligations for so long as the force majeure event is ongoing. In many cases, however, it does not excuse the obligation to pay rent.
- Lease terms that require a tenant to comply with applicable laws may be used to excuse a tenant from penalties or defaults as a result of temporarily closing the business on the leased premises pursuant to a government order.
- Depending on the terms of the policy, business interruption and/or rental insurance loss policies may cover rent payments during a government-mandated period of temporary closure.
Corporate governance issues
COVID-19 will impact the governance of corporations participating in the Canadian oil & gas industry. BLG has summarized some of the issues COVID-19 poses for public disclosure requirements and corporate governance in our earlier article here.
- COVID-19 will likely prevent a corporation from holding its annual shareholder meetings (AGM) in person. Some corporate statutes in Canada allow corporations to hold virtual AGMs, although there are some differences in the scope of those provisions across jurisdictions. A corporation should carefully review its constating documents and governing corporate statute before deciding whether to hold a virtual AGM. BLG summarized the holding of virtual AGMs in response to COVID-19 in our earlier article here.
- For publicly traded companies, COVID-19 will impact continuous disclosure documents, including an issuer's Management's Discussion and Analysis, Annual Information Form, Management Information Circular, and financial statements. BLG summarized the response to COVID-19 by the members of the Canadian Securities Administrators, including extensions to regulatory filing deadlines in our earlier article here.
- Where risks presented by COVID-19 are integral to a publicly traded company's business model, supply chain, or industry, the company should draft separate risk factors with language explaining how COVID-19 could specifically impact its future operations and results.
Business interruption issues
Provincial governments have been steadily broadening the scope of mandatory business closures as a result of COVID-19. Oil and gas producers do not appear to be directly impacted yet, but the situation is fluid and may change. It may be prudent for players in the Canadian oil & gas industry to proactively review the terms of their business interruption insurance policies with their insurance broker. BLG summarized the potential impact of COVID-19 on business interruption insurance policies in our earlier article here.
- Business interruption insurance protects companies from disruptions to their operations.
- While business interruption coverage is often limited to closures due to physical damages, some policies that cover closures or interruptions related to other circumstances, such as government orders or decisions made by "civil authorities".
- The scope and availability of coverage under business interruption insurance policies due to COVID-19 will depend on the specific language of the policy.
Safety and environmental issues for oil & gas assets
COVID-19 has potential safety and/or environmental impacts that industry players should be aware of.
- The Alberta government and the WCB have released bulletins addressing new Workers' Compensation and Occupational Health & Safety protocols in the wake of COVID-19. BLG summarized those bulletins in our earlier article here.
- Industry participants should ensure that emergency contacts are constantly available for employees working on oil & gas assets in the wake of COVID-19.
- Industry participants may want to consider developing a response or contingency plan in the event that critical employees on oil & gas assets are unavailable due to COVID-19.
Directors' responsibilities and liabilities
It is important for directors of corporations that participate in the Canadian oil & gas industry to consider their responsibilities and potential liabilities given the current level of uncertainty in the market. BLG summarized some of those responsibilities in the wake of COVID-19 in our earlier article here.
- Directors have duties to exercise the care, diligence, and skill of a reasonably prudent individual and to act in the best interests of the corporation.
- Depending on the jurisdiction, directors are potentially liable for certain liabilities of the corporation, including employee wages, employment-related withholdings, and taxes.
- Directors should be cognizant of their duties and liabilities when responding to COVID-19, making difficult budgetary decisions, and developing risk management strategies, including keeping up to date with reasonably available information and reassessing decisions as new information is obtained.
- Depending on the language of the particular policy, directors are typically covered by Directors' and Officers' Liability Insurance policies (D&O Insurance) that offer protection against potential liabilities directors could face.
- Given the current level of uncertainty in the market, it may be prudent for all directors of corporations that participate in the Canadian oil & gas industry to proactively review their D&O Insurance to confirm that adequate coverage is in place.
Availability of Alternative Dispute Resolution
A wave of court closures sweeping across the country means that promptly resolving disputes through the courts may not be possible as long as the effects of COVID-19 linger. That may have an outsized impact on the Canadian Oil & Gas industry, where prompt and efficient dispute resolution may be needed now more than ever. As a result, industry players may want to resolve disputes through Alternative Dispute Resolution.
- Alternative Dispute Resolution is a term that encompasses a range of strategies that parties can use to resolve disputes outside of traditional court processes, including:
- Mediation – a non-binding process where the parties agree to appoint an impartial third party to meet with them and actively facilitate a mutually agreeable resolution of their dispute; and/or
- Arbitration – a binding process where the parties agree to appoint one or three impartial adjudicators to fully and finally resolve their dispute.
- No matter which Alternative Dispute Resolution process or processes the parties select, they have significant control over procedural steps and timelines, meaning that Alternative Dispute Resolution typically results in a more expedient, efficient resolution of a dispute compared to court procedures.
- Arbitration is particularly amenable to resolving disputes in the wake of COVID-19, as parties can agree to a truncated timeline, fast-tracked procedural steps, and potentially even a virtual hearing.
- Parties can agree to resolve their disputes through Alternative Dispute Resolution after the dispute has arisen and even after a court action has already been commenced.
The current situation in the Canadian oil & gas industry may lead to significant cash flow, lending, and other finance issues for businesses. The Alberta government's initiatives to provide an economic reprieve to the province's Oil & Gas industry are noted above. BLG summarized the Government of Canada's general economic response plan in our article here.
- Despite the Alberta government's initiatives, the aid package offered by the Government of Canada, and the rumblings of a federal bailout for the Canadian oil & gas industry, it is likely that many industry players may face significant liquidity challenges over the coming months.
- It may be prudent for participants in the Canadian oil & gas industry to proactively retain insolvency and restructuring professionals early on to minimize liquidity issues, to assist in recovering receivables from counter-parties that may be in financial distress, to reorganize businesses and operations over the pandemic period and beyond, and, where necessary, to obtain creditor protection and pursue restructuring options aimed at emerging from the downturn as a going concern. BLG summarized some of the warning signs of financial distress in our earlier article here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.