The oil patch is getting twitchy as it waits for Ottawa to deliver a much-anticipated aid package while the value of its main oil sands-derived product approaches zero.
According to Finance Minister Bill Morneau, a multibillion-dollar aid package, including guarantees that will allow banks to keep lending to energy companies, will be announced any time now – “I’m talking about hours, potentially days,” he said last Wednesday.
But five days later, Mr. Morneau’s boss was tight-lipped on substance and timing when asked about it during his daily briefing on the COVID-19 crisis.
Prime Minister Justin Trudeau pointed out workers will be eligible for emergency wage subsidies being offered across the economy and acknowledged that the oil and gas industry is particularly hard hit because of the coincidental and calamitous drop in crude prices. He said the government “will be doing more.”
But time is growing short. Energy demand is plummeting and oil is quickly filling up any and all available storage, raising the likelihood of deep cuts in production. Cash flows in the industry have dried up as the price of a barrel of Western Canada Select heavy oil has drooped to below US$4 for the first time. This means that most operations, save those hedged at higher prices, are pumping out far more red ink than oil.
As the industry waits, energy-focused private equity firm JOG Capital has gone public with its suggestion for lifting the small and medium-sized oil companies that are most vulnerable to the crash from the abyss. It made the proposal last week after the government made a call for suggestions from the industry.
Under JOG’s proposal, the federal government should focus on the $75-billion in tax deductions that junior and mid-sized oil companies have on their books. These so-called tax pools stem from such things as non-capital losses and exploration credits. The deductions are used when profits are fat, which the industry has not generated a lot of in the past half decade.
Investors generally value tax pools on corporate books at 10 per cent to 20 per cent of face value, which could mean a cost to the government of $7.5-billion to $15-billion, according to JOG.
“A financial injection of this magnitude would be a massive positive for the small and mid-cap sector,” JOG executives Kel Johnston and Craig Golinowski said in their letter to Natural Resources Minister Seamus O’Regan.
Meanwhile, the industry could resume being taxable and contributing to the public purse when conditions improve.
The proposal, and others on the table, will anger critics who say the industry has already benefited from subsidies in the form of tax breaks over the years, and has not kept its environmental house in order.
But the tax pool buyout could come with conditions to prevent a similar public backlash to the U.S. Treasury bailout of the financial industry in 2008 and 2009, when some executives pocketed lavish bonuses. The energy companies could, for instance, commit to limiting executive pay and keeping workers on the payroll. They could also agree to use, say, 10 per cent of the funds for cleaning up old oil and gas wells, JOG suggests.
So far the industry has responded to the twin threat of coronavirus and the oil price collapse with about $6-billion in reductions in planned capital spending and dividend cuts. Some companies have reduced executive pay. So it is not a case of the industry just sitting on its hands and waiting around for a bailout.
Last week, Mr. Morneau said aid would include backstops for the banks that lend to oil and gas companies as a way to keep credit available when it is needed most. He mentioned the risk to the smaller players being particularly acute. He has also talked about some form of funding for abandonment and reclamation of aging wells is under consideration. This could address both.
Aid for the energy sector is drawing scorn from many Canadians who have said the government should not prop up a polluting industry that is in its twilight years, or that any help should be bestowed only on the condition that companies commit to much deeper emissions cuts.
The problem is that this would be negotiated under duress and would use the tens of thousands of livelihoods that depend on the industry as leverage. The result could hardly be a bargain both sides would be happy with.
Now it is a matter of survival first, then dealing with the old long-term problems when the ground stops shaking.
Jeffrey Jones