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Alberta gets mild applause for changes Some small operators say changes will help; analysts say government package not enough; big independents still cutting budgets Gary Park For Petroleum News
The Alberta government got a nice warm shower of praise where it was most expected and a lukewarm dousing where it was also expected after rolling out its latest attempt to revive exploration and development activity.
In dangling a bundle of royalty breaks worth about C$1.5 billion, primarily before the small and midsized sector, the government was told that some juniors might even raise their capital budgets this year.
But in offering to impose Alberta’s lowest royalty rate of 5 percent over the first year of production from any well that comes onstream during the 12 months starting April 1, Alberta fell short of universal acclaim.
Even the Small Explorers and Producers Association of Canada — whose members are best-positioned to benefit from the incentives — said the measures leave unresolved “some significant long-term issues that we hope can be addressed during the competitiveness review the government said it wants to engage in this year.”
“We would like the results of that review to place Alberta among the leaders in attracting oil and gas investment.”
Some response positive On the positive side, Canext Energy said the stimulus plan will have an “immediate positive impact” on its operations and cash flow, noting that one horizontal well will be brought onstream at the 5 percent royalty instead of the 25-30 percent at C$5 per thousand cubic feet of gas under the current royalty framework.
Canext also said the drilling credit of C$200 per meter will reduce its finding and development costs to C$1.72 per thousand cubic feet of Montney gas from C$2 in 2008 and for Sweeney Triassic oil to C$8 per barrel from C$10.
Berens Energy Chief Executive Officer Dan Botterill said his company will now have the ability to drill more wells than were otherwise possible under the current gas prices.
He said that Berens will probably boost the C$28 million it budgeted for 2009, even if gas prices remain around C$5.
Glenn Carley, executive chairman of Galleon Energy, said his company is planning a “significant” increase in drilling under the program and is hopeful the incentives will improve his ability to borrow more from banks.
Peter Knapp, president of Bryan Mills Iradesso, which tracks junior companies, said the program will do little for companies that are already in a financial bind, noting that only those in good financial health will be able to take advantage of the programs.
AJM Petroleum Consultants said the steps taken are not sufficient to revive the industry in a climate where companies must base drilling decisions on weak commodity prices, a lack of access to capital and high drilling costs.
Peter Doig, an analyst at Scotia Capital, listed Galleon, Birchcliff Energy, Delphi Energy, Daylight Resources Trust and NAL Oil & Gas Trust as companies that stand to benefit, but Compton Petroleum, despite holding assets in the sweet spot for the incentives, lacks the balance sheet to exploit the opportunity.
Doig said in a report that “further action will be required to attract capital back to the mature Alberta basin. We see the government having to take further stimulus action eventually (sooner than later).”
Big independents not affected At the upper end of the spectrum, big independents such as Canadian Natural Resources and Talisman Energy said the royalty and drilling incentives will not affect their capital programs, despite some signs that upstream costs are shrinking.
Canadian Natural President Steve Laut said that given commodity prices and costs “all but the very best prospects are marginal.”
He said gas prices must recover to the range of C$6-$7.50 per thousand cubic feet before his company will ramp up drilling.
But Canadian Natural has lopped another C$800 million off its 2009 capital spending, reducing its budget to C$3.2 billion from the C$4 billion anticipated last November and the C$7 billion spent in 2008 and cautioned that another C$1 billion could be removed if commodity prices don’t improve.
Talisman Chief Executive Officer John Manzoni offered a glimmer of hope when he told analysts some rig rates in North America are falling by 30 percent or more, adding that when rig contracts come up for renewal he no longer expects to face demands for increases.
He also said there are signs of 15-20 percent reductions in bidding and re-bidding on some capital projects because of a softer market.
Of the 37 Canadian producers who have updated their spending plans, field activities are headed for a C$16.6 billion cutback from last year’s level of C$49.9 billion.
Underscoring the Alberta government’s concern about the drift in drilling this year, the province issued 629 new well licenses in February (the lowest seen for February since 1992). For the first two months of 2009, the province approved 1,072 gas-targeted permits (more than 50 percent down from last year), while oil sands evaluation permits plunged to 725 from 1,663.
The latest land sale on March 4 generated C$10.588 million, raising the year-to-date total to C$52.92 million compared with C$168.32 million last year.
Gas prices, which hit a six-year low of US$3.845 per million British thermal units on March 9, are the biggest drag on activities.
Martin King, an analyst at First Energy Capital, does not rule out a further downward drift, possibly through the US$3.50 threshold.
“There’s just too much gas in the system and we’re coming to the end of the heating season,” he said.
King said so many small and midcap players are struggling “just to make ends meet, let along dig up cash to go out and drill wells.”
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