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Alberta called ‘worst place’ for gas Canadian Natural, Talisman divert money; FirstEnergy says Alberta ‘not competitive enough’; government presses on with increases Gary Park For Petroleum News
The Alberta government is plowing ahead with its bundle of royalty changes, unmoved by the latest industry complaints that the once-unrivaled jurisdiction is now bottom of the heap for gas development in North America.
Legislation was tabled in the Alberta legislature earlier in November and will pass easily because of the strong majority held by the Conservative party government of Premier Ed Stelmach, allowing the new regime to take effect Jan. 1, 2009.
Despite a steady stream of Alberta budget cuts by oil and gas producers, many of them transferring their spending elsewhere in Western Canada or the United States, the government claimed the New Royalty Framework will provide the “tools to create opportunities for investment and job creation.”
Others beg to differ, using some of the strongest language heard in almost two years of debate.
Investment dealer FirstEnergy Capital, in a research note by Robert Fitzmartyn, said “There is strong evidence … to suggest that investment is leaving the province,” referring to a slump in government land auctions and a leveling off in drilling activity.
He said Alberta’s policy is “not competitive enough to overcome the attractiveness of other jurisdictions to maintain (prior) levels of investment.”
“There is no question in our minds that Alberta has positioned itself to be an uncompetitive jurisdiction,” Fitzmartyn wrote.
He said the reallocation of capital makes it unlikely Alberta will recoup the C$1.4 billion increase in revenues it has forecast the higher royalties — especially for deep gas wells — will generate.
Canadian Natural Resources President Steve Laut made no effort to disguise his feelings, declaring that Alberta has “the worst economic environment for gas development or drilling, probably the worst in the world.”
Talisman Energy Chief Executive Officer, John Manzoni, while slightly more tempered in his comments, said the bulk of capital spending in 2009 will go to British Columbia’s Montney play and Pennsylvania’s Marcellus share gas play.
“We’re aggressively high-grading our capital spending to do only those projects with the highest returns,” he told analysts.
Talisman chief financial officer, Scott Thomson, emphasized the company will “not spend more capital than the cash that’s coming in the door.”
Alberta resolute Against that negative backdrop, Alberta Energy Minister Mel Knight was resolute, claiming the “recent volatility of commodity prices shows how the new sliding royalty rates for our non-renewable resources are well suited to the changing times.”
He said the new regime will “increase resources to the province when prices are high, while maintaining Alberta’s competitive advantage when commodity prices are low.”
“Much like the way we used our royalty structure to respond to a changing environment (in 1997 when oil prices were $22 per barrel), the new framework will give Alberta new tools to create opportunities for investment and job creation,” Knight said.
In sharp contrast, Roger Soucy, president of the Petroleum Services Association of Canada — which forecasts Alberta well completions will drop 11.5 percent or 1,350 wells in 2009 to 10,400 — said it is more attractive for companies to move their operations to British Columbia and Saskatchewan, which are now viewed as “more competitive” than Alberta.
“The world has changed since the royalty review panel presented its report and the change in the world has created situations that have made it unrealistic to have the kind of front-end takes in royalties that the new system calls for,” he said.
“The more economic barriers you put in front of industry, the less activity you’re going to have. I don’t think the government of Alberta expected to the economic scenario that we’re now in, but why they are waiting so long to respond is a question I can’t answer.”
In its updated spending and drilling estimates for 2008, the Canadian Association of Petroleum Producers reinforced Soucy’s view by forecasting spending of C$43 billion this year, down C$7 billion from 2007.
PSAC urged the government to “reconsider elements of the new royalty system that take away the incentive for producers to pursue the field activity that is the lifeblood of the service sector. The Alberta advantage is withering and needs a rejuvenation of enthusiasm and policy to take us through this challenge and continue future prosperity.”
Soucy said the government may be deceived by the current round of third-quarter earnings reports that indicate larger producers are in robust shape.
PSAC’s initial round of forecasts for 2009 estimates that Alberta’s immediate neighbors will enjoy strong years in the midst of bleak times, with British Columbia posting a 29 percent increase in well completions to 1,150 and Saskatchewan gaining 9 percent to 4,725 wells.
“The price of natural gas drives the majority of activity in this business and soft natural gas prices continue to be an issue,” Soucy said.
PSAC also updated its 2008 target to 17,400 wells, with Alberta being the only province to see a decrease from 2008.
The Canadian Association of Oilwell Drilling Contractors has predicted 14,325 wells in Western Canada next year, down from the expected 15,223 this year.
PSAC’s outgoing board chairman Frank Tirpak made one last plea to the government to complete discussions on a shallow-right reversion plan that would encourage development of shallow resource pools previously bypassed by companies chasing deeper targets and bitumen-royalty-in-kind.
He said the service sector believes shallow rights have the potential to “increase activity in areas that already have infrastructure and an environmental footprint in place.”
Soucy urged the government to “reconsider elements of the new royalty system that take away the incentive for producers to pursue the field activity that is the lifeblood of the service sector. The Alberta advantage is withering and needs a rejuvenation of enthusiasm and policy to take us through the challenge and continue future prosperity.”
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