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Alberta heeds wake-up call Province’s premier agrees royalty changes are needed to counter the potential loss of C$4 billion from shale gas ‘game changer’ Gary Park For Petroleum News
Alberta Premier Ed Stelmach has promised more changes to his government’s unpopular royalty framework, which has been tinkered with over the past two years amid a rapid erosion of upstream investment.
In a series of year-end interviews, he conceded that the rapid emergence of shale gas supplies in British Columbia and the United States has forced Alberta’s hand.
Stelmach said Alberta could see a drop of about C$4 billion in gas royalties over the next four years unless it takes “repositioning” measures.
Describing shale as a “game-changer,” he suggested it was unfair of critics to blame the government for not taking shale into account during its extensive royalty review in 2006 and 2007.
“Now, all of a sudden, it’s very easy to predict the past,” he said. “Anybody can do that. Tell me about the future.”
Stelmach said the objective now is to meet with the industry, put all of the grievances on the table, and establish royalty rules for the longer-term, “so that the industry has certainty in terms of where we go from here.”
Some rapid decline evidence However, he suggested that shale gas may not generate the wealth many have predicted.
He said there is early evidence that shale wells go rapidly into decline after two or three years, when huge initial volumes taper off.
If that is true, a lot of wells will be drilled in the United States, but whether they will be sufficient to sustain American demand is an unknown, Stelmach said.
He said that despite claims that hundreds of trillions of cubic feet of shale gas have been discovered, much of it could be difficult to produce because of challenging geography and a lack of infrastructure.
His willingness to deal with the industry drew strong praise from Sue Riddell Rose, chief executive officer of Paramount Energy Trust, who was part of an industry delegation that met with Stelmach earlier in December to discuss the challenge posed by shale gas.
She described Stelmach as a “good listener” — in contrast to claims during the royalty controversy that the Alberta government was paying no heed to industry concerns and recommendations — which is a “good first step” towards building a partnership.
Riddell Rose said the royalty framework, introduced this year, made Alberta “uncompetitive” with rival jurisdictions, a situation made worse by the nosedive in gas prices.
Review due in spring The Stelmach government is due to release the findings of a “competitiveness review” in the spring, which Paul Hinman, an opposition member of the provincial legislature, said was vital to reverse a total undermining of “confidence and stability” among investors.
David Hughes, a veteran geologist with the Geological Survey of Canada, shares some of Stelmach’s shale doubts, suggesting it might take “two to five years to know if all this hype is real.”
He noted there has been growing disagreement over the long-term projections for the Barnett shale deposit of Texas.
Stelmach’s comments were accompanied by quickening interest in Alberta’s shale deposits, which have trailed British Columbia, despite a 2006 GSC study that suggested the Colorado Group of shales in northern Alberta present an “excellent and perhaps the best” prospect for multiple shale plays in Western Canada, although the resources remain almost untouched.
Duvernay shale attracts interest But the level of interest shows signs of accelerating, with the Devonian Duvernay shale attracting the most interest in the Alberta government’s final land sale of 2009.
Robert Fitzmartyn, vice president and director of institutional research at FirstEnergy Capital, said in a research note that there is now “sufficient evidence to portray the Duvernay” as being linked to the related Muskwa shales of the Horn River basin in British Columbia.
He said the Duvernay zone, which is estimated to contain 25 trillion cubic feet — compared with the Horn River’s 500 tcf — has the advantage of easier access to pipelines and gas plants and may have superior geology.
Noting that 25 tcf is not to be scorned, Fitzmartyn said a deposit of that size “is still going to move the dial.”
But Derek Krivak, chief executive officer of Stealth Ventures, which drilled 81 Colorado shale wells in east-central Alberta in 2008, urged Alberta to introduce more attractive royalty rates for low-productivity gas wells and deeper rights, which could prevent companies from holding shallow rights indefinitely without developing them.
Stelmach’s openness to royalty revisions came at the same time that Alberta — despite a bullish final auction for 2009 — saw its land sales again languish and, for the second year on record, fall behind British Columbia.
Better results elsewhere Meanwhile, government and industry leaders found renewed support for their view that the regulatory and royalty structures in British Columbia and Saskatchewan are paying off.
Although the three dominant oil and gas producing provinces of Canada experienced a sharp setback in their 2009 land sales, those on either side of once-unrivalled Alberta, took an optimistic view of 2010.
British Columbia got a ringing vote of confidence for its latest royalty adjustments — a one-year royalty rate of 2 percent on wells drilled from September 2009 through June 2010, compared with an average rate of 19-20 percent — in a survey by PricewaterhouseCoopers of 11 companies accounting for 67 percent of the province’s gas volumes.
Capital spending by those 11 producers was C$2.61 billion in 2008, slumping to C$1.86 billion this year because of low gas prices and demand and would have dropped another C$340 million in 2010 without the government’s measures.
The survey also reported that the group planned 183 wells in 2010 before the incentives and now anticipates boosting that total by 105 wells.”
The respondents said the incentives have spurred them to hike next year’s spending by C$600 million to C$2.1 billion.
Energy Minister Blair Lekstrom said his province “continues to be one of the most competitive natural gas jurisdictions in North America and (our) stimulus package will further strengthen the sector while increasing provincial revenues.”
Dave Pryce, Western Canada operations vice president of the Canadian Association of Petroleum Producers, said the industry has repeatedly told governments “you set the right fiscal framework and we will respond favorably,” noting that auction bids in B.C. are proof that incentives linked to emerging gas plays are generating “investment that is out of sequence” with the current low-end gas prices.
Land sales down Collecting C$562 million from its final quarter sales, B.C. raised its calendar year total to C$893 million, down from C$2.66 billion in 2008.
But its peers had a similar experience. Alberta slid to C$741 million from C$1.2 billion and Saskatchewan plunged to C$118 million from C$1l.1 billion.
The trio had a combined C$1.75 billion, compared with their staggering record C$5.01 billion in 2008 and posted their weakest total results since 2004.
B.C. averaged C$3,659 per hectare from the disposal of 50,202 hectares; Alberta had an average C$402 per hectare, compared with C$333 last year, but total land changing hands fell to 1.84 million hectares from 3.68 million hectares. Saskatchewan’s per-hectare average nosedived to C$385 from C$1,461, with sales dropping to 206,658 hectares from 765,843 hectares.
However, Saskatchewan Energy Minister Bill Boyd said his province saw “increased industry (exploration) activity over the last half of 2009 as a result of the strengthening in oil prices.”
“Some companies have announced ambitious drilling programs for 2010 and (the latest) sale would indicate others may be drilling more aggressively next year,” he said.
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