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Saskatchewan goes to the Wall New government gives priority to competitive royalties, taxes; plans incentives to promote development, offset slide in output Gary Park For Petroleum News
The Alberta petroleum industry is starting to look across the fence into Saskatchewan with a mixture of curiosity and envy. And why not?
Governed for 16 years by the left-leaning New Democratic Party, Saskatchewan has been steadily displacing Alberta’s conservative bastion as a model of how to run an oil and natural gas regime.
These days there’s not much question about where E&P companies would prefer to do business.
Even before the NDP was turfed in a November election, the industry had credited a government steeped in socialist traditions with creating a pro-business climate.
In the run-up to the election, Derek Evans, chief executive officer of Focus Energy Trust, echoed an increasingly common refrain, describing Saskatchewan as having the best cost and royalty structures in the Western Canada Sedimentary basin, which embraces much of British Columbia, Alberta, Saskatchewan, Manitoba and a corner of the Northwest Territories.
That view has only gathered strength since the Saskatchewan Party under the leadership of 41-year-old Brad Wall romped home in the election and wasted no time putting word out to the industry that it had nothing to fear.
Wall: Looking to ‘become more competitive’ In a January visit to Calgary, the headquarters of Canadian oil and gas companies, Wall walked into the middle of a fierce debate over the Alberta government’s royalty overhaul at a time when companies were slashing their capital budgets by hundreds of millions of dollars.
He told one packed meeting that the only review his government would be likely to conduct would be one to ensure its regime was even more competitive on a national and global scale.
Wall’s message is clear: He is determined to ensure that his province’s economic recovery, which has relied heavily on the oil and gas industry, “translates into lasting prosperity.”
“We’re comfortable with our royalty structure the way it is now,” he said. “What we’re looking to do is become more competitive.”
Concerned that Saskatchewan is “behind a little in developing our hydrocarbon assets,” Wall said his strategy could include faster turnaround on permit applications and drafting a regulatory structure that is as conducive to nonconventional assets such as the oil sands, shale gas and shale oil as to more conventional assets.
Industry got reassurance
Gary Leach, executive director of the Small Explorers and Producers Association of Canada, whose member companies have been at the forefront of record land sales and activity in Saskatchewan, had a meeting with newly appointed Energy and Resources Minister Bill Boyd and his senior staff.
“The big elephant in the room was reassurance that we were seeking that Saskatchewan had no intention of visiting on the industry the calamity of the new royalty framework in Alberta,” Leach said. “They provided the reassurance we were looking for.”
Not only that, but the government delegation indicated it might be willing to introduce incentives for targeted activity, especially natural gas.
In addition, Wall said Saskatchewan will be looking for research and development partnerships with industry in enhanced oil recovery, where the province is already setting the pace in Canada with its funding for carbon capture and storage.
The first real test of Wall’s pledges came March 19 when the 2008-09 budget contained some potentially disturbing numbers.
Dependent on the oil and gas sector for 20 percent of its revenues, Saskatchewan pointed to a sharp downturn in industry revenues for the upcoming year to C$1.36 billion, off C$326 million from its 2007-08 projections.
Oil revenue from 429,000 barrels per day is budgeted at C$1.05 billion, off C$98.1 million from last fiscal year; natural gas returns from 658 million cubic feet per day are almost unchanged at C$118 million; but government land sales are expected to slump to C$192.5 million from last year’s record C$418.9 million, as land prices return to more moderate levels after a rush to corner Bakken and Lower Shaunavon rights.
Trends all downhill The trends over the next four years are all downhill, with conventional oil production dropping 3 percent to 415,800 bpd, natural gas sliding 20 percent to 554 million cubic feet per day and land sales nosediving 48 percent to C$101 million.
Instead of trying to recoup those losses by hiking its royalties and taxes, Saskatchewan headed in the opposite direction.
It earmarked C$829 million for resource-related capital and infrastructure spending to encourage continued oil and gas growth.
Finance Minister Rod Gantefoer, without specifically fingering Alberta, said Saskatchewan has “seen the problems and pressures that can arise when an aging infrastructure falls behind the pace of growth. Those same pressures are now emerging in Saskatchewan … (and) we must be ready for growth.”
For Wall, that means leaving existing royalties untouched while positioning his province to encourage sustainable development of its oil sands resources.
“There’s a lot of room for new investment (in an area covering about 7,000 square miles) and the energy science and technology associated with it,” he said.
“Our oil sands could offer tremendous opportunities for economic growth if they are properly developed.”
Paul Michael Wihbey, a Washington-based energy strategist, bolstered that view, saying Saskatchewan’s “research into oil extraction, combined with its stable government and untapped resources, are its top selling points.”
“It will be a driving force in how this new world market in oil will be defined,” he said.
Wall insists he “wants others outside our borders to know about this very secure, politically stable supply of energy.”
Oilsands Quest exploring aggressively To that end, hopes are pinned on Calgary-based startup Oilsands Quest, which has been on an aggressive exploration and delineation program since 2004, with preliminary estimates pointing to as much as 1.5 billion barrels of bitumen in place.
While conceding there is a question mark hanging over how much is economically recoverable, Wall is already gearing up to enhance low royalty rates with “updated and competitive” regulations for its oil sands and oil shales.
In addition, he is ready to build on Saskatchewan’s record of investing in carbon capture and storage to improve prospects for oil sands development as well as supporting research and new technologies to unlock a whole range of light, medium and heavy crudes that are part of the province’s estimated 39 billion barrels of initial oil in place, of which more than 30 billion barrels is considered beyond commercial reach for now and only 5.2 billion barrels is rated as economically recoverable using conventional means and proven technology.
The same applies to natural gas, where the potential has been estimated at 9 trillion cubic feet, of which 3.5 tcf is deemed recoverable.
Wall said that if technological advances can increase recovery rates by just 5 percent, Saskatchewan’s remaining recoverable reserves would more than double.
How the tale of two neighboring provinces unfolds will be closely followed by an industry that feels the time it has invested in explaining the nature of its business and what it can contribute in jobs and revenues is paying off in Saskatchewan.
It hopes there is a message for Alberta, which still has time to adjust its royalty framework before the final regulations are released this spring.
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