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Alberta to the rescue Government plans ‘short-term’ incentives for junior producers, drillers; details to come; Stelmach, Knight rule out royalty changes Gary Park For Petroleum News
The Alberta government is caving in to pressure from all sides by promising help for the small- and mid-cap oil and gas sector that it insists won’t involve royalty rollbacks or direct cash subsidies.
Just days after announcing it had launched a comprehensive study of Alberta’s competitive position compared with similar jurisdictions — insisting that, too, will not lead to a review of the destructive royalty changes introduced Jan. 1 — the government was again involved in some sleight-of-hand.
Premier Ed Stelmach, with Energy Minister Mel Knight in tow, told a standing-room audience at the Calgary Chamber of Commerce that a short-term targeted incentive program for the industry’s E&P minnows, along with aid for the drilling sector, will be in place within a month.
There may also be an environmental element which could involve reclaiming abandoned wells, which could give a lift to service companies.
He said the details will have to wait for Knight to examine the cash-flow plight facing junior firms and hold discussions with the industry and banks.
Knight told reporters Alberta was “absolutely not going back to review the royalty changes,” nor would it make cash handouts to struggling firms.
“It’ll be a tax incentive, a tax credit of some sort,” he said, adding, just in case the message was missed, that help will be “non-cash incentives … we’re not giving cash to anybody.”
Two changes since 2007 Since the new royalty framework was unveiled in fall 2007, the government has made two sets of changes to deal with what it calls the “unintended consequences” of the changes.
Knight said the plan will aim to loosen credit for small producers and pump new life into drilling companies, which had idled hundreds of rigs.
The junior E&P sector, which involves about 450 companies and represents about 30 of Canada’s top 100 producers, is on life support.
Because of the slump in commodity prices, there is not enough cash flow to support on-going operations, or open the door to debt and equity markets.
“We want to do whatever we can to allow companies to access capital from banks,” Stelmach said.
“Juniors take the risk in exploration. They provide a lot of jobs, not only in Calgary, but in rural Alberta, from the tire shops to the restaurants, the motels. So this is job creation for all of Alberta.”
He said the chill in the global financial system is impacting Alberta families and businesses.
“As a government, we can’t control global financial markets or the price of commodities. But there are things we can do. So we will provide an incentive program … one that encourages the banks to do their part,” Stelmach said.
However, he was unable to indicate how lenders would be guaranteed a return for their investments, suggesting the government has no thoughts of back-stopping loans.
Knight meeting with banks He said Knight has already held meetings with banks, which indicated they are willing to cooperate.
Whether that will see the banks soften the rates they charge small E&P companies may hold the key to the success of any government measures.
For now, the only ready source of money is reportedly the government-owned Alberta Treasury Branches.
But Knight will not accept that the new royalty framework is choking off the industry, despite claims that billions of dollars have been pulled back from government land sales and capital spending, or diverted to other provinces and the United States.
He said preliminary figures indicate that companies which continue to operate in Alberta will enjoy a “very strong advantage in 2009, 2010 and 2011,” based on the commodity price thresholds (US$50 per barrel for conventional oil and C$5.50 per gigajoule for gas) which trigger higher or lower royalties, along with other changes such as a C$1.8 billion royalty reduction over five years for targeted wells and a separate transitional rate for smaller E&P companies.
Knight said a number of companies already have “significant dollars that are being returned to industry because of the new framework.”
Companies don’t agree That assessment doesn’t carry much or any weight with the industry.
Gary Leach, executive director of the Small Explorers and Producers Association of Canada, said the collapse of commodity prices, equity markets and bank lending has compounded the impact on smaller companies that suffer more from the royalty increases than majors.
Typical of those trying to keep its head above water is Bellamont Exploration, which hopes to produce an average 750 barrels of oil equivalent per day this year and make a capital investment of C$7 million.
Bellamont Chief Executive Officer Steve Moran said any relief would be welcome at a time when “capital markets have gone all to hell” and that should involve Alberta taking a “lot less” in royalties.
“There should be some short-term incentives for royalty relief on just about anything that anybody puts capital into,” he said, questioning how tax incentives would serve the purpose when junior companies are swimming in losses and not paying any taxes.
Greg Stringham, vice president of the Canadian Association of Petroleum Producers, welcomed any government efforts to aid smaller companies.
“We’ll work with (the government) as quickly as we can … because we want to keep Albertans working,” he said.
Stringham said it is critical to have a plan in place before the end of the peak drilling season and the spring melt, to “allow investment to continue over the summer that wouldn’t otherwise happen in today’s crunch.”
Government controls royalties Unsure what steps the government can take in association with the banks to free up money, Chris Theal, Tristone Capital’s managing director of research, brought the debate back to royalties.
He said the one element the government does control is its royalty framework, which could be adjusted to improve the rate of return for companies and give them something to spend.
A day after Stelmach’s announcement, the Petroleum Services Association of Canada warned that major layoffs loom this spring for a sector than employs about 100,000 Albertans.
“Drilling activity in the first quarter is down from last year and it’s looking like come March and April things are going to be pretty grim,” said PSAC President Roger Soucy.
He said any moves by Alberta to introduce tax breaks won’t stimulate activity and ignores the fact that 80 percent of drilling in Alberta is done by 25 companies that would not qualify for the aid.
Soucy said a loss of jobs could translate into an “equally devastating potential loss of intellectual capital. If we lose these workers, and likely a number of companies as well, it will become more difficult to recruit new people.”
He told the Edmonton Journal that unless the government can stimulate more field activity there will not be the “manpower and expertise to keep Alberta’s economic engine churning,” even when the economy makes a turnaround.
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