Alberta getting nudged off center-stage as tax hikes prompt big E&P companies to shift capital spending to United States
The verdicts are rolling in for Alberta’s proposed new royalty regime as the leading E&P companies take the wrapping off their 2008 capital budgets.
But, in the process, those companies are reinforcing a number of deeper, more troubling elements.
It’s well understood that conventional oil and natural gas reserves in Canada’s energy storehouse are depleting.
Similarly, the costs of labor, materials, oilfield services and municipal property taxes are becoming a deterrent.
The end result is bad news for a province that has relied heavily on the petroleum industry to compile 15 years of deficit-free budgets and wipe out its debt.
Without the oil sands and the prospect of some growth in unconventional gas prospects over the longer term, Alberta would be in a fix.
The message for the province is loud and clear: It can no longer take its future for granted and operate on cruise-control.
Companies decisively scaling backForget the earlier industry bluster and posturing. Companies are decisively scaling back their spending in Alberta, and, where they can, heading for Saskatchewan, British Columbia and the United States.
ARC Financial chief energy economist Peter Tertzakian said that “from a capital spending perspective, the current contraction (across Canada) … is the most severe in at least 20 years, especially in Alberta. In 2008, the resiliency of oil patch veterans will be tested.”
ARC estimates that Canadian conventional oil and gas spending (the bulk of which usually ends up in Alberta) will tumble to C$25 billion next year from about C$30 billion this year and the benchmark C$38 billion in 2006.
Richard Grafton, vice chairman of investment banker Canaccord Adams, said Alberta is “not really a place” where investors want to risk their exploration money because the upside is gone.
He said next year will be a difficult time for service companies, while mergers among trusts and juniors and North American credit issues will add to the woes.
The consensus among many industry observers is that failing a rebound in gas prices by early next year there will be a sweeping round of layoffs.
There is now little doubt that companies will punish Alberta for reworking its royalties by either staging a retreat in the province, or, where they can, heading to Saskatchewan, British Columbia and the United States.
EnCana to spend C$500 million less in AlbertaThe clearest judgment on the state of the Alberta industry was delivered Dec. 12 by EnCana, which said its overall spending in Alberta in 2008 would be C$500 million less than it would have been under the existing royalty regime, dragging its Canadian drilling activity to a “very low level.”
The big independent had once threatened to withdraw C$1 billion from its Alberta budget next year, but scaled back because the government’s own framework was “less onerous” than the recommendations made by its royalty review panel, particularly scrapping a proposed oil sands severance tax.
Chief Executive Officer Randy Eresman said spending on Alberta gas projects and oil sands delineation drilling has been cut to “reflect the recent erosion of economic returns.”
He said that regardless of the 12-month wait until new royalties are implemented, EnCana’s 2008 budget has factored in those higher rates because of how they will affect future years’ cash flow from investments made next year.
Eresman said that in addition to royalty hikes, Alberta is being hurt by higher property tax, service, labor and energy costs, plus a sharp rise in the Canadian dollar against its U.S. counterpart that will boost operating costs by 10 percent.
Driving the point home, he said the industry, service sector, government and people of Alberta must “work together to reestablish the competitiveness of the development of Alberta’s resources.”
While EnCana’s budget will be unchanged in British Columbia at C$1 billion, the “significantly diminished returns” will take a bite out of Alberta drilling for shallow gas, deep gas, coalbed methane and oil sands delineation drilling.
Petro-Canada to slash Western Canadian gas activitiesRon Brenneman, chief executive officer at Petro-Canada, gave a similarly harsh assessment of the outlook in Western Canada (mostly Alberta) by announcing his company will increase its global spending in 2008 by 28 percent to C$5.3 billion, but slash its Western Canadian gas activities by 23 percent to C$415 million, while raising U.S. spending by C$60 million to C$190 million.
He said Petro-Canada’s gas business is “shifting away from Western Canada” to the U.S. Rockies, adding “it’s fair to say it’s been accelerated by factors such as changes to the Alberta royalty structure.”
Oil sands spending will rise to C$1.5 million from C$620 million, with C$1.17 billion earmarked to complete front-end engineering on its Fort Hills project, which is due for corporate sanctioning in the second half of 2008.
Although the planned royalty changes are “not enough to impact the overall viability” of integrated mining and upgrading operations, Brennan said the new regime might force Petro-Canada to re-examine its numbers and change the scope of Fort Hills.
But his overriding concern is the state of the Western Canada Sedimentary basin, where Petro-Canada’s shifting focus to the U.S., because of the basin’s maturity, was accelerated by Alberta’s royalty decisions.
“There are various estimates out there today that in order to justify full-cycle exploration and development of gas in Western Canada you need somewhere in the range of (gas prices at C$9 per thousand cubic feet). Gas is currently selling at C$7.”
He said finding costs have gone up exponentially in the past four years, with no corresponding increase in gas prices, while each successful well in the WCSB is yielding “less and less gas.”
“So the numbers don’t work. I’m talking about averages, of course, so there are some things that still work,” Brenneman said. “And that’s why we’re still spending C$415 million (in the WCSB). That’s not only Alberta … but a big chunk of that is in B.C.”
He said finding and development costs in the U.S. Rockies are “still pretty attractive (and the jurisdictions there) haven’t made any changes in their royalty rates.”
“If Alberta is sending a signal that it’s not interested in exploration, we’ll respond,” Brenneman said.