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Review into heavy-hitting phase Industry leaders tell Alberta if royalties are hiked on top of rising costs and environmental regulations they are prepared to pull up stakes Gary Park For Petroleum News
A couple of weeks of lightweight skirmishes in the far-flung regions of Alberta turned into some heavyweight slugging when the provincial government’s royalty review rolled into Calgary for three days of hearings.
And the message from the industry giants was unmistakable: Mess with us and we may just move elsewhere.
Industry leaders delivered some of the most potent warnings that the government has ever heard.
Devon Canada President Chris Seasons said Alberta is “increasingly uncompetitive compared with U.S. onshore opportunities” and a hike in royalties on top of rising costs and the uncertain impact of federal and provincial environmental measures, a higher Canadian dollar (that eats into export revenues from the U.S.) and the aging nature of the Western Canada Sedimentary basin could see companies such as Devon scale back spending, or simply pull out.
However, he said Devon has no plans to “pull out of Alberta at this juncture.”
“We continue to invest in Alberta, albeit at a reduced pace (the company’s 2007 capital budget is C$1.35 billion), because we believe in the long-term resource potential of the Western Canada Sedimentary basin,” even though there is a 20 percent disadvantage between the development of Canadian and U.S. assets, he said.
Apache ready to pull out of Canada Apache Canada President Brian Schmidt said his parent company has pulled out of China because of insufficient growth opportunities and is ready to do the same in Canada, despite production of 500 million cubic feet per day of gas and spending of C$800 million in 2006.
Apache wants to invest in Canada,” John Crum, executive vice president from Apache’s Houston head office, told the Calgary Herald. “A stable business climate is key.”
Talisman Energy Chief Executive Officer Jim Buckee warned that higher royalties will result in lower drilling, lower production and, automatically, lower royalty returns.
“A resource in the ground does nothing for anybody,” he said.
BP Canada Energy Chief Executive Officer Randy McLeod said the future of Alberta gas hinges on development of unconventional resources, such as tight gas, deep foothills reservoirs, coalbed methane and shale gas.
Instead of tampering with royalties, Alberta should take a lead from British Columbia’s book and offer incentives to develop marginal gas, he said.
Canadian Natural Resources wouldn’t have gone ahead with Horizon Steve Laut, president and chief operating officer of Canadian Natural Resources, describing the current royalty regime as “fair and has good balance,” said the province should be “careful we don’t tip this thing over.”
Under current economic conditions, Canadian Natural would not have gone ahead with its Horizon oil sands project, which is budgeted at C$10.8 billion and due on stream in the second half of 2008 at 110,000 barrels per day, rising in two stages to 232,000 bpd in 2012.
Because of its front-end investment, the company is committed to the second- and third-phase expansions, but is reconsidering future oil sands and coalbed methane ventures because of their marginal economic nature, he said.
Laut drew the review panel’s attention to the fact that 20 of 28 existing oil sands projects have paid out their capital investment, which means they are moving to a higher royalty bracket.
But without the existing royalty scheme, introduced in 1996 to stimulate investment “most of them would have remained undeveloped,” he said.
ARC Financial: rig count the cue ARC Financial chief economist Peter Tertzakian said the current downturn in gas drilling underscores the sensitive timing of the royalty review.
“The rig count is your cue that the money is not being reinvested” into exploration, Tertzakian said, noting that gas drilling is off 31 percent from a year ago and wells licensed for development are down 35 percent — both a source of concern for a sector that accounts for almost half the energy industry’s C$45 billion in annual capital spending. He warned that declining production at a time of rising demand for natural gas could result in price spikes, further eating into Alberta’s economic advantage.
Tertzakian said it is “not a healthy thing to have this dynamic of rising consumption and falling supplies. … To layer on another fiscal burden (through higher royalties) is not a prudent thing to do.”
He said Alberta’s prosperity is “dependent on investment and reinvestment and we are seeing investment capital migrating elsewhere.” Buckee: current royalty system puts risk on companies Buckee also suggested higher royalties would discourage activity during a period of high costs and falling commodity prices.
Noting that shrinking field activity is a strong indicator of the overall economic viability of natural gas, he said 35 percent of Talisman’s 2007 capital budget is earmarked for Western Canada, compared with 40 percent in 2006.
Buckee said Talisman invests “in a lot of projects (globally) and if they don’t cut it, we cut them.”
He argued the current royalty system puts the burden of risk on the companies and none on the government, making a case for the government to share some of the costs of dry wells.
In contrast, production-sharing contracts elsewhere in the world, which require companies to spend a specified amount of money to earn a portion of the project, mean governments share in the exploration and development risks.
Pierre Alvarez, president of the Canadian Association of Petroleum Producers, drove home a point he said was “clearly obvious, but often overlooked … both prices and costs matter.”
Labor leader says public skeptical But it was not all one-sided, with Gil McGowan, president of the Alberta Federation of Labor, reflecting a strong mood at the hearings by arguing that the public does not believe it is getting a fair shake from oil sands royalties.
Speaking for 29 unions and 120,000 workers, he said the membership did not believe Albertans were getting the “best possible deal” out of a resource owned by them.
“The public is skeptical, frustrated and wary that we are being taken to the cleaners while oil company executives snicker behind closed doors,” McGowan said. “Looking at the evidence, it’s hard for anyone to come to any other conclusion than that the industry is getting a sweetheart deal on the oil sands.
“It’s a deal that was born in a different time,” he said, noting that the initial 1 percent royalty until capital costs are paid off was put in place to encourage investment in a fledgling industry.
But that sector has now matured, with investment up 400 percent since 1997 and the price of bitumen rising 250 percent in the past decade,” McGowan said.
“We think it’s perverse that during unprecedented oil boom in Alberta, our province can’t even reach its own modest target of collecting 25 percent of revenues from oil and gas,” he said.
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