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Being flexibly inflexible Alberta won’t shift from Jan. 1 for higher royalties; will discuss economic strains Gary Park For Petroleum News
The Alberta government won’t budge from its plan to impose higher royalties in two months, despite a nosedive in resource prices and reports pointing to a sharp decline in natural gas production and revenues.
Energy Minister Mel Knight said the province will stay the course, scuttling any industry hopes of a reprieve in tough times, although he did say “trouble spots” are under review.
He said the “door is always open to discuss issues with our industry partners,” conceding there has been an economic upheaval in the last month.
Knight said “constructive, progressive” proposals will get a hearing from him, but the Jan. 1, 2009, implementation date is fixed.
Asked if the “open door” could see changes to the new royalty regime, he replied: “No, what I’m saying is that we don’t always know all of the answers.
“What we’re looking at is the economic pressure the industry is under. I think it’s unfair for me to say it’s all related to the royalty structure, because there’s a tremendous amount of pressure around commodity pricing and access to capital,” Knight said.
“Costs are continuing to creep up ... so those are some of the issues that we are talking to industry about: Are there things that we can do together to mitigate some of the serious consequences around those issues?”
Murray Edwards, vice chairman of Canadian Natural Resources, said Knight’s refusal to shift on the Jan. 1 date virtually ensures that Alberta “is the least attractive regime for conventional gas in North America” now that money is flowing into development of British Columbia and United States unconventional gas reserves.
“There’s a message for (Alberta). ... We have to remain competitive, but the Canadian regulatory framework is more challenging, which boosts risk and the cost of capital,” he said.
Royalties expected to drop A report by Tristone Capital forecast the Alberta government will see its share of natural gas revenues drop by close to C$1 billion in the next three years, based strictly on slumping gas production, compared with Premier Ed Stelmach’s rosy forecast a year ago that the new royalties would generate another C$1.4 billion a year.
Tristone analyst Chris Theal said the flight of capital to jurisdictions with more attractive fiscal regimes has contributed to declining output from Alberta’s more mature gas fields.
Adding to that problem, Alberta does not have the shale gas plays that have seized the industry’s attention this year.
Theal said Alberta’s largest gas plays face supply costs that are at or above the marginal cost of supply in North America and the emergence of shale gas development has pushed Alberta “substantially” down the ranking list for capital allocation.
He said Alberta production has slipped to 13 billion cubic feet per day, 500 million cubic feet per day short of the government’s forecast, and 1 bcf per day below 2007.
(Alberta still accounts for about 80 percent of Western Canada’s combined gas production of 16.34 bcf per day).
The number of rigs in Alberta is off 9 percent from a year ago and 40 percent from 2006, compared with increases of 19 percent in British Columbia and 22 percent in Saskatchewan.
Land sales are up 12 percent in Alberta, 318 percent in Saskatchewan and 365 percent in British Columbia.
Shortfall in gas supply The current shortfall in gas supply will translate into a C$960 million drop in the province’s natural gas take over the next three years, while lower energy prices and the credit squeeze will make 2009 “tough slogging” in Alberta, Theal said.
Canada’s National Energy Board predicts natural gas deliverability in Alberta will drop by 1.7 bcf per day to 11.48 bcf per day between 2007 and 2010, while rising by 900 million cubic feet per day in British Columbia to 3.54 bcf per day. The numbers are based on a reference case of C$9 per gigajoule at the AECO hub in Alberta.
The federal regulator also believes gas prices in Western Canada of C$7.88 per gigajoule, or C$8.30 per thousand cubic feet will give producers a reasonable rate of return.
Coalbed methane drilling is predicted to shrink by 5 percent annually to 1,508 wells in 2010 from 1,759 in 2007 as operators chase tight and shale gas plays.
“It’s certainly not a continuation of the deep ramp up earlier in the decade, it’s moving towards a sustaining kind of approach,” said the board’s technical leader, hydrocarbon resources, Paul Mortensen.
Despite that tapering off, coalbed methane output is expected to grow to 864 million cubic feet per day in 2010 from 688 million cubic feet per day in 2007, partly because the per-well decline rate is very low.
Leading the charge in British Columbia is the projected increase in Montney production to just over 1 bcf per day in 2010 from 245 million cubic feet per day in 2008, while Horn River, is forecast to reach 126 million cubic feet per day in 2010, from 9 million cubic feet per day currently.
Royalty an ‘aching sore’ But the royalty overhaul remains what University of Calgary political analyst David Taras calls an “aching sore” in Alberta, arguing many fences have still to be mended and more adjustments are need to the regime.
Regardless of this seething unhappiness, Nexen Chief Executive Officer Charlie Fischer insists “global financial issues dwarf anything to do with royalties.”
One of the few suggestions to help the Alberta government out of its impasse has come from Michael Tims, chairman of investment dealer Peters & Co., who said the new royalty structure could remain in place along with a royalty holiday for a set period to stimulate investment.
However, Fischer was unwilling to endorse any moves to reopen the royalty debate, despite the mistakes, advocating “behind-the-scenes” efforts to find cures.
Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, said there is “no interest by the entrepreneurial investor in doing work in Alberta, which is the 800 pound gorilla in all of this. When activity drops in Alberta, it impacts all of Western Canada’s averages.”
A spokesman for the Alberta government said the province is not in a battle to have the lowest royalties or the highest land sales.
Putting the new royalty framework aside, he said soft gas prices, high labor and materials costs and the credit squeeze have had a greater impact on activity.
There is backing from an unlikely quarter for the Conservative government to stay the course.
Liberal leader Kevin Taft said the new regime should be implemented while the government turns its attention to other pressing matters, such as labor shortages, credit problems and climate change.
New Democratic Party leader Brian Mason said there is “no good reason why the changes should be cancelled or delayed.”
Gary Leach, executive director of the Small Explorers and Producers Association of Canada, said the industry’s warnings of a year ago that Alberta had among the lowest rates of return anywhere would become even worse when Albertans discovered that “their economic engine isn’t humming along.”
Frank Atkins, a University of Calgary economist, said he remains optimistic about the industry’s “ability to make money and that hasn’t changed much,” forecasting that crude prices will rebound over the next few months.
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