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Keep them coming Industry leaders press Alberta government to extend royalty incentives by another year, note Saskatchewan, B.C. offer better terms Gary Park For Petroleum News
The Alberta government is under pressure to extend its short-term royalty incentives by another year, thus allowing companies to plan for a stepped-up drilling season in the upcoming peak winter season.
David Collyer, president of the Canadian Association of Petroleum Producers, told an investor symposium in Calgary that “it’s very important to have an extension … (for Alberta) to remain competitive.”
To drive the point home, Andy Wiswell, chairman of CAPP and CEO of NAL Oil and Gas Trust, said companies have “some very attractive opportunities for oil in Saskatchewan and they have a significantly lower royalty program (than Alberta). So to have the Alberta government extend the program in some fashion would be very important to our continuing investment in Alberta.”
Collyer told reporters that Alberta must make a decision “sooner rather than later” because of the impact on capital budgets that will soon be developed for the winter and into 2010.
When it announced the incentive program three months ago, in response to low oil and gas prices, the government said it would monitor the results until the end of 2009 and decide then if it was necessary to continue or extend the terms.
One-year royalty credit The incentives include a one-year drilling royalty credit for new conventional oil and gas wells and a new well incentive program which offers a maximum 5 percent royalty for the first year of production from new wells. The drilling program offers a C$200-per-meter-drilled royalty credit to companies on a sliding scale based on production.
Energy Minister Mel Knight told the symposium his government understands that operators need information on Alberta’s plans as they embark on capital spending decisions over the next 30 to 60 days.
He said negotiations with the industry are ongoing, while the government gathers information on the impact of the new royalty framework which took effect on Jan. 1.
But he was emphatic that the government will not return to the old regime, telling reporters that what existed before “may have suited people at a certain point in time ... (now) we’re going to go forward.”
Knight did make a rare concession that uncertainty over Alberta’s fiscal regime over the past three years has “absolutely made a difference in the mindset of investors.”
He said it was never the government’s intention to place itself between investors and the industry, but he suggested there is more to a healthy investment climate than just the fiscal regime, noting Alberta is also working with other governments to reduce red tape.
Decision asked by fall Wiswell said he is pressing for a decision no later than this fall on what will happen with royalty rates.
Over the longer term, he said the government should change its base royalty model so that more of the upside of oil and gas prices remains with the producer rather than heading for government coffers.
John Dielwart, CEO of ARC Energy Trust, said the government caused confusion by applying the royalty incentives to production in the 12 months from April 2009, rather than the previous year.
As a result, ARC pulled back C$30 million it planned to add to its 2009 capital program, he said, adding the trust now plans to spend 60 percent of its C$350 million budget in British Columbia and only 25 percent in Alberta, even though two-thirds of its production comes from Alberta.
Bill Christensen, vice president of strategic planning for Pengrowth Energy Trust, said confusion over the rules has also disrupted his trust’s 2009 exploration plans.
“We’re still trying to understand what the rules are,” he said.
Steve Laut, president of Canadian Natural Resources, said Alberta has made some good moves with its transitional royalty program, but the industry urgently needs some stability as it focuses on next year and beyond.
Some see benefits Not all the reaction is negative.
Michael Wuertherick, CEO of Seaview Energy, said that when gas prices were high and the royalty regime was changed Alberta was a “bad place to be. … Nobody wanted to drill wells in Alberta.
“Now, if you are somebody that’s positioned with a balance sheet and an inventory of projects, it can be a very significant value-add for a company.”
He said 440 barrels of oil equivalent per day of Seaview output qualifies for the 5 percent royalty cap, adding about C$2.5 million to projected 2009-10 cash flow.
Michael Kohut, chief financial officer of Trilogy Energy Trust, said a drilling credit of C$360,000 per well and a 5 percent royalty credit for one year gives his trust a breakeven point of $2 per million British thermal units at a time when it is making money with gas at $4.
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