HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS PETROLEUM NEWS BAKKEN MINING NEWS

Providing coverage of Alaska and northern Canada's oil and gas industry
November 2007

Vol. 12, No. 44 Week of November 04, 2007

Fear and loathing

Some ho-hum about Alberta royalty plan; drillers brace for heavy job losses

Gary Park

For Petroleum News

One minute Alberta was on the brink of catastrophe, the next it was surrounded by calm.

Such was the level of pent-up anxiety that preceded Premier Ed Stelmach’s release of his government’s new royalty plan and the initial stock market response. (See related story on this page.)

He had scarcely stopped speaking on Oct. 25 when some analysts and industry leaders were whipping up a frenzy.

“I think you’re going to see an ugly day tomorrow,” said analyst Don Rawson with investment bank Tristone Capital.

Tristone President George Gosbee said the “lack of confidence and lack of clarity” in the framework would see companies immediately start pulling investments out of Alberta.

“This will result in the loss of the winter drilling season and a decrease in royalties for 2008 and 2009,” he told a conference call. “I’m in utter shock.”

Tristone forecast an oil sands sell-off Oct. 26 in response to the royalty package, but cautioned against an overreaction until the impact of the royalty changes was better understood.

Canadian Association of Petroleum Producers President Pierre Alvarez called the framework a “very, very serious day” for the industry.

“You will see an impact,” he said. “It’s not going to be very positive.”

Peter Tertzakian, chief economist at ARC Financial, said that, faced with a difficult operating environment, “firms will now look to make cuts to their programs. It’s just a question of how much and how deep.”

Juniors expected to be hurt

FirstEnergy Capital analysts Robert Fitzmartyn and Cody Kwong said the “landscape of opportunity for the smaller capitalized juniors has shrunk discernibly. Economics will be challenged for both natural gas and oil projects, particularly on exploration projects.”

But the brokerage wasn’t issuing quite the same dire warnings of two weeks earlier when it said that implementing the full recommendations of a government royalty review panel could see 30,000 jobs disappear, including 19,000 in the oil sands sector as future projects were delayed or cancelled.

Wood Mackenzie, the Scottish-based energy research consultant, said a month ago that the panel’s proposed changes could wipe 13 percent or US$26 billion from the value of current and planned oil sands ventures, based on a long-term Brent price of US$50 per barrel.

Derek Butter, head of the firm’s corporate analysis, estimated Oct. 26 that value would shrink by only US$10 billion, using the same oil price yardstick, because of the government’s increased fiscal take over the life of projects.

He said the overall impact would be “significantly less serious” than under the panel’s recommendations.

But he said that dropping the much-maligned Oil Sands Severance Tax proposal did not remove the financial bite because royalties will rise beyond the 33 percent proposed when oil prices are above $90 per barrel.

“From the point of view of new project development economics, the new royalty framework clearly recognizes the high breakeven costs that the industry faces in the current operating environment,” Butter said. “We believe that there is a much reduced chance of the cancellation of proposed oil sands projects under the new framework than under the panel’s proposals.”

Temperate messages register

As temperate messages such as these started to register on Oct. 26, the initial downward blip on the Toronto Stock Exchange’s oil and gas subindex actually edged up 0.17 percent.

EnCana (one of the first out of the blocks after the panel’s report was made public with warnings it would likely slash Alberta spending next year by US$1 billion) lost only 16 cents or 0.25 percent of its value to C$64.25; Canadian Natural Resources (which said the panel’s proposals could see C$20 billion worth of oil sands projects shelved) saw its shares rise 1.12 percent to C$77.02, near an all-time high; Canadian Oil Sands Trust (a 36.7 percent partner in the Syncrude Canada consortium) slipped 1.2 percent to C$33.20; while oil sands giant Suncor Energy was off 14 cents at C$102.61.

That’s consistent with the buildup from Sept. 15, when the panel recommendations were released, to Premier Ed Stelmach’s response on Oct. 25.

Over that period, the 10 largest oil and gas producers experienced an average market decline of just 0.5 percent, compared with the Toronto Stock Exchange’s overall gain of 2 percent.

Not quite Armageddon for Big Oil.

Net asset value off 31%

The heaviest punishment on Oct. 26 was dished out to the junior E&P companies — Highpine Oil & Gas dropped 17 percent, Galleon Energy 11 percent and Duvernay Oil 3.5 percent, although the new royalties are seen as removing a much larger chunk from the net asset values of those companies — Highpine by 31 percent, Galleon by 18 percent and Duvernay by 15 percent.

Glenn MacNeill, who manages the equivalent of C$1.04 billion in assets for Sentry Select, said the penalties are greatest for Galleon and Highpine, which have high-productivity wells that will face higher royalties.

Jeffrey Fiell, an analyst at Octagon Capital, shared the consensus view that the new royalties will “squeeze the margins more” for smaller producers, making them less attractive outside Alberta and outside Canada.

RBC economist Derek Holt thinks the broader consequences will have only a “very marginal impact” on the Alberta and Canadian economic.

But Stelmach and his government are not yet home free.

The next big test comes with the release of 2008 capital spending programs and the first round of drilling forecasts by sector organizations.

Gary Leach, president of the Small Explorers and Producers Association of Canada, said the new royalties will hit the juniors and microcaps disproportionately harder than the rest of the industry.

Because of the greater risks associated with exploration, some of the successful small companies drilling for natural gas could be driven away, he said.

Job losses predicted

Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, has predicted as many as 30,000 job losses for the peak winter season.

But that scaling back was already well advanced, based on what he said is “uneconomic” gas in the gas-prone Western Canada Sedimentary basin.

Well counts and rigs were down 30 percent from a year ago, with the rig utilization rate for the first nine months of 2007 struggling at 42 percent, its lowest level since 1999, while the tally of new well permit — the strongest barometer of near-term industry intentions — was off 25 percent for the period.

In the bluntest terms, Herring said the “winter season is toast. … It was already toast before (Oct. 25) and all the report did was cement the uncertainty that had been lingering for months.”

He now expects only 13,700 wells will be drilled next year, compared with 22,300 in 2006 and that could translate into 16,000 lost jobs in the service sector.

Roger Soucy, president of the Petroleum Services Association, said layoffs were already under way before the government announced what direction it is taking.

Reflecting the state of confusion, Trinidad Energy Services Income Trust could employ from 2,000 to 4,000 people this winter, said chief executive officer Michael Heier, warning that once rigs are laid down “those people are gone.”

He said that what Alberta plans is similar to the Canadian government’s decision a year ago to change the tax rules for income trusts.

Bill Gwozd, vice president of gas services at Ziff Energy Group, said Alberta is kicking the troubled sector when it is already down.

The combination of current gas prices and the new royalties means the gas production outlook in Canada is “dismal,” he said.

Producers will have a tough time moving ahead with new drilling programs and, as a result, there will be cuts in drilling fleets and services, Gwozd said.






Petroleum News - Phone: 1-907 522-9469 - Fax: 1-907 522-9583
[email protected] --- http://www.petroleumnews.com ---
S U B S C R I B E

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©2013 All rights reserved. The content of this article and web site may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.