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

Providing coverage of Alaska and northern Canada's oil and gas industry
March 2009

Vol. 14, No. 10 Week of March 08, 2009

B.C. plugs on, Alberta caves in

Provinces chart different routes through tough times; Alberta answers call to stem drilling decline, save jobs; could cost C$1.5B

Gary Park

For Petroleum News

British Columbia keeps resolutely pressing ahead with its efforts to disperse gathering storm clouds, while neighboring Alberta has decided to step out from under its umbrella.

Faced with “economic instability,” British Columbia has decided to expand its royalty credit program to “support and encourage economic activity that will continue to provide jobs (in British Columbia’s) oil and gas industry,” Energy Minister Blair Lekstrom said March 2.

The next day Alberta Energy Minister Mel Knight, facing relentless industry criticism that has reached unprecedented levels in what was once the ultimate haven for the oil and gas sector, made the fourth “tweak” to his province’s controversial royalty regime.

For British Columbia, the aid will cost only a few million dollars more per year, while the latest stimulus plan in Alberta is potentially worth up to C$1.5 billion, meaning the province has handed back more than C$4.3 billion to the industry in the last year since rolling out its new royalty framework.

If nothing else, the contrasting approaches to head off a collapse in drilling and save jobs reinforce what many analysts view as Alberta’s misguided overhaul of its royalty regime.

B.C. looks to improve position

Lekstrom said that boosting British Columbia’s infrastructure development program introduced in 2004 will “improve our competitive position for attracting investment and contribute to the ongoing growth and development of our oil and gas industry.”

The program is designed to help companies build roads and pipelines into emerging gas plays, such as the Montney and Horn River tight and shale gas basins, and support year-round operations by improving access to areas that don’t normally support heavy equipment outside of winter freeze-up.

The changes will see royalty credits boosted to C$120 million this year from C$100 million in 2008 and C$90 million in 2007.

Since 2004, the credit program has allocated C$316 million to companies, resulting in 72 new road-based projects and 53 new pipeline projects, representing total capital investment of more than C$632 million.

The government estimates it gets a return on investment of 2.5 for every dollar invested.

Greg Stringham, vice president of the Canadian Association of Petroleum Producers, told the Financial Post that by bringing down the cost of development in new areas, the British Columbia government is making another competitive move that Alberta should notice.

Alberta withstands demands

But the Alberta government has withstood demands to make structural changes to its royalty framework, despite warnings that companies have insufficient cash flow after royalties and costs to invest in exploration and development programs.

Even the latest incentives are a reaction to the global economic crisis and not a correction to the new royalty regime, Knight told a news conference.

The plan will reduce royalties on new conventional oil and gas wells to 5 percent or less for at least a year, to help free up cash flow and give the industry access to capital. But the new royalty rate is limited to only the first 50,000 barrels of oil, or 500 million cubic feet of gas.

In addition, a drilling royalty credit for new conventional wells will offer a C$200-per-meter-drilled royalty credit to companies on a sliding scale based on their production levels in 2008. It is aimed primarily at small- and medium-sized producers and aims to provide a capital infusion for those companies.

Finally, Alberta will establish a C$30 million fund to abandon and reclaim old well sites, thus reducing the industry’s environmental footprint.

The new well incentive program could take a C$1.04 billion bite out of royalties and the drilling credit program will cost an estimated C$466 million.

“This has nothing to do with splashing money around,” Knight said.

“It’s relative to the economic situation, not relative to where we were a year or two ago (when the new royalty framework was being unveiled). The time to act aggressively is now.”

He said it follows consultation with the industry and financial community about the “current impediments to new investment in Alberta.”

Analysts still not happy

There is no doubt among analysts about the source of those “impediments” and they are no longer taking a subtle approach to tearing strips off the Alberta government.

In the days prior to the release of the stimulus plan, Paul Ziff, chief executive officer of Ziff Energy Group, said Alberta generated its own models for finding and development costs during its royalty review in 2007 by “conveniently leaving out dry holes … so the (estimated costs) were a lot lower than for the real industry situation and led to improper conclusions” that leave a lingering gap in understanding between the industry and government.

Randy Ollenberger, with BMO Capital Markets, said tight credit markets have restricted most Alberta companies to reinvesting internally generated cash flow, which is constrained by low commodity prices.

“It seems to me that the Alberta government still doesn’t get this,” he said.

Without changes to labor costs or the fiscal framework, the advantage that Alberta once enjoyed is ‘definitely gone … and we have to fix that,” he said.

Industry: Not complete fix

While welcoming the incentives offered, industry leaders were not prepared to suggest the plan will fix all of Alberta’s ills.

Dave Collyer, president of the Canadian Association of Petroleum Producers, said “it’s a positive step … but it does not deal with some of the more fundamental competitive issues that Alberta is facing.”

However, he said the industry is confident that Alberta’s on-going study of its competitive standing against similar jurisdictions will take a serious look at the “broader competitiveness.”

For now, Collyer said the stimulus package should help correct some of the dramatic decline in drilling levels this year.

Gary Leach, executive director of the Small Explorers and Producers Association of Canada, said his member companies will respond and “stem the decline in drilling … (by) drilling more wells than they otherwise would have.”

Although the industry leaders would not put a number on the additional wells, Knight said he hopes the plan will reverse the latest forecast of a 27 percent drop in drilling.

Roger Soucy, president of the Petroleum Services Association of Canada, said that without the incentives one quarter of the service sector workforce would have been laid off by the end of April.

“We believe this program will help stem the decrease in activity and potentially even stimulate new activity,” he said.

Investment dealer Peters & Co. said the incentives should benefit companies that have chosen to keep capital spending at “reasonably high levels, while financially challenged entities will not benefit significantly because of their limited spending capabilities and low well count.”

Tristone Capital shared a similar view, saying that for cash-strapped juniors “staring down the barrel of the banker’s gun, the incentives put in place are just out of reach, and, by extension, so is their multiplier effect on the Alberta economy.

“We are skeptical to the degree to which the producers will cycle incremental cash from the incentive program back into the ground for two reasons: One, we are long on supply in North America and adding productive capacity today is not desirable, and, two, we believe the margin of cash that is retained by the incentives will predominantly focus on debt reduction.”

Tristone research director Chris Theal said the fact that Alberta is working on a competitiveness study may dissuade the investment community from injecting more money into drilling “because things are subject to change.”






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

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)Š1999-2019 All rights reserved. The content of this article and website 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.