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Alberta’s chance to ‘get it right’ Government to release interim findings of competitiveness review; industry leaders say results key to business, government future Gary Park For Petroleum News
Aware, after more than two years of meddling with its oil and natural gas royalties, that it has lost the confidence of industry and investors, the Alberta government has one last chance to “get it right” later in December when it unveils interim results of a competitiveness review.
Having lost its edge over other Canadian jurisdictions and most of the United States, the province has promised the review — due for final release in spring 2010 — will result in a level playing field for explorers and exporters.
“It will point the way in reducing the cost of doing business in our province and remove barriers to prosperity,” Premier Ed Stelmach said in a province-wide televised speech in mid-October.
The stated objective is to improve the working relationship between the Department of Energy, industry and the financial sector, achieve a common understanding of the province’s investment competitiveness within the natural gas and conventional oil sectors, and make recommendations.
The process has involved interviews, workshops and focus groups and consultations with chief executive officers, technical and data exports.
Challenge from new party What’s at stake is Alberta’s economic future, which has been seriously damaged, according to David Yager, chief executive officer of HSE Integrated, chairman of the Petroleum Services Association of Canada and co-chair of a process to develop a new energy policy for the Wildrose Alliance, a newly minted political party that is suddenly challenging the 38-year rule of the Conservative party.
“The success of the energy business in Alberta is not how much money the government gets, but the total economic opportunities,” he said.
Wildrose leader Danielle Smith said her party has heard from companies that the Saskatchewan government takes an average 56 days to issue project approvals which take up to two years in Alberta.
The cost of the new royalty framework is increasingly evident from the comments of industry leaders.
Greg Stringham, vice president of oil sands and markets with the Canadian Association of Petroleum Producers, said the competitiveness review has become even more important, given the emergence of new shale gas resources across North America, adding to a supply surplus.
He said it is time for Alberta “to turn the page and look at where we go from here to try to set the right framework in that new world.”
Roger Soucy, Petroleum Services Association of Canada president, said the industry and the government must look beyond current commodity prices — over which they have little control, other than by offering drilling incentives — and position Alberta to rebound as quickly as possible.
He said the current royalty framework has left the investment community “wondering what will happen next” — a state of indecision that usually prompts the industry to invest elsewhere.
Alberta lagging other provinces Failure to introduce specific, targeted and permanent changes to royalty regime as a result of the review will mean a continued loss of ground to British Columbia and Saskatchewan, an investors conference was told Nov. 30.
Chris Feltin, senior research vice president for Macquarie Capital Markets, said Saskatchewan and B.C. drilling rates are close to five-year averages, while Alberta is lagging far behind.
He said the B.C. government’s new royalty incentives have enhanced the economics of developing shale gas plays, despite low commodity prices, creating an opportunity for Alberta to introduce royalty changes to make some of the more prospective plays more competitive in the North American markets.
George Fink, chairman of oil-weighted Bonterra Oil and Gas, said his company is building an inventory of drilling prospects outside of Alberta so that “we can drill for about three years without drilling in Alberta.”
He said Bonterra has felt uneasy about “being at the mercy of this particular (Alberta) government and the short-term view it sometimes takes” and is ready to stop spending in Alberta when drilling incentives end in March 2011.
Ron Solinger, chief financial officer of Ironhorse Oil & Gas, said Saskatchewan’s nominal royalties on new wells give his company a chance to recover costs quickly and provide money to reinvest.
He said Alberta needs to develop a comprehensive solution to “attract long-term investment capital, so hopefully they get it right with the competitiveness review.”
New fiscal update The pressure on the government to regain favor with investors was underscored Nov. 26, when a fiscal update covering the second quarter to Sept. 30 showed the province now expects to collect C$5.6 billion in nonrenewable resource revenues in 2009-10, down about C$346 million from its budget forecast due to lower gas prices.
Faced with that trend, the government has lowered its gas price forecast for the fiscal year to C$3.25 per gigajoule from C$3.75 on June 30 and C$5.50 when the budget was released, although the full-year oil price target has been raised to US$67.51 per barrel from US$55.50.
As a result gas royalties are expected to generate C$1.9 billion, compared with the budget goal of C$3.6 billion, although oil royalties are expected to grow about C$358 million to C$1.6 billion, while land sales — one of the clearest barometers of industry confidence — are predicted to drop C$188 million from the budget estimate to C$443 million.
Of Canada’s top 80 producers, only 25 percent posted higher gas production in the third quarter and half of them raised their output as a result of acquisitions. The overall drop was about 300 million cubic feet per day.
Even drilling incentives are forecast to fall far short of the mark at C$584 million, off C$258 million from the budget, which Gary Leach, managing director of the Small Explorers and Producers Association of Canada, said emphasizes that incentives are needed by small- and midsized companies as they set drilling programs for the winter.
Finance Minister Iris Evans said the government wants to “keep attracting investment and there’s a lot of people talking to us about drilling and citing our neighbors (B.C. and Saskatchewan). Alberta’s drilling is down 48 percent this year, it’s true. But they are down 42 percent in Saskatchewan and 25 percent in B.C.”
“And if you really take a look at their land leases and their land sales, their advantages aren’t as much as what some have felt.”
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