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Alberta gets muted response to fixes Government proclaims ‘good news’ for all; disappoints as it closes debate on ‘unintended consequences’ of new royalty regime Gary Park For Petroleum News
In trying to fix the “unintended consequences” of the royalty overhaul it cobbled together in haste last year and unveiled in October, the Alberta government said it was not bowing to pressure from any sector of the industry.
That much it may have got right.
No one is offering an unqualified endorsement of revisions announced April 10, including two royalty programs to stimulate development of deep oil and natural gas wells which the industry said were uneconomic under the government’s original royalty framework.
“These new programs will help generate hundreds of millions of dollars in royalties and countless new jobs for decades,” trumpeted Energy Minister Mel Knight. “I believe this is good news for most of the industry.”
But he didn’t get the ringing endorsement he might have anticipated, even from the large producers who were tagged as the only winners.
Industry response mixed Greg Stringham, vice president of markets and fiscal policy for the Canadian Association of Petroleum Producers, told reporters the government is “moving in the right direction” to deal with the highest-priority concerns, but he is “worried (that the response) is too narrow in its application.”
He said the first impression is that only 80 to 90 exploration wells will benefit from the modifications and, if that is the case, then the “unintended consequences” on the oil side will remain, but if the impact is broader then it should work.
Stringham said CAPP would have preferred to see the formula for gas also apply to oil, taking into account well depth along with productivity and price.
At the other end of the scale, the Small Explorers and Producers Association of Canada — whose member companies account for about 60 percent of exploration drilling in Alberta — said the beneficiaries are the big producers.
Executive director Gary Leach predicted the current slump in Alberta’s exploration will just get worse as companies cut their capital budgets or transfer their spending to British Columbia, Saskatchewan and the United States.
“The changes fall far short of what we were hoping for,” he said, adding he was told by the Energy Department that only about 85 oil wells a year will qualify for the new incentives.
Leach said companies that are able to will concentrate their efforts on Saskatchewan and British Columbia plays.
The new incentives will affect a “very small number of wells drilled by a very small number of large companies,” he said.
Junior drilling at 15-year low With exploration wells by junior companies at a 15-year low, there is no sign of an early recovery, with the latest Alberta government land sale offering only 79 parcels, the lowest posting in years.
The five-year program of changes is expected to return C$200 million a year to companies drilling deep gas wells and C$37 million a year to those chasing deep oil targets.
Without the revisions, Alberta would have lost about C$830 million in royalties over 10 years, Knight said.
He said the new structure will enable the government to “meet or exceed” its goal of C$1.4 billion in royalty increases once the regime takes effect in 2009.
Knight said the latest announcement will put the issue of “unintended consequences” to rest, adding there will be no further concessions.
List of changes The changes include:
Deep Natural Gas — The program will provide greater benefits for wells deeper than 8,200 feet, which represent 5 percent of all gas wells drilled in Alberta and 27 percent of gas production between 2002 and 2007; there will be a sliding scale of royalty credits up to C$3,750 per meter drilled; the expected cost will be C$200 million a year over five years, with the incentives forecast to generate C$1.51 billion in royalties over the next 10 years, for a net gain of C$510 million.
Deep Oil Wells — Royalty adjustments will be available for wells more than 6,560 feet deep which represented 20 percent of wells drilled and 26 percent of new conventional production between 2002 and 2007; wells will qualify for up to C$1 million or 12 months of royalty offsets, whichever comes first; the expected cost over five years will be C$37 million a year in return for C$505 million in royalties over 10 years for a net benefit of C$320 million in royalties.
Other Changes — Four par prices instead of two will be used to calculate royalties on oil, allowing royalties to be charged at a price closer to that received by the producer; natural gas royalties will be calculated based on the sum of vertical drill depth and all laterals, encouraging greater development of coalbed methane, while significantly lessening land use and the environmental footprint of coalbed methane development. First wave of reaction The first wave of reaction from analysts included:
FirstEnergy Capital — A report by the investment dealer was headlined: “Today is only slightly different than yesterday.” It said that “we envision zero to barely perceptible increases in exploration and development activity in Alberta as a result of this clarification. Any increases in activity would almost exclusively be related to strengthening commodity prices.”
UBS Securities Canada — Although generally expected in the investment community, the modifications are a “slight positive” for most producers, with the leading beneficiaries being EnCana, Canadian Natural Resources, Talisman Energy and Nexen (whose Mannville coalbed methane play was in danger of being rendered uneconomic by the October framework). Junior winners include Duvernay Oil, Galleon Energy and Compton Petroleum.
Tristone Capital — The deep oil program is a shift “closer to middle ground,” but will not be sufficient to promote new activity at the “higher impact end of the oil exploration spectrum.” The deep gas plan will be a boon to the handful of companies drilling below 13,000 feet, enhancing the attractiveness of Foothills drilling in western Alberta. Deep well drillers among the conventional producers include Petro-Canada, Royal Dutch Shell, Talisman, ConocoPhillips, Canadian Natural, Fairborne Energy, Duvernay, Paramount Resources, Compton, Crew Energy, Rock Energy and Vero Energy.
Peters & Co. — Any drilling increase in Alberta’s Deep Basin area will be a lift for the troubled oilfield services sector. Wells drilled deeper than 8,200 feet, although accounting for only 10 percent of the total well count, consumed about one-third of the total capital spent. Services companies with large exposure to deeper drilling are Iroc Energy Services Partnership, Stoneham Drilling Trust, Precision Drilling Trust, Trinidad Drilling and Ensign Energy Services.
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