Alberta tries for ‘fifth time’ lucky

Adds another year to drilling incentives; industry sees competitiveness review as best chance for government to ‘get it right’

Gary Park

For Petroleum News

Once a global beacon of oil and natural gas investment stability, Alberta is making frantic efforts to regain that reputation by trying to arrest the plunging fortunes of an industry that gave it 12 straight years of surplus budgets and wiped out a provincial debt of C$23 billion.

The new royalty framework that took effect Jan. 1 has now been amended five times — vindication for those who warned in 2006 against meddling with a regime that was carefully crafted over decades and undone in a flurry of political opportunism.

In an effort to rebuild faith with producers and investors, the government announced June 25 that it would extend by another year to March 2011 and boost to about C$3 billion the cost of a drilling incentive program.

That came just three months after it adopted a three-part program to stimulate E&P activity that it estimated would reduce royalties by C$1.5 billion if fully utilized.

Knight: E&P sector not happy

A hike in drilling “results in new, ongoing royalty revenues, keeps businesses going and people employed,” he told a news conference.

The royalty credit offers C$200 per meter drilled on a sliding scale, tied to 2008 production levels.

It offers a maximum 5 percent royalty rate for the first year of production from new oil and gas wells.

Knight, who indicated that more changes are possible, said that since the initial incentives were offered in March there has been a “very positive response” from the industry.

The government’s objective in extending the program is to show producers and investors that “we are hearing what you are saying. We understand the situation as it relates to Alberta’s industry.”

“I believe most of the players will agree with me that there is a necessity for any jurisdiction to have the flexibility to make adjustments that support the industry,” Knight said.

“What I have indicated to the players and the investment community is that we will share the risk on the downside of this industry.

“The flexible nature of the (royalty) structure we have in place in Alberta is leaving a number of millions of dollars in the pockets and in the hands of industry players to help with their cash-flow situation for this period of time,” he said.

Knight told reporters that producers need “timely assurance” from the government as they start setting budgets for the upcoming winter drilling season.

He said the one-year extension “provides the certainty for producers to plan new drilling programs.”

Response lukewarm

She said that “not even Libya” has changed its regime five times.

Neither Duane Mather, chief executive officer of drilling contractor Nabors Canada, nor Roger Soucy, president of the Petroleum Services Association of Canada, held out much hope of a surge in activity as a result of the latest changes.

Mather said the initial attempt in March “didn’t have much impact and neither will this one.”

However, Soucy said there is nothing the government can do in the short-term to offset the commodity prices.

Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, doubted the incentives extension will have much impact on this year’s drilling programs, suggesting a robust recovery won’t happen until gas prices rise.

John Dielwart, chief executive officer of ARC Energy Trust, one of the most outspoken critics of the government’s royalty strategy, said the price-sensitive Alberta royalty regime introduced on Jan. 1 makes the province less attractive than British Columbia, Saskatchewan and Manitoba.

Like other industry leaders, he is now pinning his hopes on the results of a government competitiveness review of Alberta’s standing alongside comparable jurisdictions.

Competitive results this fall

But he rejected a report released June 24 by the Fraser Institute, a conservative Canadian think-tank, which said Alberta trails seven of Canada’s 10 provinces as an attractive place to invest, insisting that study was based on out-of-date information.

Greg Stringham, vice president of the Canadian Association of Petroleum Producers, said the incentive extension and competitiveness review are both vital elements of Alberta’s future, especially with the emergence of new shale gas resources across North America that are adding to the gas supply surplus.

He said it is time for Alberta to “turn the page and look at where we go from here to try and set the right framework in that new world.”

Soucy said Alberta and the industry must position themselves to rebound as quickly as possible from the recession.

He said the current regulatory framework and the changes have created indecision in the investment community, which usually means money goes elsewhere.

But the competitiveness review is a chance to get it right, provided the province chooses to be “open and transparent, provide for input from economic stakeholders and incorporate a review of its fiscal regimes, including royalties,” he said.

Gary Leach, executive director of the Small Explorers and Producers Association of Canada, welcomed signs that the government is responding to industry concerns, describing the credit extension as an “appropriate response to very difficult near-term circumstances. It gives the industry certainty for another drilling season in terms of the royalty that will apply.”

“The other positive part is the commitment of the government to have a broader look at competitiveness,” he said.

But, like others, Leach said a significant recovery in gas prices is essential to bring about a major recovery in investment levels.

Cristina Lopez, vice president of institutional research at Tristone Capital, said the competitiveness review is likely to lead to another overhaul of royalties, which “hopefully will correct the current convoluted and exceptionally complicated system.”