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Time for second thoughts Re-jigging likely, but Alberta premier firm on overall 20% hike; industry cuts begin Gary Park For Petroleum News
The sounds wafting out of the Alberta government these days suggest Premier Ed Stelmach and Finance Minister Lyle Oberg are getting the message.
And if they’re not, it was hammered home with real force on Nov. 27 when Canadian Natural Resources laid out its response to planned royalty hikes.
Canada’s second largest gas producer and a company with billions of barrels of oil sands resources to develop, aiming for 500,000 barrels per day over the next 12 years, said its conventional operations in Alberta will be slashed in 2008 — natural gas by 44 percent and oil by 22 percent.
Its total capital budget will tumble from this year’s C$6.5 billion to C$4.5-$4.92 billion.
Conventional spending is budgeted at C$1.7 billion, off 33 percent from 2007, with C$645 million of that reduction blamed on Alberta’s royalty hikes.
Overall production will be cut As a result, its overall production will be cut for the first time in a decade, with output down 4 percent from this year’s midpoint at 554,000-618,000 barrels of oil equivalent per day.
In case the government was missing the point, senior Canadian Natural executives made little attempt to hide their feelings.
Vice Chairman John Langille said the new royalties, scheduled to take effect in 2009, would wipe out the “vast majority of any increases in natural gas prices for most of our natural gas wells. As such, the ability to increase natural gas drilling activity with increasing gas prices is severely impacted.”
President Steve Laut said the proposed new royalties pushed the economic threshold for wells producing at least 600 million cubic feet per day to C$11 per thousand cubic feet from C$8.
Drilling those deep, high volume wells is “unsustainable … by taking away the price upside and the (well) rate upside,” he said.
Laut indicated the new royalties for shallow and coalbed methane wells was acceptable, but misplaced at a time when Alberta needed “big reserve, big rate wells … so it’s counter-productive.”
He said the royalty plan has removed the “error bar … so we have much less tolerance for any kind of risk.”
Langille said the independent is “faced with eroded economics due to low commodity prices and a new royalty regime that reduces the returns on certain types of drilling.”
The immediate result will be a 12 percent drop in Canadian Natural gas output in 2008 to 1.4 billion-1.5 billion cubic feet per day.
Company says worse could come Both Langille and Laut drove home the point that unless the government makes changes to its royalty framework, there could be worse to come.
That warning was accompanied by a sharp uptick in 2008 spending outside Alberta.
In contrast to the 44 percent reduction in Alberta gas drilling, British Columbia and Saskatchewan will see a combined 8 percent increase, while the 20 percent cut in Alberta’s conventional crude oil drilling will be countered with a 30 percent hike in British Columbia and Saskatchewan.
The initial response from Energy Minister Mel Knight was to assign most of the blame to low gas prices, although he grudgingly conceded that removing a “certain amount of capital from the industry” would at some point be reflected in Canadian Natural’s budget.
But Greg Stringham, vice president of the Canadian Association of Petroleum Producers, said his organization has started meeting with Knight and his department to discuss the “unintended consequences” of the royalty framework and determine what can be done to deal with those concerns while maintaining the overall royalty regime.
Stelmach used almost those exact words in telling an Edmonton audience that “if there are unintended consequences as a result of the framework next year, then we need to discuss them and address them.”
“We heard the concerns being raised by small producers, for example, and I want to assure industry and those Albertans who work for these companies that we’ll listen closely to your concerns,” he said.
Royalty implementation team To explore those matters, the government has formed a royalty implementation team with CAPP and the Small Explorers and Producers Association of Canada prior to tabling legislation next year.
He said there could be changes to deep gas royalties and the royalty formulas the industry argues would make drilling uneconomic in some regions of Alberta.
However, Stelmach assured the Alberta legislature he will not shift from his basic objective of a 20 percent overall increase in royalties, which is expected to generate an extra C$1.4 billion in revenues in 2009, although the door is open to tweaking parts of the regime that are unreasonably punitive to some sectors.
Oberg told a Calgary conference that since the royalty package was released in October, some “inconsistencies” have surfaced on deep gas and “we’re currently taking a look at how we’re going to work with deep gas.
“I think there is a case to be made for deep oil, which is a very similar type of arrangement. We may have to (provide incentives), we may have to be a contributor to ensure the oil is brought out of the ground,” he said. “It’s an advantage to (government) to get that oil out.”
One of the seven candidates defeated a year ago by Stelmach in the contest for leadership of the Conservative party, Oberg also appeared to be putting some space between himself and the government’s royalty overhaul.
He said the royalty review was triggered during the leadership campaign, when all candidates clambered aboard the bandwagon, under pressure from journalists and columnists who said a review was long overdue.
Oberg noted that he raised concerns during the review panel’s hearings about the impact of higher royalties and was rebuffed.
He said the government wants to be sure its new royalties are consistent with its efforts to sell Alberta’s political stability to investors.
“It may be cheaper to produce oil in Venezuela, but (President Hugo) Chavez is unpredictable … in Russia there are geopolitical issues,” Oberg said.
Stringham said there is no doubt the deep oil and gas producers would take an unfair hit because of a framework that only covers wells as deep as about 13,100 feet , where the royalties cap out.
Wells below that level “are really high cost, but bring a lot of gas for the province and a lot of royalties because they are high productivity wells, are very negatively impacted,” he said.
In addition, Stringham noted that even with oil prices at US$85 per barrel, the royalty rate for new oil being developed in Alberta goes up almost 300 percent, while the province’s oil exploration program has been eliminated, meaning a lot of oil would be left in the ground.
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