New realities are starting to penetrate the Alberta government’s inner circle which is drafting its 2016-17 budget while pondering how far to go in implementing royalty changes.
In December, Premier Rachel Notley disclosed there would be a “relatively small” delay in the planned release of a report from a review panel from Dec. 31 to “early January.”
“People are looking for the outcome sooner rather than later,” she said, adding her government did not want to “kick something out the door that’s not ready.”
“Later” has now become the operative word as the roiling of crude markets shows no signs of ending and a rapidly weakening Canadian dollar heads into unknown territory.
The clearest shift has been away from commitments during last spring’s election campaign that Albertans would receive the “full and fair value” from their natural resources to hints that the royalty regime will remain unchanged until at least the start of 2017.
A spokesman for Energy Minister Margaret McCuaig-Boyd said the review and the government’s assessment of royalties has been slowed indefinitely, while the administration addresses “disincentives” facing Alberta’s faltering petroleum sector.
Pumping although losing
That coincided with the startling disclosure by analyst Martin King of Calgary-based investment dealer FirstEnergy Capital, who told a Conference Board of Canada summit that oil sands operators have little choice but to keep pumping regardless of losing money on every barrel they produce.
Although West Texas Intermediate prices have been dipping under US$30 a barrel and Alberta’s benchmark Western Canada Select, a heavy blended crude consisting mostly of bitumen, has tested sub-US$16 levels, he said the prospect of oil sands shut-ins is “extremely limited.”
For one thing, hitting the shut-off switch in a thermal-recovery project could damage the reservoir, King said.
He also noted that the billions of dollars invested in facilities that usually have a projected lifespan of 40 years or more keeps the pressure on operators to ride out low prices.
“I know it sounds contradictory, but given the long time span over which these projects are supposed to operate, they have to keep them running,” King told reporters.
Some production curtailed
Even so, some heavy oil producers have already curtailed production - 10,000 barrels per day by Canadian Natural Resources, 3,000 bpd by Connacher Oil and Gas, 2,400 bpd by Baytex Energy and 500 bpd by Gear Energy, which had earlier targeted gains of 6 percent this year.
“We essentially put our drilling plans on hold and, ultimately, it’s batten down the hatches. It’s survival mode for us,” said Gear Chief Executive Officer Ingram Gillmore.
He said lenders have already lowered his company’s borrowing limit to C$60 million from C$90 million.
Mark Oberstoetter, an analyst with consultant Wood Mackenzie, adopted a hard line, suggesting “less well-capitalized companies will eventually start to take the longer-term, riskier look at shut-ins.”
No increase in costs
Caught in this bind, Notley conceded that “no one is going to see a royalty review that increases anyone’s costs in the near future.”
Without directly answering a question on whether the industry might need incentives, rather than royalty hikes, she told a news conference that her government is aware of the industry’s plight.
“Certainly, disincentives to growth will hopefully be minimized to some extend in the new process that we look at bringing forward,” Notley said.
“We’re very, very conscious of the situation that we (face) in Alberta, both in the oil sands and well as in more conventional and tight oil situations.
“What we are going to do is bring forward a process that is predictable, more transparent and that will give developers a good understanding of what they can expect.”
Greg Clark, leader of the Alberta Party and the only member of his party elected to the provincial legislature, has repeatedly called on Notley to implement policies to bolster the energy industry rather than contemplating a bigger share of oil and gas revenues.
He said the risk for Alberta is that higher royalties could drive investment out of the province.
Drillers: historic lows
Mark Scholz, president of the Canadian Association of Oilwell Drilling Contractors, said he was unclear what Notley meant by “disincentives,” but hoped that implied the government will be “incredibly sensitive” to the industry’s plight.
“We’re sitting at historic lows for drilling activities ... and for employment opportunities,” he said. “This is not a time for uncertainty.”
The Canadian Association of Petroleum Producers said the government “has an opportunity to adjust royalties to offset increasing costs in other areas, which would encourage more activity in these economically uncertain times.”
As late as December, Peter Tertzakian, chief energy economist at ARC Financial, warned that given the magnitude of change being contemplated by the review panel “there’s always elements in the industry that cannot be competitive.”
That thinking underlies many of the 130 submissions made to the panel from oil and gas producers and lobby groups.
But the bluntest came from citizens, under subject lines demanding to know “Why Now?” and “Stop the Madness” and essentially telling Notley to postpone the review until “the global economy turns and settles to normal again.”
CAPP, in its 200-page submission, covered the full spectrum of royalties for horizontal wells, deep oil and gas, shale gas, enhanced recovery waterfloods, re-stimulating wells and mature high water-to-oil ratios.
“CAPP urges the royalty review panel, and the government to re-establish Alberta as a place that attracts capital investment, to pursue market access, to recognize that cumulative costs work against competitiveness and to support innovative technology,” the organization said. “It is critical that province undertake budget, climate and royalty policy reforms that not just maintain, but enhance competitiveness and grow the economy.”
