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Juggling defense and offense Industry hesitant to attack Alberta government royalty review for fear of advancing NDP chances in upcoming Canadian election GARY PARK For Petroleum News
A jittery mood has spread through Calgary, the home base of Canada’s oil patch, with industry leaders not sure how strongly to voice their feelings about the Alberta government’s upcoming review of royalties.
Some are replaying the fiasco that accompanied the province’s last attempt at hiking royalties, causing an outflow of capital investment to Saskatchewan, British Columbia and the United States.
Others prefer to lie low, fearing that any attacks on the socialist New Democratic Party government could, in an erratic political era, lead to the election of a national NDP administration in the Canadian vote scheduled for Oct. 19.
They have reason to fret given the stunning overthrow of Alberta’s 44-year Conservative dynasty by the provincial NDP led by Rachel Notley, sending the federal wing of the NDP under Tom Mulcair soaring in the polls.
With voters apparently no longer reluctant to take an ideological swing to the left side of the political spectrum, the oil and gas sector is wary about how far it should go in issuing threats.
Strongest line from CAPP The strongest line so far has come from Tim McMillan, president of the Canadian Association of Petroleum Producers, who used an opinion piece in the Calgary Herald to remind Albertans what happened in 2007-09 when then Premier Ed Stelmach slapped a 20 percent increase on royalties to achieve what he insisted was a fair return for the owners of his province’s oil and natural gas resources.
The industry response was swift and sharp, as TD Securities noted in a recent report, dominated by a drop in the well count to 6,700 in 2009 from 16,000 in 2008, while Alberta government land sales nosedived 25 percent.
According to TD Securities, Alberta’s slice of Western Canadian land sale revenues fell to 24 percent in 2008 from 81 percent in 2006, while British Columbia soared to 53 percent from 15 percent and Saskatchewan jumped to 22 percent from 4 percent.
But the capital migration could not be attributed solely to the royalty changes, occurring as it did in the thick of a radical transformation of the upstream sector, spurred on by the use of horizontal drilling and hydraulic fracturing to open up the Bakken formation in Saskatchewan and the vast shale deposits in northeastern British Columbia.
Capital drain Even so, TD said the 2007-09 experience had “unequivocally shown” that a multibillion-dollar drain on capital spending in Alberta was still the result of a badly timed royalty increase.
Under extreme pressure, which eventually resulted in his ouster as premier, Stelmach made a humiliating retreat when faced with evidence in mid-2009 that only 69 of 602 rigs were working in Alberta by introducing incentives to revive industry activity.
That backing off stemmed from a “competitiveness review” to correct the “unintended consequences” of the royalty changes.
“This is all about people keeping their careers, whether it be engineering, all the professions, and all the supports, the rig workers, the motel operators, the people who repair tires and trucks in small communities,” Stelmach said. “It’s all based on how we can support further activity in the oil and gas industry.”
McMillan said in his opinion piece that the Notley ordered review follows a 20 percent hike in corporate taxes (along with tax hikes for those earning more than C$125,000), higher carbon taxes, a boost in the minimum wage over three years to C$15 an hour from C$10.20 and tougher environmental regulations. (The direct impact on oil and gas companies over the next two years is estimated at C$800 million).
He said the industry is not strong enough to withstand even more costs.
Mixed signals Adding to the mixed signals from her government, Notley delivered a speech to the Stampede Investment Forum in Calgary earlier in July that made her sound at times like a voice for the industry.
She said the oil sands - widely labeled as the greatest threat to the environment - “have really emerged as our international showpiece. For more than half a century, Albertans have been coming up with unconventional solutions for an unconventional resource. And I’m here today to emphasize that the province has a government determined to defend this advantage, by being constructive at home and by building relationships around the world.”
The government knows “there is only one way to succeed. And that’s by supporting a free, open, sustainable and increasingly diversified economy,” she said.
Notley did not indicate how that position would stack up with her outright opposition to Enbridge’s Northern Gateway pipeline or her refusal to lobby in the United States for TransCanada’s Keystone XL pipeline.
But she promised that her administration would be “consultative and prudent in how we take the province in a different direction,” without indicating whether the royalty review was part of that thinking.
Panel review by end of year The answer on what is in store for royalties is expected to be known later this year after a panel headed by Dave Mowat, chief executive officer of ATB Financial, a government-owned financial institution, delivers its preliminary findings to Energy Minister Marg McCuaig-Boyd.
Although McCuaig-Boyd has offered only sketchy details on what she expects from the panel and how the review will be conducted, Mowat told the Financial Post his goal will be to “create a believable common ground for the people of Alberta, for the politicians, for the department of energy and for the companies that invest here.”
Among those companies is the ATB, which has a substantial loan exposure to the energy industry.
Mowat said he hopes to wrap up the review before the end of 2015 to help companies set their capital budgets for 2016 and give the government a clear idea of what it can expect “going forward.”
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