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B.C. turns up the heat; puts more logs on royalty fire with stimulus
If it’s not all-out war there’s at least a skirmish taking place across the Canadian Rockies as British Columbia and Alberta strive for popularity within the petroleum industry.
Both governments do their utmost to avoid any suggestion of a them-against-us contest, but the evidence is tough to ignore.
With Saskatchewan also factoring into the mix, the three provinces seem ready to pull out all stops to attract oil and natural gas investment dollars during one of the worst drilling slumps on record.
And the contest doesn’t end in Canada. Especially for gas-rich British Columbia, what happens in Texas and Louisiana is just as crucial.
David Pryce, a vice president of the Canadian Association of Petroleum Producers, told the Calgary Herald that “all provinces are watching what the others are doing and that’s a good thing. It keeps us on the sharp edge of competitiveness.”
He credited B.C. with making its move just as companies are preparing their budgets for the 2009-10 winter drilling season, with a particular emphasis on companies aiming to prove up their Montney properties.
British Columbia In the latest round of anything-you-can-do-I-can-do-better, B.C. decisively answered the most recent pump-priming by Alberta with ultra-low royalties and millions of dollars in infrastructure incentives.
This year started with B.C. introducing royalty cuts in March, stretching a program it started in 2004; Alberta answered two days later with its own incentives, in response to industry hostility to new royalty increases and a precipitous fall in upstream activity, by lowering royalties on some new conventional oil and gas wells to 5 percent or less for a year, then extending the offer to mid-2010.
B.C. came back on Aug. 6 with a barebones 2 percent royalty, compared to an average rate of 19-20 percent, on the first year of production from wells drilled in the 10 months starting in September as the centerpiece of a stimulus package that includes: an increase of 15 percent in the existing royalty deductions for gas deep drilling, including horizontal wells drilled to between 1,900 and 2,300 meters in the deep royalty credit program, a vital incentive to the tight- and shale-gas operators; an additional C$50 million, on top of an existing C$120 million, for an infrastructure royalty credit program to be offered this fall to encourage spending on oil and gas roads and pipelines; and changes to drilling license regulations to let the industry move wells to production without losing the privileges of converting licenses to leases.
The 2 percent royalty would constitute a giveaway in Alberta, where first-year decline rates from conventional gas wells are extreme, compared with the unconventional Montney and Horn River plays in B.C., where the initial reserve depletion is modest and gas can flow at sustained rates for 15 to 30 years.
Objective more wells The changes are expected to generate C$2.50 in net incremental revenue for every C$1 of royalty credits without needing any direct government spending, although the government made no attempt to project the actual revenue gain, beyond hoping for an incremental gain of 942 wells over four years, translating into a 0.6 percent hike in the province’s Gross Domestic Product.
Energy Minister Blair Lekstrom made no secret of B.C.’s objective, noting that natural gas is the “largest contributor to the economic well-being of this province” — a matter of crucial importance with B.C. facing a budget deficit of C$495 million in the current fiscal year after a string of surplus budgets.
He said the projected proceeds from increased gas production will go to education, health care and social programs.
Lekstrom said that rather than competing directly with Alberta or Saskatchewan, B.C. is focused on becoming one of the most competitive jurisdictions in North America.
“At the end of the day, we have to do what is best for B.C.,” he said. “In this day and age, capital investment is very fluid and we want to encourage the oil and gas sector to invest in British Columbia.”
Noting that global oil and gas activity is experiencing a “bit of a slowdown,” he said B.C. has weathered the storm “quite well, but this stimulus package is based on bringing things back to a higher level of activity.”
Alberta doing study While Alberta Energy Minister Mel Knight is adamant his province is not in direct competition with its neighbors, his government is in the midst of a “competitiveness” study to determine how Alberta stacks up against other jurisdictions.
A spokesman for the Alberta Energy Department said his government will not change its policies purely in response to what others do, but conceded B.C.’s regulatory regime will be part of the Alberta review.
The B.C. plan was unveiled on the same day that executives of Canadian Natural Resources, Canada’s second largest gas producer after EnCana, delivered a barely disguised slap at Alberta.
Chairman Allan Markin made an urgent plea for cooperation among producers, all levels of government, suppliers and stakeholders to rescue Western Canada’s gas sector which he said is “at a crossroads.”
He said the industry “must be vigilant in reducing costs and improving efficiencies” if it has any hope of participating in a price recovery, which CNR does not expect will happen over the short-term.
Demonstrating its own pessimism, CNR has shifted C$100 million in capital spending this year from gas to oil, reduced its forecast gas wells this year to 110 from 140 (continuing a slide from 240 wells in 2008 and 450 in 2007) and has shut-in 10 million cubic feet per day.
Markin, prior to the B.C. announcement, said the province was one of the jurisdictions that is “proactively looking at ways to support the industry.” He pointedly made no comment on Alberta.
CNR President Steve Laut said the independent producer will drill wells over the balance of 2009 purely for strategic reasons because “it makes no sense to drill for any other reason.”
But he said work continues to delineate findings in the Montney region, where the latest horizontal well posted initial output of 15 million cubic feet per day.
Richard Dunn, vice president of EnCana, which is spending about C$1 billion a year in B.C., told reporters his company is “very supportive of the way B.C. has worked with industry to produce these win-win solutions.”
He said the competition for investment is clearly North Americanwide because gas prices apply to the continent. “Canadian jurisdictions have to be competitive,” he said.
Michael Culbert, chief executive officer of Progress Energy Resources, which usually divides its C$200 million capital budget between B.C. and Alberta, said the stimulus program “could sway some additional dollars going into B.C.”
He said B.C. is offering a level of investment certainty, while Alberta is involved in constant “backtracking” on its royalty changes, adding that “from a planning perspective, knowing exactly what we have to work with is quite positive.”
Gary Leach, managing director of the Small Explorers and Producers Association of Canada, said the changes have the potential to draw investment dollars away from Alberta.
He said the incentives are “not handouts,” suggesting the industry will respond “with continued high levels of investment.”
—Gary Park
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