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B.C. looks to provide good ‘golden goose’ habitat
Kristen Nelson Petroleum News Editor-in-Chief
Alaska has been told that it has competition for oil and gas investment — but how often does it get to hear from one of its competitors? In June the Alaska State Chamber of Commerce heard firsthand what British Columbia has done in the last fours years to attract oil and gas investment: investment which more than doubled the number of wells being drilled in the province, from fewer than 650 in 2001 to more than 1,300 this year, and brought royalty revenue to C$2 billion per year.
British Columbia elected a new Liberal government in 2001, and that government wanted the province to be more competitive for oil and gas projects. The province’s Division of Oil and Gas got its marching orders — from the premier and from Minister of Energy and Mines Richard Neufeld — and the province changed the way it does business with the oil and gas industry.
“We did things in British Columbia — after undertaking a confidential analysis of all oil and gas jurisdictions in the United States, Norway, Saudi Arabia and Australia. And we built a regulatory regime that works for British Columbia,” Ross Curtis, assistant deputy minister in the British Columbia Ministry of Energy and Mines, told the state chamber’s summer energy seminar June 22 in Anchorage.
Regulation wasn’t the only change: oil and gas taxation and permitting were also overhauled.
Part of the comparative risk analysis that British Columbia did, Curtis said, was a “quite comprehensive economic analysis,” looking at how much money the oil and gas companies would make and how much royalty the government would get. Creating favorable geese habitat Curtis characterized what the province has done over the last four years as creating favorable goose habitat for the oil company “geese” that lay all of those golden eggs.
Geology is what attracts them, he said, but “… if you want them to stay, they have to have a happy home and you have to treat them well.” And it isn’t just government that benefits, he said: By creating a good habitat for geese, and increasing egg production, “the service sector gets a share and the government gets a share and the company gets a share.”
British Columbia annually produces 1.1 trillion cubic feet of natural gas a year and 14 million barrels of oil, he said, but only one of its seven basins is in production.
“The total revenue for oil and gas last year was $2 billion — that’s just royalty revenue,” Curtis said.
To get that level of royalties, the British Columbia government intervened in “all of the processes: We changed royalties. We changed taxes. We changed property taxes. We changed the regulatory regime. We changed how we work with companies. We changed how we work with communities. We changed how we work with First Nations.”
The result, he said, is that oil and gas is now the single largest source of resource revenue for British Columbia.
Since these golden geese are attracted to geologic potential, Curtis said, government needs to advertise its geologic potential. But once the geese are attracted, Curtis said: “They have to have infrastructure” if they’re going to stay. This includes roads, power and a service industry “that can provide competitive services in a timely fashion.”
They also need certainty in taxation and regulation. On the regulatory side, companies need to know how quickly they can get permits; on the fiscal side, the royalty and tax regime “doesn’t necessarily have to be simple — often it can be quite complicated — the key is providing certainty.” Golden geese ‘high maintenance’ If the habitat is right, he said, oil and gas companies will spend huge sums of money, but it’s important that these geese get to keep a share of the eggs, he said, “because otherwise there won’t be any reinvestment in their company” and the shareholders won’t tolerate that.
But, he warned, these geese are “high maintenance. They’re really high maintenance.” They need fast response from government so they can respond to supply and demand, and government needs to keep up with technology.
Curtis said he got a call from a company president in Houston last year, complaining that his company wanted to do a $50 million seismic program, but the province’s oil and gas commission wouldn’t accept the application.
When he flew up to Fort St. John to the British Columbia Oil and Gas Commission to find out what the matter was, Curtis said what he discovered was that while the province’s regulations required terrestrial mapping for seismic, the company had submitted a three-dimensional geologic image based on satellite imagery enhanced with results from an infrared tachometer flown over the area.
“You could actually identify individual animals … Our guys simply had no idea what to do with it.”
For government to be responsive to the industry, it has to keep up with the technology, he said. Geese can fly “Now the other thing you have to remember about these geese is you don’t ever want to piss them off, because you know what? They fly away. And when they fly away, it’s really hard to get them back, because somebody else has them. And they’re going to be nice to them,” Curtis said.
And trying to choke an extra egg out of the goose with more taxation (he showed a cartoon of four hands around the neck of a goose) may work for a time, he said, “but the second those hands slip off, that guy’s out of here, and you won’t attract any more geese.”
The government is the farmer, he said, and its job is to nurture the goose, and to attract more geese, and “to help the goose increase production.”
The government’s job is “to develop and operate and keep the farms clean and open.” And it’s an important job, he said, because it isn’t just geese on the farm: “there’s the service sector, there’s the rest of industry: they all have to survive.”
The job of the goose is “to produce more eggs and to be an exemplary steward on its part of the farm,” Curtis said. What did British Columbia do? The direction from his government was to make British Columbia more competitive for oil and gas investment.
“I can’t change the geology,” Curtis said, but “I can compensate for it” with royalty reductions and with a “single-window” oil and gas commission for permits.
Royalty reductions were something the provincial government was willing to do to attract investment.
On the permitting side, the British Columbia Oil and Gas Commission, “in part modeled on the state of Alaska’s” commission, was created to provide “single-window” permitting for everything from the camp toilet to putting pipe in the ground to drilling wells. The commission, he said, is “fully funded by the oil and gas industry” through fees and a levy on production. The commission now averages 18 days to get a permit out, and the target for next year is 14 days, and for the following year, 10 days.
British Columbia is also moving to electronic permitting.
And it is working with stakeholder groups and industry to change regulations to performance based.
And the province has developed what Curtis called a “shared vision” with the Canadian Association of Petroleum Producers.
“This isn’t all about making money for oil and gas companies — it’s about having a strong and viable service sector…,” he said, and about community involvement and about working with the First Nations. Competitive changes Only one of seven basins in the province was under production, so the ministry went out and talked to industry, to the communities, to First Nations and to environmentalists.
“And what we came up with was what we call the oil and gas development strategy,” Curtis said, focused on infrastructure, royalties, the service sector and regulation.
Infrastructure was crucial, because “British Columbia operates on what we called 100 days of hell — which is about 100 days of the year where it’s frozen so you’ve got better access to the ground,” much of which is muskeg. The short season not only limited the number of wells that could be drilled, it meant the local service sector had a hard time being competitive because all its costs had to be recovered in that 100 days, he said.
A better road system was crucial to extending the drilling season, he said. In the past, companies were forced to build expensive roads which might have no other use, he said — millions of dollars spent to move 10 drilling rigs.
The government decided, he said, that “if we owned the resource, then we should be sharing the risk of developing it” if economic viability was an issue. The government has contributed $30 million in royalty road credits each in 2003, 2004 and 2005, and an additional $10 million is budgeted for 2006.
The province put $30 million into one such road four years ago, Curtis said. “That road has already paid off more than $400 million in royalty returns to the province.” Technically, he said, he is the manager of that road, but in fact, “all I simply do is collect money off the companies, provide them a royalty credit and the companies have a road usage group” that has contracted with a local firm for roadwork. “It’s kind of a public-private partnership. It seems to be working extremely well,” he said.
The province has two criteria for a road to receive credits: two companies must use the road, and the road must be an arterial for somebody — a forest, or forest fire access or a logging community, Curtis said.
The province has also gotten somewhat more pragmatic about road use. The province’s department of highways closes roads for heavy loads when it thaws. But road damage is now being balanced against drilling.
“If I can drill one more average gas well, one more well in a year, that has a net credit value of $2 million” to the province, so instead of having the highway closed because moving a rig could do $25,000 worth of damage, Curtis said, “forget it: I’ll pay (the highway department) the $25,000 and take my $2 million.”
Royalty credits are also available for pipelines and telecommunications and power equipment. Targeted royalties British Columbia’s royalty system is not simple, but reflects the willingness of British Columbia to make production economic by sharing the risks.
Curtis said he discovered that the province had 5,000 shut-in wells, shut-in because at existing royalty rates the wells weren’t economic. A royalty change put “500 of those wells back in production within 30 days.”
“We have the ability to put in a royalty program for anything a company comes in the door with … anything to do with high-risk” drilling, Curtis said.
The province will share the risk with companies on unconventional gas — coalbed and tight shale — as well as on re-entry drilling, deep wells, directional and horizontal wells, and on summer drilling. Summer drilling In addition to a royalty credit for summer drilling, more roads expand the drilling season, as does the use of mats for drilling pads.
The result? In 2001, Curtis said, there were no summer wells drilled. In 2002 there were 150 summer wells, in 2003 there were 300 and this year there are expected to be 500 summer wells.
In addition to helping increase the number of wells drilled, expanding the seasons helps make the service sector more competitive. For the drilling company, it means the crew isn’t working at minus 50, and they stay around longer, and safety numbers have improved.
In addition to longer contracts for drillers, the service sector got longer contracts, and “because they’re not in that 100-day box any more they can lengthen out their capital costs.”
Both industry revenues and provincial revenues, Curtis said, were increased by the summer drilling program.
“Often in the United States,” he said, “what I seem to notice is that people underestimate the power that government can have” if that power is “used properly” to build “a sustainable, competitive habitat — what government can do to nurture the goose.”
Editor’s note: See information about the British Columbia oil and gas program at: www.em.gov.bc.ca/ogds
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