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Counting costs of planned carbon taxes Alberta’s taxes expected to take bite out of junior oil sands, conventional producers; cost could run to hundreds of millions GARY PARK For Petroleum News
The initial wave of euphoria over the Alberta government’s sweeping new climate change policy has started to break up on the rocks of reality.
Among those likely to take a pounding are smaller oil sands and conventional producers - the industry sector that fuels a significant share of exploration and drilling activity - who are already feeling the squeeze from creditors.
In addition those companies that will be required to reduce their methane emissions by 45 percent could face cost increases in the “tens or hundreds of millions of dollars” over the next five years, said the Canadian Association of Petroleum Producers.
Privately owned Laricina Energy, forced to close operations this year to save money during a financial restructuring, said the government needs to look closely at fairness and competitiveness as it develops the details of a wide-ranging carbon tax.
Laricina Chief Executive Officer Glen Schmidt said the government should be cognizant of the role oil sands juniors play in innovation and development techniques and not simply focus on the concerns of multinationals and large caps who prominently arrayed themselves with Premier Rachel Notley when she rolled out the carbon policy.
He said the announcement did what the larger companies have said by creating “some certainty in their minds,” while “likely” spreading uncertainty among Canadian-based companies “because the consultation process on what it means for companies in terms of allocations and costs are yet to be determined.”
Could be edge for US producers The carbon charge could give an edge to oil producers in the United States, he said, noting that if the U.S. does not impose a tax on its hydrocarbon production, while Canada has a charge that is above the rate of inflation, those pose a competitive issue.
Schmidt urged the government to make a greater effort to involve the juniors in its climate change planning rather than being merely being satisfied with the backing of big companies such as Suncor Energy, Shell Canada, Cenovus Energy and Canadian Natural Resources.
The Notley administration has targeted an economy-wide carbon price of C$20 per metric ton in January 2017, rising to C$30 a year later and then continuing to increase in unspecified amounts, with some of the revenue to be reinvested in technology and initiatives to lower pollution. In addition, greenhouse gas emissions will be limited to 100 million metric tons a year, up 30 million metric tons from current levels.
Analysts less troubled Industry analysts were less troubled by the impact on smaller producers.
Randy Ollenberger, of BMO Capital Markets, said the strategy as outlined could be seen as a “win” for oil sands producers, which have escaped bearing the major burden of climate change regulations.
He said the production limit does not appear to be a barrier for the industry provided it makes progress on reducing per barrel emissions, while those companies that invest in reducing greenhouse gas intensities will be rewarded.
Michael Dunn, of FirstEnergy Capital, said the emissions limit will not affect projects now being developed, while new entrants were already facing considerable challenges.
Menno Hulshof, with TD Securities, said the cost impact of the plan could range from C26 cents to C60 cents per barrel, although lower-quality companies could face taxes of C$4-C$5 a barrel.
CAPP: ‘real costs’ of 45% target On the methane issue, CAPP President Tim McMillan said that meeting the 45 percent reduction target will mean “real costs” for those who are major contributors to the current output of 30 million metric tons a year.
Notley has instructed Alberta’s energy regulator to work with industry and the province’s environment ministry to develop a plan over the next five years for achieving the methane goal by 2025.
Gary Leach, president of the Explorers and Producers Association of Canada, said methane emissions are a more potent greenhouse gas than carbon dioxide among conventional producers.
EPA sets 40-45% target The U.S. Environmental Protection Agency announced in August that oil companies must lower their methane emissions by 40 percent-45 percent below 2012 levels by 2025.
Leach suggested the Alberta government must be hoping to gain a “sizeable credit from the international community for tackling methane emissions.”
He also expressed hope that the province will factor in the cost of carbon taxes as it reviews changes to its royalties.
While the government gets to work on the details of its climate change plan, the industry is feeling the heat from its creditors, with 23 of 75 companies surveyed by Calgary-based data company CanOils reporting that their credit lines were reduced in the third quarter.
But CanOils also reported that lenders extended C$66.5 billion of available credit to companies in the quarter, compared with almost C$60 billion at the end of 2014.
CanOils noted that 34 non-oil sands intermediate Canadian companies had a US$3.4 billion loss in the third quarter, adding that capital spending cuts, layoffs and salary reductions have not been sufficient to shield the industry from such losses.
AltaCorp Capital warned that lenders are now keeping a close eye on corporate spending behavior, including a requirement for companies to obtain “lenders’ approval for certain spending decisions.”
However, AltaCorp said it is possible that lenders will be “less punishing than current expectations.”
Jon Horsman, managing director of loans syndication at ATB Corporate Financial Services, told the Financial Post that the overall portfolio is “very healthy in the bank market ... and is not imploding,” although there are some cracks at “the small end of the portfolio.”
He said companies have typically cut 20 percent to 30 percent of their capital budgets to help offset the slump in crude prices, adding he agrees with those who predict oil will remain below US$50 for the next two or three years.
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