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Providing coverage of Alaska and northern Canada's oil and gas industry
January 2019

Vol. 24, No 2 Week of January 13, 2019

Bleak and gloomy

Woes facing Canada’s petroleum industry compounded by carbon tax, well cleanup

Gary Park

for Petroleum News

As Canada’s drill rig count nosedives and foreign investors start fleeing to more competitive corners of the globe, the Canadian petroleum industry is now having to come to grips with the imposition of a new federal carbon tax and the threat that companies may soon be hit for the costs of cleaning up dormant oil and gas wells.

It all amounts to the bleakest, gloomiest outlook in memory for a sector that has been counted on to fuel a large chunk of the government costs of health care, education and other social services.

The latest rig count shows that just 70 rigs were working in late December, down by 104 rigs in a two-week period, and barely 10 percent of the tally 12 years ago.

Prodding the decline is Alberta Premier Rachel Notley’s decision to enter 2019 by shrinking production in her province by 325,000 barrels per day in an effort to stem the decline in prices for Western Canada Select, the benchmark for oil sands crude.

Rigs down 65%

Even though the holiday season usually sees a slowdown in drilling activity, the 65 percent rig-count drop in December was the sharpest for the month since 1975.

And the stumble was not confined to the oil sands. Analysts suggested it probably extended to the Duvernay and Montney shale formations.

At this point the Canadian Association of Oilwell Drilling Contractors has made no moves to revise its forecast, which projected 6,982 wells will be drilled in 2019 - up 51 wells from 2018 - while the association said it expects the rig fleet will shrink to 522 from 580.

Loss of foreign investment

The growing despair for the longer term is being compounded by the loss of foreign investment, which Canadian energy executives say is “very worrisome.”

Grant Fagerheim, chief executive officer of Whitecap Resources, said Canadians were “absolutely, massively mistaken” if they thought the industry could survive with only Canadian investors.

That message was echoed in a letter sent two months ago from Susan Johns, a United Kingdom-based fund manager, to Prime Minister Justin Trudeau, following a similar note in October from Darren Peers, an analyst and investor at Los Angeles-based Capital Research, which operates a US$1.7 trillion fund.

Johns told Trudeau she hoped “your government will start to recognize the numerous issues that are affecting Canada’s energy sector, and do everything in its power to support an industry which has benefited Canadian prosperity for a long time.”

Johns has been spent the past 30 years investing in Canadian junior and intermediate companies.

She said it is “hard for me to watch such a vibrant industry being strangled by regulation, carbon taxes and the inability of producers to get their product to world markets.”

Comparison to US

Alex Pourbaix, chief executive officer of Cenovus Energy, said it was “very worrisome” for him to compare the positive atmosphere in the United States.

He said the U.S. is working to streamline permit applications, while Canada “ignores those red flags,” adding “no one is required to invest in Canada.”

Pourbaix said fund managers and investors, such as Johns and Peers, “seldom disclose their investment risks and strategies” - a viewpoint shared by Precision Drilling Chief Executive Officer Kevin Neveu, who said the government does not need investor letters “to show them what is going on ... the data is there.”

Doug Suttles, chief executive officer of Encana, told an Energy Roundtable conference in the fall that government policy is making Canada an uncompetitive place to drill for oil and gas.

“Today, every well we drill in British Columbia (costs us) over C$100,000 in carbon tax just on the diesel used to drill and complete that well. In the United States, we don’t pay a dollar of carbon tax.”

Ian Dundas, chief executive officer of Calgary-based Enerplus, which relies on North Dakota for 90 percent of its production, said, “It’s easy to get really down (in Canada). We’ve let the Americans outcompete us and out regulate us and we find ourselves in this position.”

Dundas said he hopes the Canadian election expected this fall will encourage the public to discuss changes to national energy policies that have choked pipeline plans and the shipment of crude off the British Columbia coast.

National carbon tax

Undeterred by these sentiments, the Trudeau government pushed ahead Jan. 1 with its national carbon tax, which four of Canada’s 10 provinces - Saskatchewan, Manitoba, Ontario and New Brunswick - are preparing to fight in the courts. (Alberta has previously imposed its own tax on the oil sands sector).

The tax started at C$20 per metric ton, rising by C$10 a year until 2022 and will extend beyond there indefinitely. A former parliamentary budget officer estimated the tax will cut economic growth by 0.5 percent of C$10 billion in 2022.

Andrew Scheer, leader of the Conservative Party, said the federal environment ministry has provided briefings that suggest the tax will need to reach C$300 to be effective.

If he forms the government this year, Scheer said he will offer incentives to industry to improve “efficiencies” in carbon output.

Inactive well cleanup

Not content to leave matters alone, the British Columbia Oil and Gas Commission, OGC, plans to introduce regulations in April to clean up thousands of inactive wells, while Alberta and Saskatchewan say they will study similar measures.

Currently, the cost of tackling Western Canada’s backlog of abandoned sites is estimated at C$27 billion - of which the Alberta government has collected barely C$2 billion in security to protect taxpayers against these liabilities.

However, documents just released by the Alberta Energy Regulator put a price tag of C$260 billion on cleaning up its broader oil industry, a five-fold increase over previous calculations.

The B.C. OGC plan to rewrite current rules follows a Globe and Mail report that found 7,382 wells in that province, or about one-third of all wells in B.C., are inactive, a fraction of the 122,546 inactive wells tallied by the newspaper for all of Western Canada.

The Canadian petroleum industry has campaigned against fixed deadlines for a cleanup, which Tristan Goodman, a former executive with the AER, said represents a crisis in Canada’s oil and gas sector.

He said it made no sense to “send a whole group of companies into bankruptcy” by forcing them to meet their cleanup obligations.

That prospect is compounded by the fact that major companies have offloaded properties to smaller players, who are eager to squeeze the last barrel of oil or cubic foot of gas from the wells even when they are incapable of paying for remediation. (Other abandoned wells, known as orphans, have no known legal owners).






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