Incentives aim to boost gas exploration in northeastern B.C.

COMMENT: In terms of climate change and greenhouse gas reduction, these new royalty giveaways are utterly contradictory and counterproductive, as they only serve to getting more natural gas out of the ground and more carbon into the atmosphere.

Short-sighted, un-strategic, incompatible with GHG reduction goals. BC already has the lowest or nearly the lowest royalties in North America, with numerous "incentive" programs that reduce royalties even further. This is bad policy.

Scott Simpson
Vancouver Sun
August 7, 2009

Stimulus package designed to encourage growth despite relatively low gas prices

The British Columbia government is discounting some of the royalties it collects on natural gas and oil resources in a bid to drive new investment in the northeast.

On Thursday, Minister of Energy, Mines and Petroleum Resources Blair Lekstrom announced an "oil and gas stimulus package" the government hopes will attract investment at a time when low North American gas prices have the industry in the doldrums.

The province didn't estimate a value for the package, which will ultimately depend on how vigorously gas exploration drillers respond, but suggested that for every $1 of forgone royalties, B.C. will yield $2.50 in revenue growth from the industry.

The program does not entail any direct government spending.

The Canadian Association of Petroleum Producers (CAPP) said B.C. is already a competitive jurisdiction for gas exploration, and believes the new offerings will further enhance its profile.

B.C.'s largest gas explorer, Alberta-based EnCana, lauded the timing of Lekstrom's announcement, noting that drillers are in the initial stages of planning for the coming exploration season -- and low gas commodity prices for natural gas mean activity will be subdued and competition for investment fierce among jurisdictions across the continent.

"If you look at oil and gas activity around the world, it's taken a bit of a slowdown," Lekstrom said in an interview from his Dawson Creek constituency office. "We've managed to weather that quite well. This stimulus package is based on bringing things back to a higher level of activity."

The package includes four royalty-based incentives and two regulatory changes -- all of which are intended to get more gas flowing out of the ground so B.C. can collect additional royalties to help offset a projected $500-million revenue shortfall in the current fiscal year.

Wells drilled from September 2009 through June 2010 will enjoy a one-year royalty rate of two per cent -- compared to the average rate of about 19 or 20 per cent.

That would be a resource giveaway for a conventional gas well in Alberta -- where the greatest volume of gas flows out in the initial months after a well is tapped, and the gas and royalty opportunities quickly ebb.

But in northeast B.C., where unconventional gas plays now dominate -- particularly in booming new areas such as Horn River and Montney -- the initial bump is comparatively modest and substantial gas volumes flow for anywhere from 15 to 30 years.

B.C. is providing further incentives for deep well development with a 15-per-cent royalty deduction for natural gas deep drilling, and is expanding its definition of deep gas royalty credits to encompass resources tapped in more shallow regions 1,900 metres to 2,300 metres underground.

The province is also boosting by $50 million its existing $120-million infrastructure royalty credit program -- which encourages development of oil and gas roads and pipelines.

Industry knew the program was coming, but not the specific details of the incentives, said Richard Dunn, EnCana Canadian foothills division vice-president for regulatory and external relations.

"There was a fair bit of consultation over the last several months by British Columbia in terms of the design of the program," Dunn said. "Certainly I have heard from other folks in the industry, who have noted that it will attract investment."

Dunn described timing of the announcement as "ideal.

"Industry right now is pulling together its drilling programs principally for [fall 2009] and into 2010. This program will be taken into account in terms of making those decisions."

Industry investment in drilling rights has boomed in B.C. in this decade and reached record levels in the fiscal year just past.

In some cases, drilling companies paid record amounts to secure the rights to explore and develop new gas resources.

But many companies did not follow through when the global economy sagged last year. Some opted to shut down exploration programs while others stepped away after drilling, leaving the gas in the ground until prices recovered.

Rather than wait for that to happen -- and modest gas futures prices on the New York Mercantile Exchange suggest a price jump could be several years distant -- the province chose to give it a nudge.

"In the short term they are looking for ways to maintain jobs, and to ensure that the local contractor structure is maintained and in place," said David Pryce, Western Canada operations vice-president for the Canadian Association of Petroleum Producers.

"They're also looking to position the industry to help lead B.C. out of the downturn when gas prices turn around.

"It also considers the resource and the stage its development is in. You've got the Horn River and the Montney primarily attracting huge capital investment in land sales but industry stumbled a little bit in terms of generating activity around that."

ssimpson@vancouversun.com

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Read Scott Simpson's blog at www.vancouversun.com/energy

© Copyright (c) The Vancouver Sun

B.C. and Alberta in a natural gas poker game

CALGARY -- British Columbia fired the latest round Thursday in the North American battle to woo natural gas producers, unveiling miniscule royalty rates and millions of dollars in fresh infrastructure incentives in a move that may force neighbouring Alberta to respond to in kind.

In an effort to prod natural gas production in its Montney and Horn River shale plays, B.C. reduced the royalty rate on wells drilled between September and June 2010 to 2% for one year. Producers now pay an average royalty rate of about 20%.

“The oil and gas industry’s capital is mobile -- it can be invested anywhere in the world, so if you want to be a part of that, you want to ensure you have a competitive jurisdiction,” Blair Lekstrom, B.C.’s minister of energy, mines and petroleum resources, said in an interview. “We want to secure the future of the oil and gas industry in British Columbia.”

Alberta and B.C., Canada’s top natural-gas producers, have traded royalty announcements this year. In March, B.C. rolled out royalty breaks, extending a program it launched in 2004. Alberta unveiled its own incentives a day later, reducing royalties on some new conventional oil and gas wells to 5% or less for at least a year. It later extended that program in June.

While the two provinces are in fierce competition with each other, the royalty rate war extends beyond Canada’s borders. Prolific natural gas basins such as the Barnett shale in Texas and the Marcellus in Pennsylvania are sponging up billions of dollars worth of investments.

“I really do see it as more of a North American-wide commodity and competition for investment,” said Richard Dunn, EnCana Corp.’s vice-president of regulatory and external relations for its Canadian Foothills division. “The Canadian jurisdictions have to be competitive.”

Mr. Dunn said he believes B.C.’s latest move will spark drilling activity, and that Alberta will take it “into account” as it wades its competitiveness review.

Laura Lau, an energy and resources fund manager at Sentry Select Capital Corp. in Toronto, said B.C.’s new program is “generous” and will make it more competitive with U.S. plays such as the Marcellus, which has an advantage over its Canadian counterparts because of its proximity to major markets like New York.

But Alberta, she said, will have little choice but to follow suit to remain in the game. “Alberta will have to look at its royalty regime yet again,” she said.

Jerry Bellikka, a spokesman for Alberta’s energy department, said his government will not make “knee-jerk” policies based on what its neighbours do. However, he said B.C.’s regulatory framework will be factored in to Alberta’s ongoing competitiveness review.

B.C’s latest royalty rules are expected to generate $2.50 in net incremental revenue for every $1 of royalty credit they provide, the government estimated. The stimulus package will not require direct government spending.

Revenue from the new plan will go to education, health care and social program funding and development.

In addition to the 2% royalty rate and growing infrastructure kitty, B.C.’s initiatives include an increase of 15% in the existing royalty deductions for natural gas deep drilling and extending the deep royalty credit program to include horizontal wells drilled between 1,900 and 2,300 metres.

“[Natural gas] is far and away our largest contributor to the economic well being to the province of B.C.,” said Mr. Lekstrom.

© Copyright (c) National Post

OIL AND GAS STIMULUS TO BOOST PROVINCIAL ECONOMY

“B.C. is one of the most competitive oil and gas jurisdictions in North America, and this stimulus package will further strengthen the sector while increasing provincial revenues,” said Lekstrom. “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.”

This stimulus package has the advantage of not requiring direct government spending to increase activity and investment, while generating positive revenue to the Crown. In a conservative scenario, after three years the program will generate $2.50 in net incremental revenues for every $1 of royalty credit provided. Since these are royalty credits and not expenditures, the Crown benefits from the activity in addition to royalty revenue generated from wells that would likely not have been drilled.

The package includes four royalty and two regulatory initiatives that will enhance B.C.’s competitive business climate, creating momentum in the industry and attracting significant new investment into the province.

Royalty initiatives included in the package are:

· A one-year, two per cent royalty rate for all wells drilled in a 10 month window (September 2009 - June 2010).

· An increase of 15 per cent in the existing royalty deductions for natural gas deep drilling.

· Qualification of horizontal wells drilled between 1,900 and 2,300 metres into the Deep Royalty Credit Program.

· An additional $50 million allocation for the Infrastructure Royalty Credit Program to be offered this fall to stimulate investment in oil and gas roads and pipelines.

Regulatory initiatives included in the package are:

· Commingling in the plains area, to be announced by the Oil and Gas Commission in the near future; and,

· Amendments to the drilling licence regulation to create flexibility that will allow industry to move wells to production while not losing privileges to convert drilling licences to leases.

The package is projected to increase drilling activity, generate substantial industry investment, and provide incremental royalty revenues to the Crown.

Crown revenue from the stimulus package will go to education, health care and social program funding and development.

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Contact:
Jake Jacobs
Public Affairs Officer
Ministry of Energy, Mines and Petroleum Resources
250 952-0628
250 213-6934 (cell)

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