Energy firms get $3B boost

COMMENT: This is the fifth time in two years that Ed Stelmach's government has unwound Fair Deal recommendations in response to unrelenting whining and pressure from the petroleum industry. And listen to them in this article complaining that it isn't enough, they need more, more, more.

By Dan Healing
Calgary Herald
June 26, 2009

Royalty credits welcomed as temporary relief

CALGARY - Oil and gas industry players welcomed up to $3 billion in Alberta royalty credits under an extended drilling incentive program unveiled Thursday, but continued to demand long-term answers to the province’s fiscal competitiveness woes.

The one-year program announced three months ago was estimated to cost the treasury $1.5 billion in foregone royalties if fully utilized, but the extension to March 2011 will double the cost, Alberta Energy Minister Mel Knight said.

“For that investment, what we get is jobs,” he said in a conference call. “We get jobs for Albertans, we generate some wealth in the province of Alberta. We will generate additional royalty revenue and production over 10, 20, maybe 30 years.”

The plan, the fifth time the royalty regime has been adjusted, was welcomed for its temporary relief, but energy executives said its impact will be muted by low natural gas prices and continued to call for basic changes to the underlying royalty regime.

John Dielwart, chief executive of ARC Energy Trust, listened to the conference call and said he was disappointed with Knight’s response when asked where Alberta should rank in competitiveness with other jurisdictions.

“He could have said, ‘Most competitive,’ but he didn’t and that causes me great concern,” Dielwart said.

“What the Alberta government is saying is, ‘We’re committed to doing a competitiveness study, but we’re not committed to being competitive.’ ”

ARC has assets in all four western provinces and Dielwart said the extension will likely mean more investment in Alberta from his company.

But he added the new price-sensitive Alberta royalty regime that started Jan. 1 makes the province less attractive than B.C., Saskatchewan and Manitoba, especially after the drilling incentives expire and especially if prices rise.

Brian McLachlan, president and chief executive of Yoho Resources Inc., a Calgary company with natural gas production in Alberta and B.C., said the incentives make the complex royalty regime even more difficult to figure out.

“As usual, we don’t have a lot of detail yet, but we don’t have details yet on the first changes they made in the royalty,” he said.

“It will help marginally, but they better hurry up and get their long-term strategy in place because investors don’t invest for one-year time periods. . . . the uncertainty chases away investment.”

The Canadian Association of Oilwell Drilling Contractors had intended to release an updated 2009 western Canadian drilling forecast Thursday that would show a decline from the previous revised forecast of 11,176, a decade low for activity.

But the association held off after getting a call from the government to advise of the announcement.

President Don Herring said it’s hard to tell if the extension will have much impact on this year’s drilling plans.

“There will probably be some additional drilling,” he said, adding a more robust recovery can’t happen until natural gas prices rise.

Neither Duane Mather, chief executive of drilling company Nabors Canada, nor Roger Soucy, president of the Petroleum Services Association of Canada, thought the changes would result in many more drilling.

“The first program didn’t have much impact and neither will this one,” said Mather.

The programs give a drilling royalty credit for new qualifying wells of $200 per metre on a sliding scale based on the company’s production levels from 2008 and offers a maximum five per cent royalty rate for the first year of production from new oil or gas wells.

Knight said the extension won’t likely result in an immediate rebound in land sale revenues for Alberta, a key indicator of future drilling plans. After a $5.8-million sale on Wednesday, the province has taken in $98.3 million in conventional oil and gas bonuses this year, about a third of the $284 million collected in the first half of 2008.

Knight said he couldn’t say when higher revenues promised when the new royalty regime was proposed 20 months ago will materialize, noting that depends on many variables, including energy prices.

But he said the system that takes more as prices rise and less when they fall is working.

“When is it going to happen? It’s happening now,” he said. “The flexibility of the system is working.”

In the recent Alberta budget forecast, energy revenues are expected to fall from $12.2 billion last year to $5.9 billion this year and $7.3 billion in fiscal 2010-11.

NDP MLA Rachel Notley criticized the extension, calling it further erosion of a royalty framework that is already selling Albertans short.

“Minister Knight has just tacked $1.5 billion onto next year’s deficit, and he can’t justify it,” Notley said in a news release. “This government continues to dole out cash to the oil and gas industry, but it’s done nothing to help out-of-work Albertans get back on their feet.”

Gary Leach, executive director of the Small Explorers and Producers Association of Canada, and Dave Collyer, president of the Canadian Association of Petroleum Producers, said the extension is good news.

“It’s the appropriate response to very difficult near-term circumstances,” said Collyer. “It gives the industry certainty for another drilling season in terms of the royalty that will apply and I think the other positive part is the commitment of the government to have a broader look at competitiveness.”

The province’s review of overall competitiveness is expected to be completed by this fall, Knight said. He added that a Fraser Institute report Wednesday ranking Alberta competitiveness behind Manitoba, Saskatchewan and British Columbia is out of date.

In a provincial draft plan revealed in February, the competitiveness review was to be conducted by a panel made up of government officials and representatives of SEPAC and CAPP, but it emerged Thursday that the two industry groups are no longer being given a direct role.

Instead, they will advise government officials who will come up with recommendations.

Neither Leach nor Collyer said they object to the change.

“I don’t see it as significant,” said Leach. “We’re interested in the results of the review as opposed to the actual path that we walk down to get there.”

dhealing@theherald.canwest.com

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