Alberta extends drilling incentives

Alberta has announced a one-year extension to two incentive programs designed to breathe life into a sagging natural gas drilling sector that has been ravaged by low commodity prices.

Alberta has announced a one-year extension to two incentive programs designed to breathe life into a sagging natural gas drilling sector that has been ravaged by low commodity prices.

The move means the province would pony up as much as $3 billion between now and March 2011, Energy Minister Mel Knight told reporters Thursday.

“For that investment, what we get is jobs. We get jobs for Albertans, we generate some wealth in the province of Alberta,” he said.

“So what it is, is a front-end injection of some of the capital that we would receive from the commodity, put it back into play in the hands of business players and allow them to make these investments and give us a better return in the long run.”

Premier Ed Stelmach’s Progressive Conservative government has been sharply criticized by the energy sector since bringing in a new royalty regime in January.

The resentment coupled with tumbling energy prices has resulted in a major decline in drilling and exploration in Alberta, and a recent study by the Fraser Institute suggests the province is no longer a favourite location for energy investment in Canada.

In March, the Alberta government announced a $200 per metre royalty credit to companies on a sliding scale based on their 2008 production levels.

It also introduced a well incentive program, which would offer a maximum five-per-cent royalty rate for the first year of production from new oil and gas wells. Under the previous regime it would have been between 10 and 15 per cent.

Those programs were to have lasted until 2010, but the government moved to extend them by a year because producers need to have some degree of certainty before setting budgets for the new drilling season.

The energy industry applauded the move.

“I think it’s a positive announcement in a number of respects. It does tangibly demonstrate that the province recognizes that the external environment has changed considerably,” said Dave Collyer, president of the Canadian Association of Petroleum Producers.

“Certainly extending the drilling incentive program for another year is helpful in terms of improving the economics of drilling in the very near term and also providing certainty as to what the rules will be in another winter drilling season.”

Junior companies, which tend to be more tilted toward natural gas than their larger counterparts, have been bearing the brunt of the low prices, which have been well below US$4 per 1,000 cubic feet for months.

“Low natural gas prices are likely to persist for an extended period of time and this announcement is a welcome signal that the government is responsive to the economic situation facing the industry,” said Gary Leach, executive director of the Small Explorers and Producers Association of Canada.

Junior companies drill about one third of Alberta’s oil and gas wells, and create numerous jobs in the province, particularly in rural areas.

“We believe that each dollar of capital investment by the oil and gas industry creates more than four dollars of economic growth in the provincial economy,” Leach said.

FirstEnergy Capital analyst Robert Fitzmartyn said the extension is a positive for companies that can afford to drill, but “given the dynamic nature of the government’s royalty policy, we do not see much transcending through to the market right now.”

The new royalty framework has undergone a number of tweaks since first it was first introduced in October of 2007.

The province’s objective of providing a “fair, predictable and transparent royalty regime has been an abject failure from a capital markets perspective,” Fitzmartyn wrote in a note to clients.

Knight also confirmed Thursday that a review of Alberta’s overall competitiveness in the energy sector will be completed by fall.

He said the priority will be to make sure that companies and investors clearly understand the cost of doing business in the province.

“We think this is where the uncompetitiveness piece resides. It’s in the cost of doing business here,” Knight told reporters.

“We have to be sure that we can maintain an environment here that allows industry players and investors to be certain that the costs that they’re going to see going forward in Alberta are reasonable and competitive.”

Adding to its challenges, Alberta’s energy industry is also facing stiff competition from emerging shale gas plays in neighbouring British Columbia and throughout the United States, which until recently have been technically difficult to exploit.

Knight acknowledged that significant opportunities lie outside of Alberta, the historical powerhouse of Canada’s energy industry.

But he said: “We are not, by a long shot, out of this game.”

“Unconventional gas is the future for the province of Alberta. We have lots of it and we will be sure that we work with industry and with the investment community to put in place the right economic climate for people to be able to produce those resources.”

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