Woe is Canada

CAPP submits wish list to Alberta royalty review board, asks 3-year change delay

GARY PARK

For Petroleum News

The Canadian Association of Petroleum Producers, speaking for companies which account for 90 percent of Canada’s oil and natural gas production, has painted what is the bleakest picture of the industry’s health in recent and possibly living memory.

So bleak, that CAPP has gone for broke, submitting 60 recommendations to the Alberta government’s royalty review panel, asking for a three-year delay in implementing any changes to royalty rates and pleading for lower royalties to offset the new administration’s imposition of higher income taxes and carbon levies.

That’s the battered taking its begging bowl to the bruised.

Both sides are reeling, with the government announcing the worst deficit in Alberta’s 110-year history, along with word that there is no chance of balancing the books before the 2019-20 budget year, while the industry is on its knees, delivering a daily dose of the latest payroll cuts.

In a 12-page submission to the royalty panel, CAPP calmly admits that Alberta’s oil and gas sector has lost its competitive place in the North American market.

“The United States, Alberta’s number one customer for oil and gas exports, is quickly becoming its top competitor,” CAPP said.

“The industry is challenged not only by price, but transportation to existing and new markets, and by rising costs.”

In this environment, CAPP urges the review panel and the government to “re-establish Alberta as a place that attracts capital investment, to pursue market access, to recognize that cumulative costs work against competitiveness and to support innovative technology for its ultimate and ongoing value to Albertans.”

Industry employs 1 in 3

CAPP said the province’s fiscal regime must factor in the total costs of production, not just royalties, to attract investment and protect employment.

“Ensuring we have the right balance is crucial for us to compete in a global market,” said Tim McMillan, CAPP’s president.

He said Alberta already charges higher royalties than its neighbors in British Columbia and Saskatchewan, while the United States, as a result of fast-rising production over the past year, is “eating our lunch.”

McMillan said Canada has seen its share of North American oil and gas investment tumble to 17 percent today from 36 percent in the 1990s as the industry has deployed new technology to exploit shale-oil prospects in the United States, such as the Bakken and Eagle Ford.

He said “any changes that we make on royalties need to take into account all costs. We recommend that royalties be a mechanism through which balance can be found.”

In addition to asking for a three-year notice of any royalty changes, CAPP wants royalty cuts to handle the cost of government climate policies, an end to the bitumen-in-kind royalty in the oil sands in favor of cash payments to the government and support for gas-fired electricity generation at the oil sands.

Royalty changes delayed

CAPP insists on greater predictability, noting that the current five-year-old royalty regime is structured to meet the evolving nature of the industry, but cautions that the “myriad of changes” introduced since 2007 has placed Alberta’s status as a stable investment jurisdiction at risk.”

It calls for changes to make the system “more transparent, stable effective and competitive,” noting that the C$29 billion decline in capital investment since 2014 will not turn around until the issues facing the industry are resolved.

“While global commodity prices are well beyond the government’s control, the royalty and climate panels are two initiatives that need to be resolved sooner rather than later,” the submission said.

Three areas of development

At the same time, the three categories face stiff rivalry - 1) the geological tight oil potential in Saskatchewan, North Dakota, Montana and Texas, 2) the deep/shale gas prospects in British Columbia and prolific shale plays in the Marcellus and Utica deposits in Pennsylvania and Ohio; and 3) the alternatives to the oil sands in the offshore North Sea and Mexico resources and the ultra-heavy crude oil deposits in the Orinoco Belt in Venezuela.

To ensure Alberta is able to compete in these areas, CAPP called for:

•Thoughtful management of growth through royalty and tax programs that are best suited to ensuring a competitive and equitable distribution of costs and benefits, while linking development to “well-developed land use planning thresholds.”

•Ensuring that all Albertans in all regions of the province benefit from the wealth generated by oil and gas development.

•Recognition of the importance of mitigating climate impacts by working with the government to achieve meaningful environmental results.

CAPP said Alberta can be a leader by applying innovation and technology to maintain and expand energy supplies “in a responsible manner, while addressing societal and environmental needs.”

Alberta tries spending binge

So what emerged when the government of Premier Rachel Notley released its first budget for 2015-16 — a tax, borrow and spend program — would only have surprised those who weren’t paying attention.

Adding to that surprise the government has opted to try spending its way out of trouble, while redirecting its economy.

Grabbing the headlines were a record C$6.1 billion deficit, to be followed by four more deficit years; confirmation that Alberta will be forced to borrow for the first time in 20 years to help fund capital projects and cover operating needs; word that a contingency fund to help pay for “rainy days” will evaporate this fiscal year; and a staggering decline in energy revenues to C$2.9 billion from C$8.9 billion in the 2014-15 fiscal year.

The NDP administration also seized one last chance to lash out at its predecessor government for “squandering resource revenue” instead of squirreling some away and for failing to “diversify” Alberta’s economy.

The one mildly positive number from Finance Minister Joe Ceci was that Alberta will limit borrowing to 15 percent of its gross domestic product, compared with an average 30 percent in Canada’s nine other provinces.

In its energy analysis, the government said that despite a short-term blip in oil prices during the summer, Alberta was unable to cope with rigorous efforts by North American shale oil producers to contain costs and improve productivity to deal with low prices.

“Most analysts now expect that excess supply and lower oil prices will continue for the remainder of 2015 and the first half of 2016, with supply and demand beginning to rebalance toward the latter half of 2016,” it said.

It forecast that reduced drilling levels in North America, reduced investment elsewhere and production disruptions in war-torn regions should slow supply growth over the next year.

But Alberta is having to fund its spending on forecast average prices of US$50 a barrel for West Texas Intermediate, down from US$80 last year and US$100 the year before, edging back up to US$61 in 2016-17 and US$68 in 2017-18.

For Western Canada Select, the benchmark price for blended bitumen, the spread to WTI is estimated at US$13.60 this fiscal year, down from US$17.30 in 2014-15, but is projected to grow back to US$18.50 in 2017-18 as more oil sands projects come on stream, raiding output by 21 percent over three years.

Bitumen royalties are estimated at C$1.5 billion for this year, down C$3.5 billion from 2014-15, than making an average annual recovery of 35 percent over three years as output increases from 2.47 million barrels per day to 2.85 million bpd.

Conventional oil royalties are budgeted at C$536 million for the current year, down C$1.7 billion from 2014-15, and expected to recover by 16 percent a year over the next three years, while production slips from 560,000 bpd to 518,000 bpd.

Looking outside its ailing petroleum sector for help, the Notley government will pour C$34 billion into infrastructure projects over the next five years, creating a program that will pay companies C$5,000 for each new job they create.

The end result could be a debt of C$47.4 billion by 2020 about 15 years after Alberta fleetingly achieved debt-free status.

The radical shift in economic direction has prompted Moody’s to give a “credit negative” rating, reflecting a “lack of significant expenditure controls,” which the firm believes will see Alberta’s debt burden rise to 60 percent of revenues by 2016-17 from 30 percent on March 31, then to 80 percent by 2016-18.

However, Robert Kavcic, an analyst with BMO Nesbitt Burns, said that if any jurisdiction has the capacity to release a “firm dose of government spending to support the economy as it adjusts to the negative oil price shock ... it is probably Alberta.”

—GARY PARK