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
The report notes that the industry employs one of three Albertans, representing 375,000 direct and indirect jobs, generates 42 percent of Alberta’s gross domestic product and is responsible for 36 percent of provincial revenues (or C$10.7 billion in royalties, land sales, corporate and municipal tax and a carbon levy).
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
Alberta Energy Minister Marg McQuaig-Boyd has promised that the government will delay any changes to royalties to 2017 to give the industry an adjustment period.
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
CAPP said that given the presence of large deposits of unconventional resources coupled with the technological expertise to develop them, the future focus of petroleum industry activity in the province is expected to occur in three areas: tight oil, deep/shale gas and the oil sands.
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.”
