The province will forego up to $1.5 billion in oil and gas royalties in order to stimulate drilling activity in the beleaguered energy sector, a decision that has St. Albert MLA Ken Allred feeling apprehensive.
Energy Minister Mel Knight announced Thursday that he was extending two existing drilling incentive programs until March 2011, a year longer than originally planned. The extension could see the total value of unclaimed royalties double to $3 billion from the $1.5 billion that was originally anticipated.
“For that investment, what we get is jobs,” Knight said. “We generate some wealth in the province.”
St. Albert MLA Ken Allred, a fellow PC, expressed concern about the government’s direction given Alberta’s natural gas deposits cost more to produce than some other sources and may simply not be economically viable if prices remain low.
“I have a lot of difficulty subsidizing somebody if we’re just going to be losing more money on it,” Allred said. “Maybe we should be looking at just holding it in the ground.”
Extending the incentive programs will generate more royalties over the next 10 to 30 years, Knight said.
The programs in question are a royalty credit of $200 per metre of depth on new wells drilled and a five per cent royalty cap on first-year production of new oil or gas wells. Both programs began in March 2008 and were to lapse next year. Now they will run until March 2011.
NDP MLA Rachel Notley called the extension a 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.
“This government is having back room meetings to please the oil and gas executives, meanwhile they’ve plunged our province into a record deficit and they’re forcing Albertans to pay the cost,” she said.
Industry players reacted positively to the announcement.
“Any incentive in the industry right now can only help,” said Elaine Schafers, CEO of Kodiak Wireline Services, based in St. Albert.
Drilling activity in Alberta is at a virtual standstill. As of this week, only 11 per cent of Alberta’s 602 available drilling rigs were working, compared to 28 per cent at this time last year, according to stats kept by the Canadian Association of Oilwell Drilling Contractors (CAODC.)
In meetings with the Conservative caucus in recent weeks, the industry has been delivering the message that “things are particularly bleak out there,” said CAODC president Don Herring.
“The most important part of the announcement is the fact that they made an announcement,” he said. “While it doesn’t address all the issues, certainly we interpret it as a sign that the government is actually listening to us.”
Alberta was once a preferred locale for natural gas investment but has lost its appeal since ushering in a new royalty regime and subsequently adjusting it several times, Herring said.
On Wednesday the Fraser Institute released a report that ranked Alberta last in Canada as a place to invest in oil and gas and number 92 among 143 locations worldwide.
Alberta’s industry is having trouble competing with vast low-cost shale gas reserves in the Southern U.S. and growing imports of liquefied natural gas, said Enbridge executive Steve Letwin in the Financial Post last week.
Recent discoveries have pushed U.S. natural gas reserves 60 per cent higher than they were four years ago, said a recent press release from the Canadian Association of Petroleum Producers.
What the Alberta industry really wants is a wholesale review of the province’s competitiveness, Herring said. This is something Knight delivered Thursday, saying a provincial review will look at all components of conventional oil and gas operations, including regulatory efficiency, fiscal aspects, taxation and availability of labour. He expects results by fall.
