Alberta Offers Natural Gas Incentives for Drilling

CALGARY -- Alberta is offering producers of deep oil and gas substantial royalty breaks, in an attempt to spur more drilling in the province and undo some of the harshest effects of last October's royalty regime overall.

Under the terms of a new program announced yesterday, companies that drill deep wells will receive royalty offsets or credits, a move that will cost Alberta more than $1-billion over the next five years.

The province yesterday introduced two new royalty programs, a move aimed at relieving pressure on companies drilling high-cost, high-productivity wells that were seen as the most heavily penalized by the previous royalty regime changes last October.

"Addressing the unintended consequences with these programs will help Alberta achieve the necessary levels of investment and production to generate the royalties anticipated by the New Royalty Framework," Energy Minister Mel Knight said.
Drillers of deep natural gas wells will get a break on royalties through credits, which will cost the province about $200-million a year for five years, while the credits to deep oil drillers will cost $37-million annually, also over five years.

Alberta believes the cost of the program will be recouped by additional drilling, and the province expects to get an extra $2-billion over 10 years.

The main change is for deep natural gas wells, those drilled to more than 2,500 metres in depth, multimillion-dollar efforts that occur in the Foothills of the Rocky Mountains.

While only accounting for 5 per cent of gas wells drilled, deep wells contributed a quarter of the province's total gas production and are crucial to the provincial treasury.

The changes come as new figures show Canada's energy firms are funnelling vast sums of money into Saskatchewan, at least in part at Alberta's expense.

In October, Alberta approved increased royalties on oil sands, natural gas and oil production, seeking to increase the amount earned by the province by 20 per cent or $1.4-billion after the new rates come into force Jan. 1, 2009.

The changes to the regime were complex - rates varied depending on both the depths and productivity of wells - but effectively hit conventional oil producers and firms that operate deep gas wells the most. Spending cuts of more than $1-billion were seen as companies such as EnCana Corp. and Canadian Natural Resources Ltd. redirected spending out of Alberta.

Junior firms, which have fewer assets and so less options for redirecting capital, were seen as being particularly affected. Highpine Oil and Gas Ltd., a deep-oil-producing junior, said in October that the initial changes would reduce its cash flow by as much as 29 per cent. Yesterday, Highpine CEO Jonathan Lexier said it was "too early to tell" if the new programs would improve cash flow, adding the government had provided "scant detail" about the changes.

However, he said, Alberta at least appeared to be recognizing the struggle for firms at recovering the costs of their investment challenge for companies from deep wells.

While the changes will affect many oil and gas producers in Alberta, juniors with a focus on deep production should see the most benefit. Other provinces also appear to be reaping the benefits. Both B.C. and Saskatchewan have made more in Crown land sales so far this year than Alberta. While hot new plays in both provinces are seen as a cause, so too are Alberta's royalties.

"This level of interest is unprecedented and speaks to the optimism about the economic prospects of both our province and our No. 1 industry," said Saskatchewan Energy and Resources Minister Bill Boyd.

"It is also a clear sign of confidence in Saskatchewan's new government and our stable royalty and regulatory regime."