Back in July Horn River News posted an article titled “Will the Horn River Basin make Alberta the next “have-not” province?“. Given the latest report from TD Economics, Alberta may closer to that title then originally thought.
Yesterday, TD Economics released a report stating that Alberta’s natural gas industry faces “significant and growing risks” and according to Derek Burleton, TD Economic’s director of economic analysis, Alberta’s future looks a bit gloomy:
“The potential for an accelerated long-term decline of an industry that does so much of the heavy lifting in the Alberta economy is arguably the No. 1 risk facing the province’s standard of living.”
Many people have the impression that Alberta is flush in oil revenues but don’t realize that the Province’s main revenue source is natural gas and not oil. The long term strategic importance of the Alberta oil sands, and massive Suncor / PetroCan mergers make the front page news that often relegates natural gas to the back pages. The only time natural gas has really hit the front pages was to report record breaking land lease sales in British Columbia and then the subsequent headlines covering the crash of natural gas prices. But before natural gas prices crashed, gas producers were starting to understand the potential of shale gas, and in Canada, these producers started to focus their attention – and money – towards the Horn River basin.
Back in 2008, when natural gas was hitting new high prices, the Alberta Government let their greed get the better of them. Ignoring warnings from industry leaders Alberta raised royalty rates and as forewarned, major players started focusing their exploration and development dollars to better royalty structures found in neighboring British Columbia, and Saskatchewan (BC was lowering royalty rates while Alberta was increasing them). Alberta’s Premier Stelmach could not have had worse timing for his decision. The markets dropped, so did the economy and so did the demand for natural gas. Premier Stelmach scrambled and revised Alberta’s royalty plan several times only to further shatter the confidence in the industry that Alberta was their to provide a stable and low cost royalty program. Anyway you cut the mismanagement of Alberta’s royalty program has not been positive for Alberta.
However, the move from conventional gas to shale gas would have happened even if the Alberta government would not have raised royalty rates. But it did serve as a catalyst for major producers to start mobilizing resources out of Alberta and into shale gas in British Columbia. The subsequent drop in natural gas prices then kept these resources out of the Alberta and resulted in further cuts in drilling activity in Alberta. Capital was spent on Horn River (and elsewhere) to maintain the land leases that these companies invested heavily into. Meanwhile technological advancements just in the last 12 months continue to improve the economics of developing shale gas and further distance companies from conventional gas exploration and development.
But wait. Before we close the curtain on Alberta lets put things into perspective. The move of major players into larger shale gas plays will open the door for smaller more efficient companies to develop and manage conventional natural gas assets. One company’s lost may just be another company’s gain. Consolidation of assets will most certainly transpire. This sort of situation plays out in all industries. Someone invests money into a business, and can not make a return based on the investment and their operating costs. So they sell it off. The purchase price for the asset is based on the new buyer’s assessment of being able to make a return on the purchase. Sometimes this means selling an asset at a substantial discount so you can attract a buyer and provide them a potential return. Point being is when Encana, Suncor etc do sell their assets they will be purchased by those that can make a return on that investment. This applies to both existing production and development land that provides quality geological mapping. Of course, prices take into consideration and reflect the buyers projected price of natural gas. On the development side smaller companies will need to see $6.00 plus to justify development.
And also consider the numbers. Under an average expanding economy in the US and Canada, it required continuous drilling in Canada’s western basin to meet demand. The Horn River basin and shale gas in general in North America is the future for natural gas exploration and development but though these wells come on strong producing 20 million cubic feet per day, production falls off dramatically in the first year. As much as 90% in the Barnett shales. (This is one of the promising aspects of the Horn River basin. Production rates have shown so far not to decline as much as other shale basins). Point being that natural gas – conventional and unconventional – will play an increasing long term role in meeting energy demands. And as long as that demand is there someone will find a way to get the resource to the market and make a buck doing it.
The importance of natural gas to the Province of Alberta is not lost with the Minister of Finance who last month announced that declining natural gas royalties and corporate income taxes are the key contributors to Alberta’s budget deficit of almost $7 billion (2.3% of GDP) in FY 09-10.
The highlights of the TD Economics report state:
- Even as prices likely gain ground this winter, worries will persist about the longer-term viability of Alberta’s natural gas industry.
- The primary concern surrounds recent technological advancements that have improved the economics of developing shale gas, notably in the U.S. and British Columbia. (Highlight added by HRN)
- Natural gas currently drives about $35-40 billion per year in annual output in Alberta (10% of GDP), so the risks facing the industry extend to the province’s overall economy.
- It remains too early to count out the industry. Still, Alberta will need to adjust its course given that the industry is unlikely to return to its former prominence.
While it is apparent that natural gas is evolving to hopefully take its rightful place as a cleaner “bridge fuel”, the industry will go through some serious changes that reflect the changing landscape of the industry as it moves from a conventional to unconventional focus. And a part of this shift will occur in Alberta itself, who has shale gas potential yet to be tapped. Has shale gas taken first billing in the future of the natural gas industry? Yes. Is conventional natural gas dead and no longer feasible? No. But one thing for sure… the natural gas industry may never be the same as it was in the summer of 2008.
TD Economics Report: Alberta’s Natural Gas Industry Faces Considerable Long Term Pressures (pdf)
