In Saturday’s Globe & Mail article “‘Clock is ticking’ for Alberta royalty cuts“, industry players are again calling for Alberta to reduce royalty rates or risk seeing its natural gas production in the province continue to fall. Alberta depends on revenues from the oil & gas industry but while most think of Alberta as an oil producer the fact is the majority of revenues are from natural gas production. The Province has already seen a drop in royalty revenues year to date as a result of a crash in natural gas prices and subsequent production cuts. But Alberta’s natural gas industry was starting to crumble well before prices began their fall.
In perhaps what was the worst decision of his political career and despite industry advise, and a subsequent crash in oil and natural gas prices… Alberta Premiere Ed Stelmach made good on his promise to increase royalty rates in Alberta. Alberta brought their new royalty framework increases into effect only to see a number of subsequent changes to the framework which simply confused the market, and created more uncertainty in an already fragile industry. The damage had been done.
Natural gas producers think long term and the Alberta government did not give them the stable framework for them to base their exploration and development plans. What was certain, was that BC was reducing their royalty rates and were offering shale gas which has a lower break even point then the conventional gas opportunities in Alberta.
To many, the situation in Alberta is nearing a point of desperation and it may be that Alberta is still in a state of denial not fully understanding an industry that is so vital to their well being. Iris Evans, the normally sunny Alberta Finance Minister, voices concerns but is quoted as stating:
“It’s not only the freefall of the prices, it’s what’s happening south of the border. The shale gas … can be a real headache for us.”
This is partly true. Shale gas is the future of natural gas, and can be produced at a lower break even point then conventional gas which is the bulk of Alberta’s current production. However, the key point that industry players are trying to hammer home is that without a competitive royalty framework the game is over for Alberta natural gas before it even begins. Meanwhile, major producers have started the process of selling conventional gas assets in Alberta (and elsewhere) and focusing on shale gas plays in Northern BC’s Horn River basin, and in the U.S. And while Alberta tries to figure out the new rules, it simply may be too little, too late. All the major players have gone to play elsewhere.
Fortunately, markets change and the long term demand for energy will dictate that all sources of cleaner energy – like natural gas – will be tapped. Natural gas has a great opportunity to reposition itself as the domestically abundant clean alternative to foreign oil and to high carbon coal. But this renewed demand for natural gas may take years. Too long for those that depend on the natural gas industry to make a living.
Globe & Mail: ‘Clock is ticking’ for Alberta royalty cuts
Archive: Will the Horn River Basin make Alberta the next “have not” province? Horn River News July 12, 2009