Alberta’s new royalty system is less than one year from implementation, and the oil and gas industry still has many unanswered questions. As Greg Stringham, vice-president of markets and fiscal policy at the Canadian Association of Petroleum Producers, says, it’s not just about royalties. With the new climate-change policies, costs that continue to rise, and a hot Canadian dollar, the oilpatch is in the midst of a rough ride. Stringham recently spoke with Calgary contributor Michelle Magnan about the state of oil and gas, his concerns with the new royalty system, and the threat of losing Alberta’s competitive advantage. As to whether he’s optimistic or pessimistic on working through these issues with the government, Stringham says it’s too early to tell. “The crystal ball right now is more foggy than I have ever seen it in the last decade.”
Since the panel’s report came out this past September, what has happened in the oilpatch?
Really, the deep gas stuff got hit hard, and that’s where a lot of the natural gas comes from and a lot of the royalties come from. As we go deeper and deeper into the basin now, it’s harder to get to the very deep oil and gas and the high productive areas, which is probably where the royalties increased the most and the ones where the most royalties and production were going to be coming from in Alberta. We need to find out whether that was intended or unintended. If it’s intended, Alberta becomes more a development basin. You don’t do the high-risk stuff. If it’s unintended, then let’s fine-tune those areas to try to fix it.
One of your concerns is that the royalty review panel hasn’t considered the cost of producing oil and gas in Alberta. What makes producing in Alberta so unique?
The government used Norway as a comparison, but the nature of our basin is different than those offshore basins. In Norway, they’d produce 3,000 barrels of oil per day out of a single well. That’s their average production. In Alberta, we produce between 12 and 18 barrels of oil per day out of a well. You’ve got to drill a lot more wells here to get 3,000 barrels than you do in Norway. They didn’t look at the different cost basis. They just looked at the sharing basis.
The other unique aspect is the basin is maturing on the conventional side, but we have this huge resource of unconventional resources. We’re just starting to tap into the unconventional natural gas, whether it’s coal-bed methane, which is just gas that’s trapped in coal rather than in rocks, or the tight sands, which is lots of gas that’s in a very tight formation. We have as much gas in each of those as we do in the conventional basin, but it’s higher cost, it’s deeper, and you have to do a lot more work to get it out of the ground.
The third big difference is the oilsands. No place in the world has the oilsands like we have it. It is high cost, but there’s lots of it. If we can get the costs down and break through on the technologies, this can be a very big growth industry for all of Canada.
If the new royalty plan goes ahead, won’t investment in conventional oil and gas fall by the wayside?
That’s right. You’re already seeing it in companies that are making their announcements right now. They’re saying, “We’ll adapt to this fiscal regime, and that means we’ll be going out and spending in other areas.” Probably the biggest thing we’ve seen out there is that from an international investment perspective, when you add in all of the changes over the last year — not just the royalty changes, but the income tax changes, the climate-change policies — Alberta’s huge advantage has now been relatively neutralized. We have to earn it back again.
How do you gain that advantage back?
That is going to be a real challenge. Companies have to look at what their cost profiles are. They have to look at what government and they can do together to deal with the labour issues that
are out there.
What does all this mean for investment in the industry?
Two years ago, we were at record levels for investment. We were at $53 billion invested in Canada by the oil and gas industry. In 2007, natural gas prices came down a little bit, so we dropped down to $49 billion. This year, we’re down to $46 billion as we sit right now. Realistically, the oilsands’ investment is flat from 2007 to 2008 at $16 billion, and B.C. and Saskatchewan are relatively flat, if not growing a little bit. So $49 billion to $46 billion — that $3-billion drop is all in Alberta and is almost all natural gas. If the new royalty regime is implemented as is, we see a declining trend going forward.