Three Reasons why Damage to Alberta’s Oil Industry May be Irreversible

The Alberta government’s stimulus package is expected to bring a 3.5 per cent increase to oil production this year. But damage brought on by low prices per barrel, inconsistent government policy and the emerging PR nightmare surrounding environmental pressure may cripple investment in Alberta’s oil sands for a very long time.

In 2007, Dark horse candidate of the Alberta Tory party Ed Stelmach made a bold and unprecedented move to increase oil sands royalties owed to the Alberta government, a move that cooled the well-known love affair between the petroleum producers of Alberta and the provincial government. At first, the move was heralded as a success by many observers.

But amid the dramatic drop in oil prices and the ailing Alberta economy in 2009, the tone has changed. Rig counts are down, the economy is in a slump and many of the petroleum producers of Alberta are pointing their fingers directly at the royalty adjustments of 2007, with the Chairman of Calgary Economic Development going so far as to call it “the most disastrous economic decision the province has ever made”. Clearly feeling the pressure, the Stelmach government has imposed a new framework on the Alberta royalty regime in an effort to stimulate investment and get the rigs pumping again.

The change, expected to last at least a year, effectively offers a 5 per cent decrease in royalty payments, bringing it from 20 per cent to 15 potentially. However, since this is based on the amount of production, this package could allow small size and mid-cap producers an up-to 50 per cent decrease in royalty obligations while larger companies stand to benefit from a 10 per cent decrease.

But will this work? As Alberta Energy Minister Mel Knight observed, this will have no benefit at all if companies do not drill, so the obvious question is whether this ‘temporary adjustment’ will result in an increase in rig counts and a revival of investment. This is where the bad news starts.

• Inconsistent policy has lost Alberta the trust of petroleum producers
This is the fourth adjustment to the royalty regime since Stelmach took office. While the Canadian Association of Petroleum Producers, the industry’s main lobby group, is providing token applause to the move, many observers feel that the industry’s dissatisfaction with the Alberta government simply runs too deep, like finding your spouse of 30 years in bed with another man. Making matters worse, Minister Knight stated clearly that this is merely a short term fix, which, as leading oil patch consultant Richard Harris observed, does little to comfort an industry reliant on long term planning and consistent government policy.

• Little sign of increased investment in the future
Big players in the industry such as Encana, Canadian Natural Resources, Husky and Talisman have already transferred billions of dollars in investment from Alberta into to more oil-friendly regions such as, ironically, Saskatchewan and British Columbia. Projected spending in the oil sands is still anticipated to decrease over the next year.

• No room for the little guy
As mentioned earlier, the drilling credit is designed to give special aid to smaller and mid-sized companies. Unfortunately, most of them are too strained financially to undertake new projects.

Though price-per-barrel naturally will increase, for the near term Alberta may have to settle in for a prolonged slowdown.

Written by: Stephen Magusiak
magusiak at gmail.com

One comment

  1. To add to the problems, the Heritage fund which should be the beneficiary of high oil prices was only protected from inflation. now that’s POOR leadership. Look at Alaska and what they did with their legacy fund, it’s huge and will eventually pay for personal income tax (or one of those taxes). Not in Alberta, the name of the game is spend in the short term. TERRIBLE leaders. We need an opposition to stop this uncontrollable consumption.

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