staff layoffs - end of the drilling boom for conventional oil and gas
October 26, 2007 News Synopsis
Industry Very Disappointed With New Royalty Regime
By Lynda Harrison
In addition to its severe cash flow impact and dampening effect on future investments, the new Alberta royalty regime announced Thursday has introduced a level of distrust between industry and government, will likely bring staff layoffs and marks the end of the drilling boom for conventional oil and gas, say two key industry associations.
Asked to comment on yesterday's announcement regarding the Alberta government's changes to its royalty regime Pierre Alvarez, Canadian Association of Petroleum Producers (CAPP) president said it's bad news for all concerned.
"I don't think there's anybody in this business who isn't going to be touched by this decision, whether it's a small E&P company, a large oilsands producer or an international investor," said Alvarez. "Everybody is going to be affected. I don't think there's anybody in the industry who's happy today... there's nobody in this town who's a winner."
Producers are disappointed that despite overwhelming evidence the government simply has not grasped the implications of the industry cost pressures, the effect of the rising value of the Canadian dollar and the increasingly difficulty geology in the province, said Alvarez.
The government has brought in tremendously onerous changes on the oilsands side despite the fact the national oilsands task force is only 10 years old, he said.
CAPP members are concerned that important details have not been released on the deep and horizontal drilling program and about "what the government has up its sleeve" for the future if talks between (it and) Syncrude Canada Ltd. and Suncor Energy Inc. don't proceed to conclusion and, ultimately, the long-term relationship between the province and the industry. There will be no grandfathering of existing oilsands plants and the provincial government wants Syncrude and Suncor to accept the new royalty regime although their current agreements don't expire until 2016.
"We've had a working relationship that has been founded on mutual respect and mutual understanding and I think a lot of people around town feel that the government has walked away from that," said Alvarez.
An element of uncertainty about doing business in Alberta has now been introduced into the equation not just in Calgary but around the world and that's something that endures well beyond an election and has ramifications that stretch over many years, he said.
Alvarez called the government's one to nine per cent royalty pre-payout on oilsands and 40% post-payout payment -- on huge projects that take years to build and require billions of dollars to develop -- with only 14 months' notice, "a very, very dramatic and negative step."
The government has completely lost sight of the fact these are the most difficult to develop and expensive oil reserves in the world, he said. "They've assumed that because we've seen significant production growth over the last number of years that oilsands production has become easy and I think if you talk to anybody in that business they would tell you that this is a tough, tough business," he said.
Nor has the province considered the costs involved to produce conventional oil, he added.
According to Alvarez, the only positive is that companies have a year to prepare before the changes kick in.
The government has thrown out its changes to the royalty system with so few details that companies' business and budget-making decisions are going to be very, very difficult, he said.
There are going to be a lot of pink slips handed out today and next week, predicted Roger Soucy, president of the Petroleum Services Alliance of Canada (PSAC) which represents service and supply companies.
Soucy had been preparing an already dire outlook for next year that's now going to be even grimmer. He estimated service companies have laid off 15% of their workforce in the first six months of 2007 and that trend has continued into the second half.
The changes Premier Ed Stelmach's Progressive Conservative government will make to the royalty system are going to exacerbate an already bad situation for the conventional industry, particularly on the natural gas side, said Soucy.
He worries about the government's philosophy. It's going to drive away entrepreneurs and leave people who have mortgaged their homes to invest in small industry-related businesses high and dry, he said.
The one-year phase-in actually works against much of the conventional industry decline in the coming year, said Soucy. Because royalties will be reduced on lower-end producing wells starting in 2009, unless producers are desperate for cash flow, wells that were marginal anyway now won't get drilled until then, when royalties will be lower.
With the royalty changes, government will take an additional estimated $1.4 billion per year of cash flow from producers - and 85% of that will no longer be re-invested, he said.
Soucy said effects of yesterday's announcement will be seen immediately in small-town hotels and restaurants and eventually work their way to Alberta's cities.
"The bloom is gone from the industry, certainly on the conventional side," said Soucy. "I would suspect that the days of 25,000 wells in Western Canada are done, that we're going to go into a slow decline and even with the reversal of gas prices that would never, ever bring us back to where we were in 2005."
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Originally Posted by DonJuan
