Surrounding Areas
Area gas producers want more changes to royalty regime
kgousseau@medicinehatnews.com
With natural gas prices expected to remain low into the future, industry insiders say the Stelmach government must further tweak its fiscal and royalty regime to keep southeast Alberta and other parts of the province competitive.
Natural gas prices are being depressed by the glut of shale gas from northeast B.C. and the U.S. that has been flooding the market.
“There’s such an oversupply (of natural gas) right now,” says Tracy Heebner, business development officer for the Economic Development Alliance of Southeast Alberta. “While we’ll eventually see natural gas prices return to the $6 to $7 (per thousand cubic feet) range, I don’t think it’s going to happen in a year’s time.
“It’s going to be a slow, gradual progression...and it’s because of that mass supply.”
The Small Explorers and Producers Association of Canada predicts natural gas prices will remain below US$7 per thousand cubic feet for the foreseeable future.
“That’s maybe the new world we live in,” says association executive director Gary Leach. “Alberta’s conventional gas production is continuing to decline at a fairly brisk pace and we haven’t hit the bottom on that yet.”
Leach says Premier Ed Stelmach’s Progressive Conservative government must continue to make adjustments to Alberta’s fiscal and royalty framework to keep the industry running.
“For southeast Alberta, like nowhere else in the province, there’s a real need for a fiscal and royalty system that working together keeps that resource development viable,” Leach says.
“The Alberta government is far better off providing the necessary incentives through the royalty system to keep these wells in production, keep people drilling (and) keep the service sector working.”
The association is also continuing to press Ottawa for an economic stimulus package aimed at boosting drilling activity in Western Canada.
Currently, companies can deduct 100 per cent of the federal taxes they incur from drilling over a three-year period after the wells have been punched.
However, the precipitous drop in drilling activity this year, led by low natural gas prices, has prompted the association to ask Ottawa to refund taxes on drilling after only 12 months.
Leach says the measure would encourage energy companies to boost drilling activity, creating jobs in Medicine Hat and across Western Canada.
“It’s comparable to tax relief that was provided to manufacturers in Canada,” Leach says.
He says the initiative has been gaining support among Alberta Conservative MPs
“We’ll have to wait and see in the federal budget,” Leach says. “If we don’t get it, we’re not going to give up on it because we think it’s a great idea.”
Photo Courtesy of the City of Brooks
84 — REPORT ON SOUTHEAST ALBERTA 2010 ■ Celebrating our Community
SE Alberta drilling activity less dire than predicted
kgousseau@medicinehatnews.com
The downturn in oil and natural gas drilling activity in southeast Alberta isn’t as severe as earlier predicted, according to industry associations.
The Petroleum Services Association of Canada recently revised its 2010 drilling forecast and is now predicting an additional 1,000 oil and gas wells will be drilled this year in Western Canada.
Half of those additional wells will be drilled in the Medicine Hat area, the association says, and the other half will be drilled elsewhere in Alberta.
The 500-well increase for the Medicine Hat area brings the total number of wells forecasted to be drilled in the region this year to 1,800.
Of those wells, 1,550 will be natural gas wells, while 180 are oil-producing wells. Seventeen service wells and 15 dry wells are included in the forecast.
While 1,800 wells is an improvement over the association’s initial drilling forecast in 2009, that number pales in comparison to the 6,500 wells that were drilled in the area in 2008.
“Even with the incentive programs that the province has brought in, it’s still tough slugging,” says association president Roger Soucy.
Companies drilling for shallow gas, the primary resource in southeast Alberta, need natural gas prices of about US$7 per thousand cubic feet to turn a profit. Currently, gas prices are hovering between $4 and $5 per thousand cubic feet.
“The economics for those wells with $4 to $5 gas is a real challenge,” Soucy says.
However, shale gas plays in the U.S. have been profitable at prices as low as $5 per thousand cubic feet. Commodity prices are expected to remain low as the Americans continue to flood the market with shale gas.
In spite of those challenges, the Canadian Association of Oilwell Drilling Contractors (CAODC) reports that rig utilization has increased 25 per cent in Alberta compared to 2009.
In February 2010, rig utilization in southeast Alberta was at 81 per cent. While that number may seem high, it should be noted that the rig fleet in southeast Alberta was about half the size of those in other regions of the province.
The CAODC is forecasting an average rig utilization rate of 27 per cent in Western Canada, only a two per cent increase from a year earlier.
That number may be conservative, says CAODC president Don Herring. On the other hand, he adds, it could be prophetic.
“There (is) some suggestion that the fleet continues to work almost on a hole-to-hole basis,” he says. “We could be into break-up fairly quickly, as we were last year.”
The CAODC estimates about 8,500 wells will be drilled in Western Canada in 2010.
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