The B.C. government is staying the course on oil and gas royalties while the Alberta government revises its controversial new scheme.

Alberta-based energy producers and service companies are happy to hear the B.C. government will not raise its oil and gas royalty rates. But some industry analysts have also dismissed the Alberta government's recent decision to revise its rules further after receiving heavy criticism.

Premier Ed Stelmach's government recently announced that producers will have the option of a transitional royalty program for new wells drilled at depths of 1,000-3,500 metres between Jan. 1, 2009 and Dec. 31, 2013.

The Alberta government says the new scheme, which allows producers to postpone royalty payments during more costly startup phases, will save producers $1.8 billion over five years.

File photo by Larry MacDougal, Business Edge
PSAC president Roger Soucy says Alberta's policies have contributed to a downturn in drilling activity and increased energy interest in B.C.

But existing Alberta wells are still subject to increases designed to provide the province with an additional 20 per cent, or $1.4 billion, per year.

David Pryce, vice-president of Western Canada for the Calgary-based Canadian Association of Petroleum Producers (CAPP), says members welcome the B.C. decision to hold the line in wake of higher Alberta royalties.

"What's important for the industry is looking for the most competitive jurisdiction in which to invest our money," says Pryce.

B.C. Energy Minister Richard Neufeld says his government has no plans to alter its royalty framework as new investment pours in from Alberta.

"There's nothing on the horizon that says we're going to change anything," Neufeld told reporters after speaking at a Canadian Energy Pipeline Association conference in Calgary.

B.C.'s current royalty structure gives unconventional natural gas producers an advantage by charging them lower rates in the initial stages of development, and takes in higher rates once companies recoup their investment.

Under Alberta's new plan, the province will begin collecting about $1.4 billion more in royalties from the oil and gas sector starting Jan. 1, 2009.

"B.C. will remain stronger this winter than Alberta may be," says CAPP's Pryce. "That's because the industry has put some large sums of money in the land sales in the past year."

Land sales refer to B.C. government auctions at which producers acquire mineral rights from the province. They do not actually buy the land.

This year, producers have spent more than $2 billion at B.C. land sales, compared to $1 billion all of last year. Saskatchewan has also reaped higher land-sale revenues, thanks to its popular Bakken play.

"I wouldn't characterize (producers' interest in B.C.) as a backlash (to Alberta's higher royalties)," says Pryce. "The industry is simply looking for the best opportunities. The other jurisdictions are simply more competitive than Alberta at the moment."

But Roger Soucy, president and CEO of the Calgary-based Petroleum Services Association of Canada, says Alberta's royalties have contributed to a downturn in activity in the province.

He adds that Neufeld's comments, previously expressed to the industry, come as no surprise.

"There's a very good reason why (B.C) is not raising them," says Soucy.

"If you look at the statistics, B.C. and Saskatchewan are way up and Alberta's down."

PSAC's recent winter drilling forecast anticipates that activity across Canada will decline four percent, or by about 650 wells, in 2008-09.

Alberta accounts for the bulk of the decline while B.C. and Saskatchewan are expected to see increases of 29 and nine percent, respectively.

Soucy says Alberta's well count will fall by 1,350 wells this year, largely because of the new royalty scheme.

The province's well count has dropped 46 percent to a projected 10,400 in 2009 from 19,250 in 2005. Saskatchewan, on the other hand, has enjoyed a 26-percent increase to 4,725 from 3,757 during the same period.

Since 2005, PSAC statistics show, drilling activity across Canada has declined 30 percent. Usually, Alberta has the most wells per year.

"Alberta doesn't have similar kinds of new plays that are attracting the attention of the producers," says Soucy.

"However, having said that, part of the drop in activity in Alberta is due to the royalty changes that the government is bringing in."

During his recent winter forecast presentation, Soucy contended the current world financial situation has changed the dynamics under which the royalty system was conceived, and created a situation that needs maximum flexibility and economic creativity.

Jock Finlayson, vice-president of policy for the Business Council of British Columbia (BCBC), says Neufeld made a smart move by not raising royalties because the B.C. government's energy policy and fiscal framework have attracted major investment in the upstream industry in recent years.

"We've seen quite a bit of growth, a big commitment of capital, a fair amount of new activity and, of course, the government itself has reaped a lot of the benefits of that through the royalties into the Crown," he says.

"The second reason it's smart is, what Alberta did in their royalty review ended up creating a less-attractive environment, particularly on the natural gas side.

Northeastern B.C., once too costly and difficult to access, is believed to hold several trillions of cubic feet of natural gas in its shale formations.

Pryce says the Horn River and Montney plays, which spurred the higher land sales, and favourable sites in Saskatchewan have turned producers' attention outside Alberta.

Some analysts have likened Horn River's activity to the oilsands boom.

"We know that in British Columbia, it's a bit more costly to access some of the areas because they're pretty remote," Neufeld said.

"And so we need to look at different structures to actually encourage the investment in the area."

Smaller unconventional producers have said Alberta's new measures would be particularly harsh on their developments.

Canadian Natural Resources Ltd. vice-chair Murray Edwards also said recently that Alberta's "punitive" new royalty regime will make many developments uneconomic.

Meanwhile, B.C. Energy Minister Neufeld repeated his pledge for more co-operation with Alberta on regulatory matters.

CAPP's Pryce and PSAC's Soucy say progress is being made on that front, but there is room for more.

Pryce says CAPP would like to see more harmonization on production reporting and measuring.

Producers also want more provincial and federal co-operation on reporting related to climate-change legislation.

Soucy says the Trade Investment and Labour Mobility Agreement (TILMA) between Alberta and B.C. is starting to pay off as more employee credentials are recognized in both provinces.

But less progress has been made on environmental issues.

BCBC's Finlayson says it makes sense to streamline and harmonize the regulatory frameworks in B.C. and Alberta, considering that producers on each side of the border toil in the Western Canadian Sedimentary Basin and the same companies operate in both provinces.

He says rules could be harmonized "expeditiously" if there is enough political will.

"It's not as if the standards (in B.C. and Alberta) are drastically different," he says.

"It's an excellent idea to simplify the rules without lowering the standards."

- with files from The Canadian Press (Monte Stewart can be reached at monte@businessedge.ca)