Fallout from the royalty review’s “unintended consequences”
The real "Alberta Advantage" was natural gas and now its slipping away
Contrary to a popular misconception, the conventional industry in Alberta is now natural gas, not oil. A perfect storm of negative factors may be buffeting this mainstay industry with high labour and material costs, a strong dollar and low gas prices. However – as Paul Ziff, CEO of Ziff Energy Group, points out – the most significant cause for dramatically declining natural gas drilling activity is “Made in Alberta” and warns against the adoption of the new royalty review regime while gas prices are low.
Nineteen ninety-seven was the last year in which more oil wells than gas wells were drilled in Alberta. Since 1998 gas drilling has surpassed oil drilling activity, with gas wells outnumbering oil wells by two to one in 2007. For the past 10 years, drilling for natural gas – and not oil – has driven Alberta’s massive service industry, as is evident from drilling statistics (Figure 1).
The cost of finding new gas reserves has escalated dramatically over the past several years. As a result, since 2006 the price of natural gas is no longer high enough for new gas exploration for many drillers. The Western Canada gas price versus full cycle gas cost highlights the predicament faced by gas drillers today (Figure 2).
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