British Columbia borrows from Alberta’s royalty framework for energy development
On the left coast, the gas industry is greeted by a co-operative regime and light royalties adapted from B.C.’s neighbor
It pays for a government to behave like a partner instead of a master, says Blair Lekstrom, Liberal member of the British Columbia legislature for the Dawson Creek area and the province’s energy and mines minister. He estimates that for every dollar given up now by deferring royalties to encourage northern natural gas development, in the long run the treasury will gain $2.50 from increased production.
He means business. Shortly after describing the provincial attitude to Alberta Oil, Lekstrom acted on it. With a vow to keep B.C. competitive, the province made royalty cuts that parallel Alberta efforts to put a floor under a slump that cut drilling by as much as 60 per cent across Western Canada this year.
B.C. cut royalties to two per cent for the first year of production by wells drilled between September 2009 and June 2010. Permanent adjustments were also made. The depth requirement for B.C. horizontal wells to qualify for deep drilling royalty savings was reduced to 1,900 meters (6,200 feet) from 2,300 meters (7,500 feet). Expense deductions for deep drilling were increased by 15 per cent. Plans were announced to simplify B.C. regulation, including rules to enable “commingling” gas output from different geological zones and to let companies begin production from new wells without losing legal and financial advantages of holding mineral rights as exploration properties.
Industry officials applauded the changes, including the timing of the announcement to match corporate schedules. B.C. drilling budgets are set in late summer and early fall because the action mostly happens in the cold seasons, when heavy equipment can be moved and used on northern muskeg marshes.
No forecasts of the program’s value were released. As in Alberta, such projections are complicated and unreliable because royalty rates and revenues vary depending on prices, production volumes and types of drilling.
Financial analysts predicted Lekstrom’s program will keep B.C. in contention for industry spending. The break-even gas price for a typical new B.C. well dropped by about 11 per cent to $5.25 per thousand cubic feet from $5.92, Peters & Co. estimated. The same well in northern Alberta, under drilling incentives announced in the spring and summer, breaks even at an almost identical $5.48 gas price.
In both provinces, the break-even points remained higher than severely depressed prices. No guesses were made about the results of the aid programs. Those depend on expectations of the market’s future, whether drilling targets are big enough to stay in production until prices revive, and whether exploration and production companies are financially capable of paying for new wells now in anticipation of economic recovery later.
The new incentives “offer a little something for virtually all producers that plan to be active in British Columbia,” FirstEnergy Capital Corp. observed. As in Alberta, “those able to enjoy maximum exposure to this plan are producers with the financial flexibility to accelerate drilling activity over the tenure of this offering.”
Sobering experiences make Lekstrom hesitant to make predictions. He is a Saskatchewan-born veteran of 47 years in B.C.’s notoriously boom-bust Peace River region. He rode its forest products, mining and energy cycles as a phone company installer-repairman for nearly two decades until he switched into politics full time after stepping up from Dawson Creek town councilor into the mayor’s chair in 1996. “I don’t want to project where we’ll be,” he says when asked to look ahead 10 years.
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