The Alberta government Thursday granted a one-year extension of two temporary natural gas drilling incentive programs but postponed decisions on introducing any permanent regime changes.

Provincial Energy Minister Mel Knight said the expiry date on a royalty credit for drilling and a new well incentive will be set back by 12 months to March of 2011. The schemes give producers credits against royalties of C$200 (US$174) for each meter of new drilling, and set a ceiling of 5% on royalties for new production.

The schemes were forecast to cost the province C$1.5 billion (US$1.3 billion) in foregone royalties and fuel a drilling revival when they were first announced last winter. But dropping gas prices since then have undermined all such projections by sharply cutting both field activity and the value of royalties. Rates automatically drop as prices fall. Industry officials say market conditions are the biggest factor affecting drilling in Alberta, where activity fell into a deep slump despite the incentives.

The announcement was timed to give gas producers a chance to incorporate the incentives into budgets for the 2009-10 drilling season and possibly increase numbers of wells planned. In Canada, field activity peaks during the coldest months because the industry relies on taking advantage of frozen ground for moving and operating heavy equipment.

“This extension responds to market challenges facing oil and gas exploration in Alberta,” Knight said.

The principal challenge identified by producers and the government alike is low prices on a glutted market across Canada and the United States. Industry sources in Calgary predict that the incentive program extensions are bound to encourage drilling but will not fully counter fundamental supply and demand conditions.

Most benefits are expected to be scooped up by gas producers that have exceptionally attractive targets in their drilling rights lease portfolios. In those cases the royalty incentive schemes top up the economics of projects that stay attractive even in spells of low prices. Anderson Energy, for instance, predicts all its drilling costs will be covered and initial production royalties will be substantially reduced as it embarks on a joint venture with ConocoPhillips Canada to tap a rich central Alberta shallow gas deposit known as the Edmonton sands with up to 1,000 wells.

Alberta Premier Ed Stelmach, in a two-day flurry of political spin prior to Knight’s announcement (see Daily GPI, June 25), said the province recognizes the main underlying cause of the soft market is surging unconventional supplies led by shale gas in the U.S. But unlike British Columbia, where a northern branch of shale production is developing, Alberta has no special royalty regime tailored to the new technology.

Knight set a target of this fall to complete Alberta’s promised “review of overall competitiveness” including regulation, taxation, costs and labor as well as the provincial royalty regime.

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