Alberta officials as soon as Thursday are expected to announce revamped natural gas drilling incentives to improve the province’s appeal to producers and investors, Premier Ed Stelmach said.

According to a spokesman, Energy Minister Mel Knight is expected to extend the temporary royalty breaks on gas drilling that took effect April 1 (see Daily GPI, March 5).

“We’re not immune to what’s happened around the globe,” Stelmach said. “This is all about people keeping their careers, whether it be engineering…the rig workers, the motel operators, people that repair tires and trucks in small communities. It’s all based on how we can support further activity in the oil and gas industry.”

Under the current program, the province offers royalty credits to producers of all sizes for new wells drilled through March 31, 2010. Alberta also is levying a 5% royalty rate — its lowest rate — for the first year of production for any well that begins to produce during the period.

The well incentive program now in effect also provides a maximum 5% royalty rate for the first 12 months of production, up to a maximum of 50,000 bbl of oil and 500 MMcf of natural gas. For example, as long as production caps were not reached, a well producing on April 5, 2009 would be eligible through April 5, 2010; a well producing on March 25, 2010 would be eligible through March 25, 2011. The two programs together were expected to amount to around C$1.5 billion in royalty savings for producers in the next year. In addition to the drilling incentives, the province planned to invest C$30 million to begin an orphan well fund for the clean-up of inactive oil and gas wells.

Stelmach’s latest pledges to producers included an acknowledgement that there is no higher-stakes game for the provincial treasury because gas royalties are the provincial government’s largest single revenue source. Stelmach, echoing Canadian industry leaders and analysts, said the province’s current gas prices and revenue troubles are not going away because the cause is not financial and energy market cycles, but rather new technology being used to increase gas supplies in the United States and other Canadian provinces.

Describing the gas market as “very depressed” across North America, the premier predicted “there are dark clouds ahead if we don’t respond.” A provincial energy strategy released nearly a year ago raised the possibility of royalty breaks for unconventional production — especially shale gas and coalbed methane — and the premier’s statements Wednesday appeared to signal that the government believes the time to make a move has arrived.

The Alberta treasury has been feeling the pain from increasingly glutted gas markets and the resulting erosion of prices for more than three years. The total royalty take — normally 20-30% of gross wellhead revenues, calculated with a complex formula driven by prices and well production volumes — has dropped by more than half.

After peaking at C$8.4 billion (US$7.3 billion) in 2005-2006, annual Alberta gas royalties for fiscal years ending every March 31 tumbled to C$6 billion (US$5.2 billion) for 2008-09. In the current 2009-10 budget year the government officially estimates that gas royalties will be C$3.9 billion (US$3.4 billion). But that guess was made early this year, when provincial forecasters still felt confident that the 2009 average price would be C$5.50/gigajoule (US$5/MMBtu).

On top of slipping prices, Alberta is plagued by natural production declines in conventional fields that have amplified the effects of soft prices. In a recent annual state-of-the-industry report, the province’s Energy Resources Conservation Board (ERCB) predicted that output would fall by 6% this year and then erode by an annual average 4% through 2018. The ERCB predicts that fledgling coalbed methane production, and eventually shale gas development, will partially compensate for the decline but makes no guesses by how much. Coalbed gas remains in its infancy in Alberta and there is no known commercial shale production yet.

Industry sources say producers are pressing for an Alberta counterpart to the attractive shale gas regime enacted by British Columbia (BC) earlier this year, which set off fevered mineral rights acquisitions and drilling plans in the Horn River Basin (see Daily GPI, March 4). The BC system is a “net-profit royalty” that mimics an approach Alberta adopted for the oilsands in the 1990s to kick-start a 10-year bitumen boom.

BC’s policy discards customary practices of taking royalties immediately as a percentage share of gross sales revenues from wells or projects. Instead, rates are restricted to token amounts until supply development costs are recovered, then for the lifetime of projects the government share is limited to a percentage of net revenues after production costs.

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