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Alberta Gas Revenues Pay Public Service Bills, Outweigh NIMBY Concerns

As long cases testing the limits of access to suburban Alberta drilling targets ground through the regulatory process this winter, even the industry's environmental critics showed respect for the central role natural gas plays in livelihoods and public services across Canada's chief producing province.

"It's always a dilemma," said Mary Griffiths, a policy analyst with the Pembina Institute for Appropriate Development and lead author of a widely used manual of citizen's rights before Alberta regulatory agencies (When the Oilpatch Comes to Your Backyard, A Citizen's Guide). "The public at large benefits from the employment and royalties we have gained from the oil and gas under the ground," Griffiths said.

The result is that apart from immediate neighbors of projects and a handful of extremists, opposition to drilling and production development still tends to focus on putting safety and environmental conditions on gas activity rather than halting it outright. Producers still believe they have good enough chances to beat forces nicknamed NIMBY and BANANA (short for "not in my back yard", and "build absolutely nothing anywhere near anything") to advance drilling projects on the fringes of Alberta's principal cities, Calgary and Edmonton.

Even in rare cases where the Alberta Energy and Utilities Board flatly rejects a contested drilling proposal rather than attach a long list of conditions, the industry is often able to retrieve its exploration targets by relocating its rigs outside the most sensitive areas. The biggest discovery in a generation - a whopper estimated at up to 800 Bcf of "sour" gas laced with lethal hydrogen-sulphide - was made in central Alberta by Shell Canada after a previous exploration drilling location closer to a town in the region was rejected.

The annual winter crop of financial statements made it easy to see why Alberta drilling activity continues to march from one record to the next, with about 20,000 wells forecast this year, despite increasing conflict between growing communities and the industry. The provincial government turned in by far the most spectacular results from strong gas markets and prices, underlining the Canadian role of resources as an engine of public as well as private growth.

For the government fiscal year ending March 31, the provincial treasury's third-quarter 2004-05 statement projected non-renewable resource revenues of C$9.6 billion (US$7.7 billion). That works out to one third of total provincial revenues of C$28.8 billion (US$23 billion) or C$3,000 (US$2,400) for every one of the 3.2 million men, women and children who live in Alberta. Personal income taxes in Alberta of C$4.6 billion (US$3.7 billion) for 2004-05 are C$1,480 (US$1,180) per capita. Gas royalties of C$6.5 billion (US$5.2 billion) account for 68% of the resource revenue total.

The proportion would be even higher if the provincial accounts identified drilling targets that drive industry purchases of resource leases. About 80% of mineral rights in Alberta belong to the provincial government, which sells them at twice-monthly auctions and declares the proceeds as part of non-renewable resource revenues. Sales for 2002-05 are projected to be C$1.2 billion (US$960 million). About three-quarters of drilling activity is aimed at gas, and no doubt accounts for a majority of the lease sales revenue. (Alberta also remains by far Canada's top oil producer.

But the royalty take on oil has receded as conventional wells deplete and the industry replaces them with costlier oilsands operations, which are charged only nominal rates as plant development incentives. Gas royalties can approach 25% off the top of market revenues under a formula reflecting well vintages and market prices. The oilsands incentive rate is 1% until development costs are repaid then rises only to 25% of the net value of non-upgraded bitumen priced at a discount to the final product of refinery-ready light synthetic crude.) All concerned credit the surge in natural gas prices and sales -- led by exports to the United States, which account for more than half of production -- since the late 1990s with making Alberta debt-free.

The last loans outstanding are being paid off as they fall due, eliminating a provincial debt that peaked at about C$19 billion (US$15 billion) in lean years of the early 1990s. On top of establishing a final schedule for paying off the debt, the 2005-'06 provincial budget will earmark about C$4.5 billion (US$3.6 billion) for education initiatives while continuing to support a cradle-to-grave medicare system and an array of "infrastructure" improvements such as urban and northern road-building. Although Alberta's conventional gas production is widely believed to have peaked at current capacity of about 12.5 Bcf/d, aggressive drilling has postponed a widely forecast decline, and unconventional sources are increasingly being tapped.

The strength of the Alberta gas sector registers on business barometers of producer performance such as Calfrac Well Services Ltd., a specialist in completing wells with "fracturing" injections of materials into geological formations to stimulate gas flows. "Highly leveraged" towards gas, the field service contractor posted increases of 54% in revenue and 132% in net income for 2004 and forecast an equally strong '05. Not the least of the drivers will be coalbed methane, a new but rapidly developing addition to conventional gas supplies in Canada, Calfrac said.

While still too new for reliable forecasts by the producer and regulatory establishments, coalbed methane is showing up as a hot growth field among the contractors that do the often confidential wells and production installations. Canadian gas producers drilled 1,500 coalbed methane wells in 2004 by the count of Calfrac, which completed 617 of them as a leader in the field. The company is expanding its fleet of truck-mounted fracturing equipment. Forecasts by the Petroleum Services Association of Canada predict coalbed methane drilling will double to 3,000 wells this year and likely keep on growing as the industry sharpens its geological and technical know-how.

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