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Alberta Looks to Stimulate Unconventional Gas Development

October 12, 2009
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After years of resisting special financial treatment for unconventional drilling, the Alberta government is showing signs of preparing to grant new breaks to kick-start activity that has to date largely bypassed Canada's largest producing province.

"The vast potential of unconventional gas has caused a fundamental shift," said Barry Rodgers, executive director of economics and markets in the Alberta Department of Energy. "Shale gas has changed the world."

Rodgers was explaining, to a conference called "playmakers" for industry and financial insiders held in Calgary by Houston-based PLS Inc., the thinking behind a "competitiveness review" getting under way on Alberta's energy policy and regulatory apparatus. The inquiry's assignment, set by Premier Ed Stelmach after a hard two years of dueling with industry over royalties and depressing effects of fallen oil and, especially, gas prices, calls for designing "a more strategic, planned approach to attracting investment," Rodgers said.

In sharp contrast with the 2007 Alberta royalty review group, which angered business leaders and recommended stiff increases, the new competitiveness inquiry panel only includes senior representatives of the industry, financial community and government. No public or academic critics are involved.

The four-member competitiveness panel stars two elder statesmen of the Calgary gas industry establishment. Representing oil and gas companies is Roger Thomas, who recently retired as executive vice-president and chief of Canadian operations for Nexen Inc. His credentials include terms as chairman of the Canadian Chamber of Commerce and president of the Alberta Chamber of Resources, cradle of the developer-friendly oilsands net profit royalty regime. The financial community is represented on the competitiveness panel by Christopher Fong, who recently retired as the Royal Bank of Canada's managing director of corporate energy banking. Originally an engineer, he is also a director of Anderson Energy Ltd., the firm of Calgary gas drilling and development dean J.C. Anderson.

"The vision is that we need to get the facts on the table and a process for informed dialogue that is committed to understanding the objectives of all three [industry, finance and government]," Rodgers said. "Alberta has a big, complex industry. Solutions aren't always immediately obvious. On shale gas, for instance, it's difficult to imagine we won't need to have change -- on the regulatory front and on the economic front."

Rodgers added, "that's a political decision" and followed Canadian civil service etiquette by refusing to make explicit predictions about how Alberta's Conservative government will behave. But he added that fact-finding reports and recommendations will start going to the politicians by the end of this year, with particular emphasis on responses to unconventional gas.

In Canada the question is whether British Columbia (BC) started a trend for all the current and potential gas-producer provinces by enacting special treatment for unconventional shale sources, which is a clone of Alberta's developer-friendly regime in the oilsands (see NGI, Aug. 10). BC assistant deputy energy minister Gordon Goodman confirmed that work is under way on the first batch of royalty agreements for the province's prolific shale deposits in the northern Horn River Basin (see NGI, Oct. 5; Sept. 28).

The BC regime is a net profit royalty structure that holds provincial levies down to token levels until capital costs of production systems are paid off. After that the system continues to restrict the government take by applying higher rates only to after-expense revenues. Traditional Canadian gas royalties, notably including the Alberta system, take provincial shares off the top as levies against gross sales revenues with sliding-scale formulas that increase rates as prices and production volumes rise.

Rodgers made no promises that Alberta will match BC. But the harshest corporate critic of the Alberta royalty regime, top gas producer EnCana Corp., sees signs of change and calls them encouraging. "They're going about it the right way," said EnCana Canadian gas operations leader Mike Graham. "They want to do a better job."

Provincial policy is a critical element for industry decisions on whether to launch unconventional production by taking costly technology out to new locations, Graham said. "Without the good policy in BC we wouldn't have the Horn River or the Montney [another big shale formation development]. Alberta has to realize that."

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