With Canada's natural gas production in perpetual decline (see Daily GPI, June 1), the Canadian Association of Petroleum Producers (CAPP) joined the Small Explorers and Producers Association (SEPAC) to make their case that Alberta's current oil and gas royalty regime, which is now under review, needs to remain robust to accommodate the maturing and shifting nature of the province's resources.

The Alberta government in February assembled a six-member independent panel to examine the province's royalty and tax regime to ensure the province received a "fair" share from energy development through royalties, taxes and fees. The review is focusing on all aspects of the royalty system, including conventional oil and gas, coalbed methane (CBM) and oilsands. A final report with recommendations will be given to the Minister of Finance by Aug. 31.

To date, Alberta has collected a total of about C$14.3 billion (US$13.47 billion) from the oil and gas industry.

CAPP President Pierre Alvarez told the Alberta Royalty Review Panel that even though there are higher commodity prices than five years ago, "we also are experiencing much higher costs...driven not just by the absolute cost increases for materials globally and regional labor, but also by the diminishing discovery size and lower productivity of the wells. In the conventional basin, we are running harder and spending more just to keep production from declining more quickly."

Alvarez said the world average discovery size for oil is 340 times larger than the Alberta average. World average natural gas discoveries are 280 times larger than in Alberta, he said.

"Another key factor is how much production comes from a single well," Alvarez said. "In Alberta, the average oil well produces 17 b/d, in Alaska it's 600 b/d and in Norway, an average well produces 6,000 b/d. This is an important difference in comparing royalty regimes."

Alvarez added, "for natural gas in Alberta, the future is moving into unconventional natural gas...CBM, deep basin tight gas and shale gas. Alberta's royalty regime needs to reflect these coming changes."

In a 48-page report, "Alberta's Oil and Gas: Benefits to Alberta and Canada, Today and Tomorrow," CAPP and SEPAC said enhanced recovery technology is being used to extend the life of maturing conventional oil and gas fields.

"As these resources mature, investment and interest is moving to less conventional resources such as deep gas, CBM, and tight sands and shale gas," stated the report. "These vast unconventional sources are more challenging and costly to produce and require innovative approaches for development."

However, the benefits to the province are more than royalties, lease sales and taxes, stressed the authors.

"There are new jobs in technical, trades and professional fields, and new business opportunities to provide goods and services from pipelines and equipment to research, trucking, restaurants, environmental and accounting services. All of these contribute to Alberta's economic growth. The challenge for the province of Alberta, as the owner of the resource, is to ensure that this growth continues into the future and that the full scope of benefits continues to be shared fairly."

Alberta's current conventional royalty structure automatically adjusts for price and productivity, but it does not adjust for escalating costs, the report noted. The existing fiscal regime, which combines upfront lease bonuses, production royalties and corporate income taxes, "has produced growth, jobs and continuing benefits for the province."

CAPP represents 150 companies, which produce more than 95% of Canada's natural gas and crude oil. SEPAC's 450 producers operate almost 20% of the conventional oil and gas wells drilled each year in Western Canada.

A copy of the report by CAPP and SEPAC is available at www.capp.ca. To read about Alberta's current royalty regime and the review, visit www.albertaroyaltyreview.ca.

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