?The Alberta government has released a three-point stimulus plan for oil and gas producers, marking the fourth change in the province’s royalty program since September 2007.


“With each iteration, the government takes one step forward in establishing investor confidence in a competitive fiscal regime, and two steps back in establishing investor confidence in a stable and transparent royalty program,” say analysts at Tristone Capital Inc.


Nonetheless, the latest program does carry good news for producers. A drilling royalty credit of C$200 per meter will be applied to new nonoil-sands wells drilled between April 2009 and April 2010, and a maximum royalty rate of 5% will apply to conventional wells brought on production during that time.


The credit portion of the stimulus is crafted such that smaller producers receive the greatest benefit. Additionally, the government will invest C$30 million to help fund abandonment-and-reclamation liabilities.
These changes come in the face of plummeting drilling and production activity in Alberta. This ?year’s drilling activity is expected to drop 28% below that of 2008.


A drawback of the program is its requirement that producers spend money to earn the drilling royalty credit and new-well incentive. Companies with ample funds can certainly benefit, but these firms have to be convinced of the desirability of adding productive capacity in today’s oversupplied market.


The Tristone analysts estimate the stimulus plan could increase the overall 2009 Canadian well count between 3% and 5%. The increased activity will mainly occur in shale-gas drilling and fracturing, in areas that already have the most favorable economics.


While Alberta’s energy incentive program is a good step forward, access to capital remains a major stumbling block to the province’s economic recovery, according to AJM Petroleum Consultants, an evaluation firm that specializes in the economic evaluation of oil and gas reserves. The company’s comments were reported on UGcenter.com, a recently launched online repository of financial and technical information about unconventional gas exploration and development.


“The Alberta government deserves credit for its efforts to stimulate an industry that is in a critical state,” says Ralph Glass, AJM’s vice president of operations.


“However, it’s important to bear in mind that the current slump in the oil and gas industry wasn’t caused by the introduction of the new Alberta royalty framework—it is a result of the capital equity freeze and the crash in commodity prices. The government’s new drilling incentive program improves the situation for companies that have ‘money in the bank,’ but it won’t have much impact on companies that need to access capital to fund their drilling programs.”


In an economic climate where E&P companies must make drilling decisions based on low oil and gas prices, a lack of access to capital and high drilling costs, Glass believes that the Alberta government’s efforts alone will not stimulate a recovery of the industry.


“Prices and costs remain the fundamental drivers behind whether to drill or not to drill, so the royalty savings offered through the new Alberta energy incentive program are relevant only to producers who are able to drill—if wells are not being drilled or the number of wells being drilled is limited, the benefit of the royalty savings will be similarly limited.


At the end of the day, oil and gas companies are in business to make money, and if projects are not economically viable, they will not proceed with them, regardless of the attractiveness of royalty rates.”?

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