The uncertainty surrounding Alberta’s policy on oil and gas royalties has already caused several companies to shift capital into other provinces, and this should come as no surprise.
Premier Rachel Notley and her newly-elected NDP government promise to move quickly on their royalty review, and outline how the process will work by the end of the summer.
The economic environment and energy markets are much different today, but if Alberta’s 2007 royalty review is any guide, some big shifts may be coming.
TD Securities analyst Juan Jarrah noted that the previous review had the unintended consequence of sabotaging producer spending in the province.
“Ultimately, we saw B.C. and Saskatchewan earn their fair share of producer spending and it took the Alberta government a number of revisions and incentive programs to ultimately undo the negative impact of the royalty review in 2007,” he told clients.
For example, Alberta accounted for 81 per cent of revenue for crown land sales in the Western Canadian Sedimentary Basin in 2006, but that number dipped to 24 per cent by 2008. Meanwhile, land sale revenue in B.C. surged to 53 per cent from 15 per cent, and Saskatchewan’s jumped to 22 per cent from four per cent.
“In our view, land sale activity is representative of producer intentions in the future, and in this case we expect to see BC and Saskatchewan increase their share of crown land sale proceeds in 2015–2016 at the expense of Alberta,” Jarrah said.
Drilling saw a similar trend, with Alberta accounting for 71 per cent of activity (based on total metres) in 2007, but that figure fell to 58 per cent by 2009. Both B.C. and Saskatchewan saw gains during that period. A similar trend is expected for 2016-2017, as capex programs are typically set a year in advance.
This has Jarrah calling for M&A as a potential theme this year and next, since Alberta-focused energy companies with limited opportunities outside the province seek future production and resource growth.
In B.C., the analyst noted that Leucrotta Exploration Inc., Painted Pony Petroleum Ltd., Crew Energy Inc., Yoho Resources Inc., and Chinook Energy Inc. could be attractive targets. In Saskatchewan, he highlighted Northern Blizzard Resources Inc., Raging River Exploration Inc., Rock Energy Inc., Spartan Energy Corp., and Torc Oil & Gas Ltd.
© The Financial Post
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