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Drilling contractors cautiously optimistic over Alberta royalty review

Drilling contractors cautiously optimistic over Alberta royalty review

The Canadian Association of Oilwell Drilling Contractors (CAODC) is cautiously optimistic given the release of the Alberta Royalty Review and Advisory Panel Report, but concerned about the impact on the service sector.

The report provides industry with the certainty it needs to move forward. “In today’s economic environment, industry is looking for certainty from the Alberta Government in a time of unprecedented market volatility. The fact that industry has an understanding of what to expect relative to royalties is important,” says Mark Scholz, President of CAODC.

“Today’s report does not make significant changes to the overall royalty take by the province, however it falls short of our recommendation to reduce rates in order to incent drilling activity and offset higher provincial taxes,” Scholz notes. “Furthermore, the recommendations do not address Alberta’s competitiveness gap with other Canadian oil and gas jurisdictions such as Saskatchewan and British Columbia.”

CAODC is concerned about the Alberta Government’s objective to incentivize oil and gas producers to reduce costs through the Drilling and Completion Cost Allowance. “It’s ironic that the Alberta Government wants to encourage cost leadership by the industry when it has effectively increased industry’s costs through increased corporate taxes, carbon levies and minimum wage. The Alberta Government should show its own cost leadership in order to support lower costs in the basin,” says Scholz.

CAODC will be closely monitoring the mechanics of the calibration period for the Drilling and Completion Cost Allowance. It is not clear how well costs will be determined given the dramatic collapse in drilling and service rig rates. “Today’s drilling and service rig rates are unstainable. The government would be unwise to calibrate well costs in today’s pricing environment. These prices are uneconomical for the service industry and should not be used to establish a benchmark,” explains Scholz.

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