Industry group raps province's shale gas rates regime10/17/2012
Canada’s largest oil and gas industry group says New Brunswick’s proposed shale gas royalty rates regime is not competitive with other provinces and will drive away investment in the emerging natural gas sector.
The Telegraph-Journal has obtained the Canadian Association of Petroleum Producers’ submission to a report authored by Louis LaPierre, a biology professor emeritus at the Université de Moncton. The government report was released Monday.
Submissions from SWN Resources Canada and Corridor Resources, also obtained by the newspaper, are critical of proposed rules from government that aim to shift the risks of shale gas development from the province’s landowners to industry.
In its written response to LaPierre, the Canadian Association of Petroleum Producers said both New Brunswick’s proposed regulatory and royalty frameworks provide “high levels” of risk and uncertainty to industry.
The industry group adds that New Brunswick will have the country’s highest royalty rate.
Natural Resources and Environment Minister Bruce Northrup proposed in May that the provincial government should receive 40 per cent of shale gas development profits.
Northrup said at the time that the figure represented one of the highest asking prices for natural gas extraction in the country.
The proposal would see the provincial government maintain its current royalty rate for natural gas at 10 per cent. But it would then add an “economic profit” royalty component.
That would take 40 per cent of profits made by an oil or natural gas company after it recovers its costs.
“The proposed net profits royalty regime is uncompetitive and unnecessarily complex and will be a detriment to industry investment in the natural gas sector in New Brunswick,” reads the association’s submission, signed by fiscal policy manager David Daly and dated late July.
“These views are consistent with those conveyed to the Government of New Brunswick over the past few months by our member companies and ourselves.
“Using the established 10 per cent ad valorem royalty as the basic royalty and then switching to a net profits royalty with the highest royalty rate of any Canadian net profits regime is like ‘having your cake and eating it too.’and#8201;and#8201;”
The industry group argues that a net profits royalty regime is typically only used with large-scale development projects that require multi-billion dollar capital investments.
It states that it would be “inappropriate” in New Brunswick.
It adds that should the province insist on establishing a net profits royalty structure that it should fall in line with lower rates in other jurisdictions or risk a regime that is “not competitive and would be a barrier to future investment and development in the province.”
“There is certainly producing industry interest in working with New Brunswick to enable the development of provincial shale gas resources to supply both provincial and ex-New Brunswick markets,” reads the submission.
“However, this opportunity will only be realized if New Brunswick establishes a competitive fiscal regime that appropriately recognizes the technical and economic uncertainties inherent in development of its resources.”
The Canadian Association of Petroleum Producers also cites a Fraser Institute report released in June that labelled New Brunswick the worst place in Canada for oil and gas investment.
The report, which surveyed petroleum executives and managers, stated that the province’s movement toward new industry regulations and an anti-shale gas sentiment in New Brunswick were said to be to blame.
The industry group stated that it is imperative for New Brunswick to counter those perceptions by introducing clarity, certainty and predictability to its regulatory regime.
“Workforce availability, social license and infrastructure are areas of uncertainty that industry can mitigate and overcome with experienced engagement and development plans,” reads the submission.
“However, the uncertainty of the regulatory and royalty frameworks is beyond the control of industry and rests solely with government to ensure that the risk is mitigated and that the final frameworks provide industry with a level of risk that they can accept.”
SWN Resources Canada
A 20-page submission from SWN Resources Canada dissects the province’s proposed regulations line by line, raising a particular objection over a part of the provincial government’s proposed regulations that aim to reduce the financial risks of the industry on the province’s landowners.
The proposed regulations include a line that states industry is “presumed to be responsible for replacing or restoring a water supply” within 200 metres from seismic activity if contaminated.
“The intent of this section is to protect the public from a debilitating financial burden in case of problems with property damage,” reads SWN’s submission. “We agree with the intent, but will never accept being presumed guilty until we prove ourselves innocent.
“We feel strongly the burden of proof should be on the landowners to establish all elements of water well contamination claims including causation. To do otherwise could lead to many frivolous lawsuits.”
It adds: “This concept has also not been adopted in any other Canadian jurisdiction and any proposal to impose such a drastic departure from tradition for the first time must be carefully considered.”
SWN Resources also states that a requirement to have two layers of casing and cement in well bores is “not justified” and “will add unnecessary cost to wells.”
It contests that closed loop drilling fluid systems are not necessary, calling the proposal “overkill.”
It also calls for discussion and clarification on numerous other proposed rules.
In a submission from Corridor Resources, president and CEO Phil Knoll also raises concerns over the government’s proposed royalty regime, stating that it is in need of incentives that other jurisdictions provide such as royalty holidays and other expense reductions.
Knoll also raises concerns about a part of the provincial government’s proposed regulations that aim to reduce the financial risks of the industry on the province’s landowners.
“Presumed responsibility as outlined in the discussion document basically puts industry in a position where the operator may be guilty until proven innocent,” it reads. “This concept is not imposed in any other Canadian jurisdiction.
“Private landowners must bear some responsibility to only bringing forward legitimate claims.”
The submission also states that the province’s phased environmental impact assessment program should not be mandatory for existing approved development projects.
Reached by phone on Tuesday, Knoll said the concerns need to be addressed.
“We know that the cost to do our exploration is very high in the province because there is no critical mass there and so we have to import a lot of our services and equipment,” Knoll said. “We point out that because of this, if the government wants to attract this industry, they need to ensure that the royalty system is competitive with Saskatchewan, British Columbia and Alberta.
“Our opinion is that there is a need for modifications of that for sure.”
But Knoll said he believes industry can live with the recommendations put forth in LaPierre’s report.
“We’re reasonably satisfied that there is a path forward here,” he said. “Bottom line is that we feel with these recommendations that we should be able to move forward.”
Knoll said he had no difficulties with LaPierre’s proposal of a phased-in approach to developing the shale gas industry in New Brunswick that would initially limit two or three sites within the province for shale gas development.
“Frankly, if you look at the maturity level of the industry in New Brunswick and you look at the exploration that is going on to date, there is only two or three sites where things can move ahead anyhow,” he said. “I don’t see it as a major issue.”
Paul Barnes, the Canadian Association of Petroleum Producers’ manager for Atlantic Canada, said that New Brunswick needs to come forward with a clear set of regulations that allows shale gas development.
“We don’t expect as an industry that those regulations will be static, we do expect they will change over time, but what we wouldn’t want to see is a constant fluctuation,” he said. “From an industry perspective the regulatory regimes in all of the areas that we work in Canada are constantly changing, but it depends on the extent of the change.
“What we are looking for in New Brunswick is a clear set of regulations that allow for industry to undertake exploration and drilling activities.”