The recommendations of the Royalty Review Advisory Panel reflect the fact that major changes have taken place in the global energy landscape. These changes have implications for Alberta’s energy industry and Alberta’s royalty framework.
Natural gas
For a long time, Alberta was a major supplier of natural gas to many markets in North America including the U.S. West Coast and U.S. Midwest regions, and areas farther away such as central Canada and the U.S. East Coast. North America was perceived in the early 2000’s as running out of gas; liquefied natural gas import terminals were being built and prices reflected that future.
Things began to change in 2006. Advances in technologies, such as horizontal drilling and multi-stage hydraulic fracturing, made it possible for producers to unlock large deposits of natural gas from U.S. shale.
In seven short years, U.S. shale gas production has expanded to a volume that is nearly four times larger than Alberta’s entire gas production. In 2014, average U.S. shale gas production was over 37 billion cubic feet (Bcf) per day. By comparison, Alberta’s average gas production was approximately 10 Bcf per day.
The U.S. shale gas revolution has flooded North American with natural gas. This led to a collapse of natural gas prices in 2008, and prices have remained low since. As U.S. shale gas supplies are closer to major markets than Alberta’s gas, U.S. shale gas has increasingly pushed Alberta gas out of its traditional markets.
The combined effects of low gas prices, high transportation costs, competition from U.S. shale gas production, and the maturity of Alberta’s conventional gas fields, has resulted in Alberta’s total gas production falling over time.
Oil markets
The same technologies that led to the U.S. shale gas revolution have also been used to unlock large deposits of unconventional oil from the U.S., particularly North Dakota and Texas.
This has led to resurgence in U.S. oil production in a short time. For example, the equivalent of Alberta’s total oil production (2.9 million barrels per day) was almost achieved by Texas’ unconventional oil production in only four years. This has enabled the U.S. to markedly reduce the amount of light crude oil that it needs to import from other countries.
Like shale gas, U.S. unconventional oil supplies are geographically much closer to major U.S. refineries than Alberta’s crude oil supplies, and so they have lower transportation costs.
Alberta’s crude oil and synthetic crude oil (i.e., upgraded bitumen from the oil sands) are now competing head-to-head with U.S. unconventional oil for space in oil pipelines and refineries. This has placed downward pressure on the prices that Alberta receives for its crude oil products.
Oil sands (bitumen)
Bitumen production from Alberta’s oil sands is providing our province with some shelter from U.S. competition. Over the past decade, a number of refineries in Canada and the U.S. modified their operations to accept bitumen as a feedstock. These refiners are now structurally committed to accepting Alberta’s bitumen.
However, the huge supplies of U.S. unconventional oil will look increasingly attractive to refineries. Over time, as refineries examine ways of expanding or improving the efficiency of their operations, there is risk they will lean more heavily towards U.S. unconventional oil and away from Alberta bitumen.
For now, a factor that makes bitumen attractive to refineries is its low price. As aheavier oil that is more difficult to process, bitumen is not as highly valued as lighter oils. As a result, bitumen is priced at a discount to light oils such as West Texas Intermediate (WTI). Royalties are calculated on bitumen, and reflect the price it gets.
What it all means
Alberta’s biggest customer is now its biggest competitor. This is problematic, since we have long relied on the U.S. as our primary customer, and do not have sufficient means to transport our oil and gas to other countries.
Changes in the energy landscape have put downward pressure on the prices Alberta receives for its oil, gas and oil sands products. This impacts the amount of value that Albertans, as owners, can collect through royalties.
To avoid losing market share, Alberta will need to be an efficient producer, and companies will need to use innovative technologies and processes to improve efficiencies and lower costs.
Though low prices impact the value available for royalties, they can be a powerful attraction for “value-adding.” Refineries, fertilizer plants and petrochemical plants use oil and natural gas as feedstocks, and are attracted to places that have abundant and affordable oil and gas supplies.