Perfect storm induced budget reduction
Deborah Yedlin
Calgary Herald
Wednesday, November 28, 2007
Canadian Natural Resources has followed through on its earlier promise (threat) to cut capital spending in Alberta.
The company, at the start of its annual investor day in Calgary on Tuesday, said it's going to spend $1.6 billion on conventional opportunities in 2008 -- that's a 35 per cent drop from the $2.6 billion in 2007.
Most of the changes are the result of what Canadian Natural called a perfect storm -- looming changes to Alberta's fiscal structure announced by the government on Oct. 25 that will come into effect in 2009, additional environmental charges and the elimination of the accelerated capital cost allowance at both the federal and provincial levels.
In total, Canadian Natural is expecting to drill 195 natural gas wells in 2008, down from 346 this year. The conventional gas side of the business is going to take the biggest hit -- with 80 wells planned, compared with 179 in 2007. In total, the company estimates it will drill 22 per cent fewer natural gas wells as a result of the new royalty structure.
It's more than just a tad ironic that Canadian Natural's announcement comes the day after Finance Minister Lyle Oberg deigned to suggest that Alberta's financial stability was ensured because of the underlying activity in the oilsands.
Hello.
Surely Minister Oberg can't believe that an announcement with the magnitude of Canadian Natural's won't have a negative impact on the province and its royalty take; it's more than a safe bet that EnCana will do something similar when it holds its investor session in Toronto on Dec. 12.
When asked what he thought of the dollars fleeing the province in search of royalty regimes that are more favourable to natural gas drilling, Minister Oberg did nothing more than put his faith in the market; his expectations are that natural gas prices will recover from current levels.
"The new royalties don't come into effect until 2009," he said.
In Oberg's world, prices could recover next year, causing companies to start drilling again.
Oberg clearly wasn't paying attention to the energy execs with whom he supped extensively in the fall months while the government was trying to figure out what to do with the royalty structure because he still seems to think that activity in the energy sector can be turned on and off like a light switch.
Companies are planning now for 2009.
During Tuesday's session, Canadian Natural laid out its spending plans for 2008 and 2009.
And when it comes to the world of natural gas, it isn't so simple.
As part of its presentation, Canadian Natural addressed the challenges facing the industry: high costs, low prices and the growing impact of liquefied natural gas.
It said conventional natural gas activity, with the possible exception of shallow wells, is unsustainable under the new royalty structure.
When it comes to unconventional natural gas opportunities, the company said the economic viability varied between areas.
Under the new system, a natural gas well producing 600 million cubic feet a day needs an $11 gas price; under the old system, $8 was enough to make it work from a financial standpoint.
Then there's the LNG factor.
According to numbers put forward by Canadian Natural, the amount of LNG (liquefied natural gas) currently being landed in North America is 6 billion cubic feet per day. By the end of 2008, with new construction of terminals completed, the total capacity will jump to 14.4 bcf/d.
The implication for natural gas prices in North America -- and Alberta -- looks like this:
If the cost to land the LNG is less than what it is to produce and transport it on the continent, it will affect how much natural gas is drawn down from storage facilities.
Canadian Natural estimates the cost in 2008 will be between $6.50 and $9 per mcf. This effectively caps the price producers can expect for their commodity; in other words, $11 gas isn't happening.
Right now, the only good news on the natural gas pricing front is that they are over $12 per thousand cubic feet in Europe, which means LNG ships destined for the U.S. are turning around and going to where the price is highest.
The LNG factor is yet another illustration of the fact that Alberta's energy companies are part of a global industry and therefore will continue to be buffeted by the changes afoot miles from here.
It therefore doesn't help that a government, which has shown itself to be a poor steward of the public purse, wants a bigger share of the revenue stream at a time when the business climate is challenging; it will only make things worse.
Canadian Natural's messages Tuesday more than support this.
Let's look at it another way.
Canadian Natural, whose market value is north of $35 billion, is listed on the Toronto and New York Stock Exchanges and is a key position in investment portfolios of both individual and institutional investors.
With its diversified suite of assets, it is arguably a good proxy for the sector and a decision to change direction and allocate capital elsewhere should serve as a red flag to foreign energy players and investors alike in the context of Alberta's deteriorating investment climate.
dyedlin@theherald.canwest.com
© The Calgary Herald 2007
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