Energy battle heats up as B.C. lowers royalty

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British Columbia is fighting back against Alberta in an escalating battle for lucrative natural gas drilling dollars, introducing an ultra-low royalty to lure investment.

B.C. is bringing in a nominal 2-per-cent royalty on the revenue from the first year of production on new wells drilled from September through next June.

As a global race for capital intensifies, Thursday's royalty announcement by B.C.'s Liberal government is a direct response to similar measures introduced in Alberta earlier this year.

"It's not only Alberta," said B.C. Energy Minister Blair Lekstrom. "This is a global competition. Capital is mobile."

The two commodity heavyweights are engaged in an ever-more intense battle for the attention and investment of energy companies.

Major gas discoveries in northeastern B.C. have attracted several billion dollars from companies to secure land to explore, shifting the spotlight away from the perennial energy capital of Alberta.

Alberta had increased royalties, but backed down several times after the energy industry slashed spending in the province.

Both provinces also face significant continental competition from the likes of Texas and Louisiana, where large pools of natural gas are easier to access and the commodity is much closer to energy customers.

British Columbia's 2-per-cent royalty on gas, as well as oil, is less than half the comparable 5-per-cent deal in Alberta, and was the centrepiece of a package of breaks in Thursday's announcement.

The B.C. incentives will make a tangible difference, with wells drilled that otherwise would not have been, industry executives said.

The timing is also right, as energy explorers are busy working on their winter plans, the time of year when the ground in remote regions is frozen to allow rigs to move to locations more easily.

"There's no doubt a 2-per-cent royalty is very positive," said Michael Culbert, chief executive officer of Progress Energy Resources Corp., which typically splits its capital spending of roughly $200-million between British Columbia and Alberta. "This could sway some additional dollars going into B.C."

The natural gas business has been crunched by a surge in supply from shale gas plays in the United States and a slump in demand because of the recession. The benchmark price at a key Alberta trading hub is about $3 for 1,000 cubic feet, too low to justify much of the difficult drilling in northeastern B.C.

Alberta said it won't immediately respond to the B.C. incentives, instead focusing on a general review of the province's competitiveness, which is expected to be finished late this year.

"In the end, having the lowest royalties may not be the key," said Jerry Bellikka, a spokesman for Alberta Energy.

EnCana Corp., North America's largest gas producer, said the B.C. decision reflects the fact that competition for drilling dollars is intense and the high costs of work in rugged and remote northeastern British Columbia must be weighed against easier options in Texas and Louisiana, home to prolific and promising gas fields. EnCana operates in all the areas.

"[B.C.'s]a tough place to do business," said Richard Dunn, a vice-president of regulatory affairs at EnCana. "We consider investment opportunities continent wide … The lower royalties definitely help."

Northeastern B.C. is home to the Montney play as well as Horn River, a shale deposit north of Fort Nelson that could become Canada's biggest gas discovery ever.

Companies in the past two years have spent heavily to buy exploration rights. Because companies have five years to drill, there isn't an immediate demand to get to work, especially with low gas prices, so B.C. hopes the new royalty deal accelerates plans.

The province also has a special low royalty program for Horn River, for which it is currently settling deals with about a dozen companies.

The province has come to rely on the natural gas business to fund public spending, especially as the traditional foundation industry of forestry fades more each year. With a spiralling deficit and the spectre of deep cuts to health care, B.C. said each dollar of new royalty credits will generate $2.50 in additional revenue in the next three years, money that will go to health care and education.