| Highpine Oil & Gas: Tax Revolt |
| Utility | |||
| Written by John Zorabedian | |||
| Friday, 29 February 2008 | |||
 Alberta wants to nearly double its royalty taxes on conventional oil production. Gordon Stollery hopes the industry can keep that from happening.
Hoping to avoid what he calls a punitive hike in royalty charges, Highpine’s co-founder and board chairman, Gordon Stollery, said his company and others in the industry have been working to negotiate an alternative plan with the province’s energy department. A clause in the proposal protecting the industry from “unintended consequences” could provide the industry with the leverage it needs to renegotiate the royalty plan.  Gordon Stollery, Co-Founder and Board Chairman “When they announced the new royalty program, companies like Highpine stopped drilling,” Stollery said. “The new program basically doubles our royalty from 25% to 50%, and that has an enormous effect on our existing production, and it will have a similar effect on our future drilling.” Highpine has held talks with the provincial government, including Premier Ed Stelmach. Led by the Canadian Association of Petroleum Producers (CAPP), an industry group in which Highpine is a member, the oil and gas companies are making their case to the public that the government’s plan would hurt the economy and cost jobs. Stollery is hopeful that the government will “come to its senses” and fix the proposal before the end of the year. “The government has been doing quite a bit of consultation with Highpine and the industry in general,” he said. “I think they’ve come to understand our situation a little better. They hadn’t understood it.” In the meantime, Highpine has had to focus on its financial health in anticipation of the worst. And at the beginning of February, the company’s newly appointed president and CEO took over the company from Stollery, who had been acting as interim CEO since the former chief stepped down last May. For Highpine, this year is a period of high stakes for the company’s future prospects. Exploited oil Alberta is the heart of Canada’s oil and gas industry, and the industry is the main economic driver for the province, as well as the primary source of revenue for the provincial government. But in Canada, it is the government that owns the rights to the country’s vast natural resources, and exploration companies pay royalties to the provincial governments along with taxes to the federal government. The Alberta government’s royalty proposal, detailed last October in a report called “Our Fair Share,” would seek to raise the incremental revenues from oil and gas exploration by 20%, to an estimated C$1.6 billion. The plan would increase royalties from 30% to 50% on conventional oil wells producing more than 100 barrels per day, while minimally charging lower-producing wells. According to Highpine’s estimates, based on the company’s share of high-producing conventional oil wells, it would be paying nearly 10% of total revenues raised from conventional oil. The government plan would cut further into the company’s profits in what is already a very costly enterprise, Stollery said. And the royalties assessed on high-producing wells mean it becomes less favorable for the company to continue to explore the region for diminishing supplies of what is an economically challenging source of oil. “It’s just like a lottery or a casino,” Stollery said. “When you explore for oil and gas, statistically you get a lousy well most of the time, and a good well once in a while.” Much of Alberta’s high-potential conventional oil (as opposed to oil sands) has high concentrations of hydrogen sulfide (H2S), what is known in the industry as sour gas—a highly poisonous gas that is deadly in small amounts. “We’ve been dealing with sour gas as an industry for 60 years, and the technology is mature, so the risk is pretty much mitigated,” Stollery said. “In any event, it is costly. Because we’re in areas where there are residents, the safety precautions that we take are extremely fastidious. We’re forced to be triply fastidious by the residents, who have quite a bit of say as to whether or not we get drilling permits.” Additionally, the reservoirs of oil lose pressure as the oil is pumped. To keep the reservoirs at the minimum operating pressure, Highpine pumps water into the reservoir at the same rate as it extracts the oil. This means having to drill additional injection wells and source wells for the water, adding to the cost of development. Even at a time when the price of oil is consistently over C$90 a barrel, production costs have accelerated at a similar pace. Damage control Highpine and other oil and gas companies have had a number of meetings with Alberta’s energy department to make their case that the proposal is so punitive that it would cut production to a level that royalty revenues would actually drop. Stollery observed that the government has all of the power in this negotiation. “I think it would be flattering to describe it as a negotiation,” he said. “It’s like a mouse negotiating with an elephant. They’re going to do what they want to do.” Yet the oil and gas industry does have a large bargaining chip—jobs and the province’s natural resource dependent economy. The government, Stollery said, wants to get more money from the industry, “but they don’t want to lose any jobs or activity. They’re not concerned about whether we make any money or not, but it all ties together. If we don’t make any money, we don’t drill any wells, and we don’t hire any people.” Behind every barrel of oil produced are a myriad of companies and employees, from geologists (such as Stollery himself and a number of Highpine’s 100 employees) to the service businesses supplying the drilling rigs and other equipment. About 275,000 people in Alberta are employed directly and indirectly in the oil and gas industry, according to industry group CAPP—a point CAPP made repeatedly in a major media campaign across the province from November 2007, the month after the royalty proposal was announced, to February 2008. CAPP ran a series of 20 television spots on CTV in Alberta presenting the industry’s viewpoint regarding the environment, safety, community, employees, economics, and regulations. A radio ad campaign aired on 45 rural radio stations, and a print series ran in community newspapers. In one of three television spots called “Part of Your Community,” a young child, an engineering student, an electrician, and an aboriginal woman separately face the camera and each say: “I am the oil and gas industry.” Albertans appear to recognize that the oil and gas industry’s fate is the same as their own. In comments in May 2007 before the Alberta Royalty Review Panel, which made the recommendations that served as the basis for the royalty proposal, CAPP President Pierre Alvarez pointed to polling of Albertans indicating that a plurality of residents feel that the current royalty and tax regime is about right. Fiscal fix As the government and the industry hash out the details of a new royalty program, Highpine is mainly focused on making sure it can survive the tumult. Stollery and the board of directors have appointed a new president and CEO, Jonathan Lexier, whom they hope can lead the company through the straits. Lexier has more than 25 years of experience in the oil and gas industry, most recently as COO of NAL Resources, managing an oil and gas trust for major financial institutions. Stollery, who founded the company in 1998 with former CEO Greg Baum, said the company’s board recognized that it needed to find an experienced executive with a particular skill set. “Both Greg and myself are more company starters as opposed to company runners,” Stollery said. Stollery has founded or co-founded four other oil and gas companies and serves on the board of several others, including as chairman of AGS Resources Management, an oil and gas investment group. But once Highpine grew to its current level of producing more than 20,000 barrels a day, the focus of management moved into areas of employee relations and investor relations issues. “It was getting to be away from where Greg’s skills and my skills were, which is more on the technical, conceptual side,” he said. Under its new management, Highpine will attempt to pay down the remainder of a C$175 million bank loan, which by the end of 2007 had been reduced to approximately C$150 million. “We’ve reduced our budget for 2008,” Stollery said. “We’re hoping to reduce our loan to about C$50 million.” Overall, the company’s financials need to be “tuned up in case anything awful happens,” Stollery said. But Highpine is not intending to cease operations in Alberta. In fact, as other exploration companies have slowed down or pulled out of the province due to the royalty fight, drilling costs have gone down for Highpine by 20% to 30%. “We’re still going to drill some exciting wells. We have a very full program,” Stollery said. “Our company is simple. We are an exploration company whose goal is to explore for oil and gas accumulations. How we got to where we are is by drilling a successful oil well and then reinterpreting the old geology in an area that had never properly been exploited or explored. We work in this area almost exclusively, and that’s where we’re going to continue to work.” Although Stollery said Highpine is preparing for the worst-case scenario—a near doubling of royalty fees and a massive undercutting of the company’s value—he remains hopeful that the province will eventually amend its royalty plan in a way that is fair to all parties. “I think it will be fixed,” he said. “Or else the government is going to shoot themselves in the foot.” |
|||
| < Previous Story | Next Story > |
|---|
© 2008 American Executive - RedCoat Publishing. All rights reserved.
American Executive is a RedCoat Publishing publication.
American Executive is a RedCoat Publishing publication.
