Shale versus Balanced Budgets

It would be funny were it not so ominous for all of us the Alberta government’s belated reaction to the threat to it posed by shale gas. When I was researching “The Shale Gas Revolution” for April’s oil and gas industry report back in February, I put in a call to the Ministry of Finance to see if they anticipated any impact to the provincial treasury of massive new gas finds in the United States. They referred me to the energy ministry.

Fair enough. Alberta Energy has its own technocrats responsible for watching the industry and advising on the collection of natural gas royalties. But after posing the question to them, spokesman Bob McManus got back to me insisting that they did not anticipate any significant impact on revenues. But shale gas is such a game-changer, I persisted. Alberta has tons of shale, he replied. As if it were a question of geology, not finance.

Unfortunately, none of that Alberta shale has yet produced gas on a commercial scale, save for the eastern extremity of the Montney formation extending over the border from British Columbia (which, if you ask any geologist, isn’t technically a shale play but rather a finer soapstone, though producers use the same techniques to extract the gas there as for shale). Worse still, all of Alberta’s gas production – conventional, coalbed, tight, what-have-you – is finding itself in a losing battle to stay competitive with shale production coming on-stream close to major markets in Texas, Louisiana and Pennsylvania. Last I heard there were just 69 drilling rigs operating in the province, compared to hundreds, mostly drilling for gas, three years ago. People in the industry will tell you, regardless of any economic recovery, gas prices are going to stay low in North America for 10 years at least, because any price spike can quickly be matched by a run-up in shale production.

Now it looks as if the glory days of 2000-2006, when gas prices were high and Alberta was supplying as much as a third of the United States market, was the aberration, not today’s low prices. And finally the penny has dropped in the halls of government that those billions of dollars a year in gas revenues that were largely responsible for the budget surpluses and “Ralph bucks” in those years are not coming back, probably ever.

On June 23 Premier Stelmach finally made the link between shale gas and the revenue shortfall in public, hinting that the government would respond with yet more royalty tweaks (which of course will do nothing to fix the fiscal shortfall) and broad-based spending cuts. I’d feel more confident in our leadership if it had recognized this five months ago, when a shmo like me did.

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