Canada's petroleum industry faces a major challenge to meet its share of growing North American demand for natural gas in the face of rising depletion rates, says the chairman of the Canadian Association of Petroleum Producers (CAPP).
Other industry issues John P. Dielwart sees include taxation, climate change, industry access to resources, and transportation costs. Dielwart is president and chief executive officer of ARC Resources Ltd., Calgary
Canada's gas role
Dielwart says Canada has played a major role in meeting North American gas demand in the past few years and will continue to be a strong and reliable source for the continental market. He noted that a CAPP reserves study shows that producers replaced 106% of the gas sold in 2001, increasing reserves by 385 bcf to 60.1 tcf. But drilling activity has declined as a result of lower prices, and he says it is not at a level required to maintain production.
The CAPP chairman said that two areas, the Sable Island fields off Nova Scotia and the prolific Ladyfern field in Northeastern British Columbia, have been responsible for the major additions to gas reserves. Combined production from the two fields added about 1.3 bcfd to Canadian production. Sable Island is expected to increase production of about 600 MMcfd, but Ladyfern is experiencing rapid depletion as a result of declining reservoir pressure. Dielwart said Ladyfern production is expected to drop from a peak of about 750 MMcfd to below 200 MMcfd in the near future. Dielwart says the Ladyfern situation just shows the nature of production in North America. He said gas supply could be tight if Canada experiences a "normal" cold winter this year, as opposed to the mild winter many forecasters are predicting.
Tax, pipeline issues
The CAPP executive says another major issue for members is the current level of taxation imposed by the federal government. Ottawa announced in 2000 that it would reduce corporate tax levels to 21% from 28% over 5 years but excluded the petroleum and mining industries on the grounds that they already receive preferred tax treatment.
Dielwart says this is a serious disadvantage for the oil and gas industry, which must compete for investment capital on both domestic and foreign markets. He says the loss of funds will have an impact on exploration, and CAPP wants Ottawa to give the oil and gas industry what it considers to be equal tax treatment.
"We are actively engaged with Ottawa on this issue, and we are hopeful. There is a new federal budget in February 2003," Dielwart said.
The CAPP chair says the industry is also facing ongoing tolling issues and is having to protect its netbacks from the desires and needs of pipelines to be granted higher tolls. He said CAPP won a decision before the National Energy Board in a dispute over toll increases sought by TransCanada PipeLines Ltd., but he added, TransCanada will try again for regulatory approval of toll hikes.
Dielwart says arctic natural gas pipeline projects also remain an issue. He says CAPP believes that subsidies are not the way to build them and that market demand should dictate pipeline development.
"More gas on the market will have a price impact. Our concern is that we could get a project that comes on prematurely as a result of subsidies. Any arctic pipeline project has to be market-driven. If they are viable under market forces, they should go ahead," he said.
Resource access hurdles
CAPP also has serious concerns on access to areas where resources are located and the complexity of the regulatory process involved to obtain approvals for exploration and development
As the industry goes further afield in the search for reserves, Dielwart says, there are increasing issues of access to aboriginal lands and to environmentally sensitive areas. He says the industry is also looking for regulatory streamlining in areas such as the Arctic and East Coast, where there are multiple regulatory agencies involved.
Speaking from his personal experience as the head of a junior producer and as a former executive with a major as well as his role as the new CAPP chair, Dielwart says the regulatory process is more complicated than it needs to be, which hikes costs for industry.
He contends that more progress has to be made in negotiating land settlements with aboriginal groups but acknowledges this to be a highly-complicated and challenging issue and thus does not blame Ottawa for slow progress. He says aboriginals have real concerns, and progress has been made in working with aboriginal groups in Alberta and the oil sands regions. The CAPP executive said too often companies become a pawn or a cash cow for aboriginal groups if they have an issue with governments.
One of the most pressing concerns facing the industry, Dielwart says, is Ottawa's plans to have the Kyoto Protocol on Climate Change ratified by yearend. CAPP has been conducting a campaign to delay ratification, which Dielwart says now is inevitable. He says the industry wants detailed information on the economic impact of Kyoto and favors a made-in-Canada solution to emissions, rather than the international treaty.
Dielwart says Kyoto will never work in Canada, which has a strong economy and growing population, and Kyoto will have a negative impact on economic growth.
Kyoto has hard emissions reduction targets that cannot be achieved, and the uncertainty it creates for investors will have an impact on capital and debt markets as soon as the treaty is ratified, he added.
The CAPP chair said the industry is sensitive to environmental issues and has made great strides in reducing emissions on a per-unit basis.
"The Kyoto issue is not even on the radar screen in the US because they don't think we would be stupid enough to ratify it," he says.
"Our message on Kyoto has been: Why the rush to ratify?" Dielwart said, adding that public education on the issue must come first. "We believe 80% of the impact of reductions will be on the backs of consumers, because consumption, not production, is the major issue."
CAPP became chairman of CAPP in November 2002. He earlier served on CAPP's board of governors.
Dielwart is president and chief executive officer of ARC Resources Ltd., Calgary.
Prior to joining ARC in 1994, Dielwart was a senior vice-president and director of a major Calgary-based oil and gas engineering consulting firm. Before that, he spent 5 years with a major oil and natural gas company in Calgary.
Dielwart served as a member of the executive committee of APPEGA.
Dielwart has a BSc in civil engineering from the University of Calgary (1977).