By Dave Collyer, CAPP President
As printed in the New Brunswick Telegraph-Journal
Imagine you are the CEO of a company that wants to develop natural gas in New Brunswick.
What do you have to consider?
First and foremost, the CEO must consider “competitiveness,” meaning the ability to develop a viable business opportunity for the company and its investors in order to attract investment capital.
What are the factors that drive competitiveness for the natural gas industry?
First, the company has to find out if there’s enough natural gas in the ground to justify the considerable expense of committing people, equipment and time to drill. In other words, you have to decide if the resource is potentially large enough to be commercially viable.
In assessing commercial viability, there are a number of important considerations. The company has to consider how much it will cost to do business in New Brunswick, and whether this cost allows the recovery of expenses and payment of taxes and royalties while generating revenues for reinvestment and delivering a competitive return to investors.
Government plays a key role in determining the competitiveness of any jurisdiction. The first is in establishing royalties and taxes, which must balance competitiveness and a fair risk-based return to investors with a fair return to the people of the province who own the resource. The second is establishing the regulatory framework for resource development, which must ensure that a province’s resources are developed responsibly while not imposing undue delays or cost burdens on industry. Both the royalty system and the regulatory framework for natural gas are currently reviewed by the New Brunswick government.
A key part of realizing the natural gas opportunity for New Brunswick is establishing a royalty regime that recognizes the volatility of the natural gas market, as well as the technical challenges and costs inherent in the development of the resource. An effective, balanced royalty regime must provide a reasonable return to the owners of the resource, in this case the people of New Brunswick. It must also allow companies investing in New Brunswick to earn a reasonable risk-based return for their investors and shareholders. The return to the resource owner will only occur if the resources are developed and produced by industry.
Investment capital is fluid and flows to industries and jurisdictions where it can expect to earn a competitive return. That’s the efficiency of the free market at work. Alberta and British Columbia serve as good examples for how New Brunswick must compete for capital and other resources to move its own industry forward and to realize the resulting economic benefits.
Alberta’s experience is instructive on natural gas resources, competitiveness and the often fickle nature of investment capital. When Alberta raised royalty rates in 2009, investment capital left the province to the benefit of other jurisdictions because industry no longer considered Alberta a competitive and stable province in which to invest. The higher royalties particularly hurt the natural gas sector, which was also adjusting to lower prices, and the province as the resource owner. Simply put, paying higher royalties on a lower-priced product presented a problem to investors and companies. In 2010, the Alberta government re-adjusted its royalty regime to once again be competitive and investment started to flow back into the province.
B.C.’s royalty regime is competitive with other jurisdictions and has generated significant amounts of resource revenue for the province. It is specifically designed to stimulate development of higher risk, higher cost natural gas and to attract longer-term investment.
The second key factor determining competitiveness is a province’s regulatory framework. An effective and efficient regulatory framework ensures environmentally responsible resource development and assures the public that resource development can proceed safely.
Industry, in all jurisdictions, encourages regulatory frameworks that are based on sound science, eliminate duplication and overlap, and are predictable and stable. These considerations will avoid placing undue costs on development of natural gas resources in the province and help to attract investment capital. Experience consistently demonstrates that investors avoid jurisdictions with costly, time-consuming and uncertain regulations.
As it reviews the regulatory framework for natural gas development, we also encourage the New Brunswick government to consider the operating practices for hydraulic fracturing released by the Canadian Association of Petroleum Producers in January, 2012. These practices outline industry’s approach to water management and actions we are taking to protect water resources, for example supporting the disclosure of fracturing fluid additives as well as the development of fracturing fluid additives with the least environmental risks.
A reasonable and stable regulatory framework based on sound science can result in increased natural gas development in New Brunswick, which is industry’s objective.
Industry is optimistic that natural gas has a future in New Brunswick. We believe that given the right conditions, natural gas in New Brunswick can be responsibly developed and benefit the people of the province through royalties, job creation and other economic benefits, while also providing companies and investors a fair return on their investment. This will only occur if New Brunswick has a competitive royalty system and regulatory framework that appropriately address the interests of both the natural gas industry and the people of New Brunswick.
Dr. Louis LaPierre, in The Path Forward, made the important point that the provinces that are developing their natural resources – B.C., Alberta, Saskatchewan, Newfoundland and Labrador – “have best weathered the economic storm” from which Canada is still emerging.
Competitiveness attracts investment that creates economic opportunity and leads to economic strength.
This is an opportunity for New Brunswick that should not be missed.