Governments hold the key to the offshore’s survival

Brian Lee Crowley

The reports of the demise of the east coast oil and gas industry have been exaggerated, but that does not mean that the patient is in robust health.  In fact, the industry is looking sickly, and unless we put it on a better regulatory and tax regimen, it could easily meet a quite unnecessary and untimely death.

Marathon Oil’s recent abandonment of its Crimson exploration well is merely the latest in a spate of bad news to come out of the east coast. News of $100-million exploration wells being abandoned without commercial quantities of resource being found has been too common recently, but it needs to be put in perspective.

Exploring for oil and gas under the ocean floor is an inherently expensive and risky business everywhere, and especially in Atlantic Canada. The region is relatively unexplored and can have nasty climatic conditions, while exploration is heading further offshore and into ever-deeper — and ever-dearer — waters. The probability that an exploratory well here will find any resource at all is about one in ten; that it will find commercial quantities of hydrocarbons, about one in twenty. 

Exploration has always been a risky business. The 1947 Leduc well that started Alberta’s petroleum industry was preceded by 50 dry ones. Today we have only the haziest idea of the extent of the offshore resource, and have drilled a few hundred wells in total and a mere handful of exploratory wells. By contrast, over 300,000 wells have been drilled in the Western Sedimentary Basin. But then an exploration well in Alberta can cost $500,000 or less to drill. In the Gulf of Mexico offshore, it’s $6-million. On Canada’s east coast, wells cost $40-120 million apiece. That’s why exploration is and can only be dominated by the major oil and gas companies. Even their exploration budgets are limited and every exploration project is in competition with others around the world for the company’s scarce resources. No one can afford too many dry holes at these prices.

Industry analysts believe that achieving a serious east coast industry requires at least ten new exploratory wells each year for the next ten years. In both 2002 and 2003, however, only seven such projects were undertaken, only the Crimson and Cree wells are happening in 2004 to my knowledge, and almost nothing is planned for 2005. Twelve exploration licences were recently allowed to expire.  A further 11 licences could be allowed to lapse on December 31^st. If that happens, nearly half the exploration licences in the Nova Scotia offshore will have been allowed to expire unexplored. While that makes them available for others to pick up, people with pockets that deep aren’t plentiful, even in this industry.

Nothing can be done about the climate, the depth of the water or the quantity of resource waiting to be discovered. Something can be done, however, about the excessive regulatory and tax burden government imposes on the industry.

Let’s take just one example: the too many cooks that are spoiling the region’s regulatory broth. The Nova Scotia and Newfoundland and Labrador offshores each involves as many as 20 federal and provincial government regulators. These are all insatiable regulatory maws into which industry must pour time and resources, often merely to duplicate a regulatory result already achieved at another level of approval.

Regulatory approval times for the region’s major projects have taken as long as 21 months, and approval times are getting longer. By contrast, according to one recent study, approval times for areas such as the UK’s North Sea fields range from 5 to 12 months. And the time needed to get regulatory approvals has been falling in the North Sea and other comparable major offshore areas.

The only cure is a single regulatory hearing and approval process. All parties have to be at the table, and all necessary approvals need to issue from this single process. Only Ottawa, the owner of the resource, has the power to clean up this mess. So far, however, both the feds and the provinces talk a good game but have yet to give any real response to the industry’s pleas for regulatory relief, let alone a more exploration-friendly tax regime. Where is Ottawa’s so-called Smart Regulation initiative when you really need it?

Time is now of the essence. The persistence of an onerous costly regulatory and tax regime combined with poor exploration results to date make further exploration a hard sell to industry executives who can drill in basins around the world. Yet more exploration is vital to producing a viable, long-term industry. Oil and gas is the greatest opportunity Atlantic Canada has known in a generation, but if its current loss of momentum reaches the tipping point, it may take another generation to come back. Yet the same governments that claim to want nothing more than to help Atlantic Canada escape from under-development cannot seem to find the will simply to get out of the way.

Brian Lee Crowley is president of the Atlantic Institute for Market Studies (www.aims.ca), a public policy think tank in Halifax. E-mail: [email protected].