Saskatchewan’s ever-increasing regulations are making this province uncompetitive: Hromek

All things being equal, Alberta has better rocks than Saskatchewan

Regina – On April 11, the province put out its bi-monthly press release on Crown land sales. This month, as Pipeline Newspointed out in its story, was one of the lowest Crown land sales in the last decade, coming in at $1.5 million. That was consistent with a pattern of low April sales since 2015, with sales of $5.3 million, $3.1 million, $1.3 million and $2.9 million, from 2015 to 2018. In 2014, April brought in $47.9 million.

In the government press release, Minister of Energy and Resources Bronwyn Eyre said, “Industry sources frequently identify Saskatchewan as having a very attractive operating environment and fiscal regime.

“We are also home to some of the best and most cost-effective conventional oil and gas development opportunities you will find anywhere.  It’s not surprising that when we talk to audiences around the world about the investment opportunities in Saskatchewan, we are often talking about oil and gas.”

Jon Hromek, president and CEO of Regina-based Adonai Resources II doesn’t see things quite so rosy. Upon seeing the Pipeline News story on our web page, he sent us the following email:

 “The latest research from the Frasier Institute shows that Saskatchewan is NOT competitive with respect to oil and gas investment in North America. In addition, C.D. Howe Institute in early 2018 indicated that Saskatchewan was already behind Alberta and, of course, the U.S. with respect to competitiveness. And this research doesn’t take into consideration the never ending regulatory burdens that are constantly being added to us here in Saskatchewan oil and gas.”

Pipeline Newsspoke to Hromek about his concerns on April 16.

Adonai II was formed in 2017, and has production in the Carnduff area. The tightly-held company has plans to drill 10 to 12 wells this year.

The first of those two reports is the C.D. Howe Institute’s Death by a Thousand Cuts? Western Canada’s Oil and Natural Gas Policy Competitiveness Scorecard, written by Benjamin Dachis and released Feb. 1, 2018.

Effective Tax and Royalty Rates on new Investment in Oil and Gas after Canadian and American Tax Reform, by Philip Bazel and Jack M. Mintz, released in the spring of 2019.

The Mintz name is key, as the Saskatchewan Party government for years has quoted him and his studies in justifying many of their economic policies.

Hromek and his team are one of the few out there these days following the junior oil producer business model, one that, for the last several years, is struggling.

“At the end of the day, you can’t bank on more than $40,000 to $50,000 per flowing barrel, and maybe $60,000 if you’ve got a lot of really good finds and a lot of undeveloped locations that are very provable and very solid. But it’s getting harder and harder to find plays, and then you tend to be spread out across the southeast, and lose your operating efficiencies. The regulations keep adding and adding and adding, and costs keep going up, so your cost of production goes up.

“Right now, it’s not that it’s the price that’s really hurting us. The WTI is pretty solid. Our wellheads are very solid. It’s the compliance costs that have just gone through the roof. That used to be the big advantage to Saskatchewan, especially the southeast. Because Alberta has such better reservoirs, so you have much lower geological risk in Alberta, but you’ve got a pretty high regulatory cost. It’s okay to have one or the other.

“But here, now, you’ve got a high geological risk and a high regulatory compliance cost, and that’s what is hurting the cost of production and capital efficiencies.

“The median well in Saskatchewan is only six to 6.5 barrels per day. If you can’t make money on the median well, what are you going to do? Property taxes keep rising. Compliance costs, regulatory, keep rising. Now they want to license flowlines under the Pipelines Act.”

 The recent expansion of the Saskatchewan provincial sales tax on oil and gas has been another hit. “The biggest capital hurt to us was the PST. The vast majority of our work was PST exempt, and they got rid of most of the exemptions,” he noted.

Hromek’s overarching concerns is that Saskatchewan’s regulatory regime, combined with increasing property taxes and other hurdles from rural municipalities, and now the PST, are making Saskatchewan increasingly less competitive with Alberta. And with the election of Jason Kenney’s United Conservative Party in Alberta, and their promise to reduce red tape and business taxes, Saskatchewan now has a lot less going for it in comparison.

And this is where he turns to those aforementioned studies. The C.D. Howe paper speaks of pipeline constraints, corporate taxes, royalties, greenhouse gas emissions taxes as well as property and municipal taxes. It found the cumulative competitiveness cost of government policies on a natural gas well and an oil well was highest in Saskatchewan, between Alberta (2017), Saskatchewan, Texas, North Dakota and Colorado. Much of that was attributed to pipeline delays.

The Fraser Institute paper “sticks out like a sore thumb, the marginal tax rate on new oil and gas investment,” Hromek said. It found Saskatchewan’s marginal tax rate is the worst among North American oil producing jurisdictions.

On oil Saskatchewan’s marginal effective tax rate is 35.9 per cent, or as Hromek pointed out, “The worst in North America.”

Basically, that’s the tax rate on new investment, and includes all forms of taxes, from GST to royalties. That study even gives Saskatchewan something of a leg-up, as it incorporates a 17 per cent freeholder royalty rate, whereas in southeast Saskatchewan, that number is typically 18 to 21 per cent.

“If Kenney gets in tonight in Alberta, Kenney’s going to drop their corporate rate from 12 per cent down to eight per cent. So that Alberta number of 23 per cent is going to drop four per cent. So look at this difference between Saskatchewan and Alberta. It’s massive.”

“At the end of the day, the main thing that matters in this business is the risk-adjusted return on capital. If your risk is high because of geology, compliance and regulatory costs, and we know from the Fraser institute, our tax rates are higher, this hurts the return,” Hromek said.

“You either deregulate or drop taxes. That’s the message I’m pushing.”

He concluded, “I see Saskatchewan really falling behind here and losing out, being a competitor with other jurisdictions.”

 

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