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Let's Talk About Saskatchewan

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Let's Talk About Saskatchewan LET’S TALK ABOUT SASKATCHEWAN Saskatchewan is one of Alberta’s main competitors when it comes to crude oil. The Panel is looking at Saskatchewan not only because it competes with Alberta for capital investment for crude oil production, but because it: Shares similar geographic and market access constraints, Has a similar resource ownership structure, Competitively auctions leases to develop the resource, similar to Alberta, Has similar tax structures, Has a royalty structure similar to Alberta’s (particularly Alberta’s royalty framework prior to 2007), and Offers similar royalty programs as Alberta. Geology and Geography Given that the Western Canadian Sedimentary Basin (the source of oil Alberta’s oil and gas reserves) also cuts across a swath of Saskatchewan, it is no surprise that Saskatchewan also has an energy industry. In fact, Saskatchewan is Canada’s second-largest oil producer, accounting for 15% of the country’s total crude oil production, and it is the third-largest natural gas producing province in Canada. Saskatchewan’s first commercial crude oil discovery was made in 1944, some twenty years after Alberta’s first major discovery. Like Alberta, many of the major oil pools in Saskatchewan were discovered as a result of an intensive exploration effort in the mid-1950s and early 1960s. Saskatchewan’s geology lends itself mainly to crude oil production (although it also has some natural gas production). In fact, its crude oil production is actually on a scale comparable to Alberta’s. In December 2013, Saskatchewan had 29,885 producing wells with an average daily crude oil production of 502,200 barrels per day (compared to Alberta’s 41,601 wells in 2014 with an average crude oil production of 589,600 barrels per day). Saskatchewan produces both light and heavy crudes, similar to Alberta. Saskatchewan’s heavy oil production is from the Lloydminster area and the lighter crudes are produced further south. Saskatchewan’s geology includes a portion of the Williston Basin, containing the Bakken formation. Over the past seven years, the Bakken has emerged as a key source of U.S. shale oil production. New technologies, such as horizontal drilling and hydraulic fracturing, have enabled producers in unlock large amounts of shale oil from the Bakken in North Dakota. Those same technologies have been used to improve Saskatchewan’s oil production from the Bakken (in the province’s southeast), and also from the Lower Shaunavon and Viking formations (in southwest and west- central Saskatchewan, respectively). Saskatchewan is also estimated to have 2.7 million hectares of oil sands potential, adjacent to the massive Athabasca deposit in Alberta. However, these oil sands are too deep to mine, and their geology is not suitable for existing in-situ recovery methods. As a result, Saskatchewan has not produced any oil from their oil sands resources. Saskatchewan does produce some natural gas, but at much lower quantities than Alberta. At the end of 2013, Saskatchewan had 23,081 natural gas wells that produced an average of 0.49 billion cubic feet per day. This is compared to Alberta’s 104,046 producing natural gas wells in 2014, producing an average of 9.4 billion cubic feet per day. Geographically, Saskatchewan faces similar circumstances to Alberta. As a landlocked province, it does not have easy coastal access. This makes it challenging for Saskatchewan to get its oil to international markets. Saskatchewan is also located a great distance from U.S. refineries and markets, which adds transportation costs to its products. Structure of the Industry Saskatchewan has a stable democracy, the rule of law, and an open market economy. However, as only one province in a larger country, Saskatchewan (like Alberta) does not have exclusive authority over all things that impact energy development. For example, Saskatchewan cannot decide all by itself when and where pipelines to tidewater will be built. Also similar to Alberta, the energy industry in Saskatchewan is made of private companies undertaking the actual exploration, production and sale of the resources. (The government is not directly involved in developing the resources through any kind of state-controlled energy company.) Many of the same companies that operate in Alberta also operate in Saskatchewan. The Saskatchewan government leases mineral rights to private companies for development and production through an auction-style system, with the winner paying a “bonus bid” for the rights. Companies are given a defined period of time to prove productivity of the resources, or the mineral rights are handed back to the Crown. This is the same general process as Alberta has. As in Alberta, the majority of Saskatchewan’s oil and gas resources (approximately 75%) are owned by the Crown (i.e., the people of Saskatchewan). Energy companies operating in Saskatchewan and developing Crown resources must therefore pay royalties to the Saskatchewan government. Saskatchewan also has some refineries and upgraders in its energy sector. Saskatchewan has a crude oil refining capacity of approximately 109,000 barrels per day, and heavy oil upgrading capacity of approximately 137,000 barrels per day. Like Alberta, most crude oil produced in Saskatchewan is sent outside the province for refining. As of December 2013, there were 29,885 producing oil wells, and 23,081 producing gas wells, in Saskatchewan (compared to 41,601 producing oil wells and 104,046 producing gas wells in Alberta in 2014.). Fiscal Framework Similar to Alberta, although the actual formulas are different, the Saskatchewan government collects royalties on oil and gas resources that are owned by the Crown and levies a tax on freehold production. For oil, the royalty rates are on a sliding scale, sensitive to commodity prices, production, and when the well was drilled (i.e. old, new, third tier and fourth tier oil). Drilling incentives are available for most new conventional oil wells drilled, providing maximum royalty rates of 2.5% for vertical wells and 4% for horizontal wells. Incremental production from a new enhanced oil recovery (EOR) project somewhat resembles Alberta’s oil sands royalties, using a pre- and post-payout structure, with a royalty rate of 1% of gross revenue applying to projects pre-payout and a 20% royalty on net revenues post-payout. Saskatchewan’s natural gas royalties are similar to its oil royalties, set on a sliding scale, sensitive to commodity prices, production, and when the well was drilled (i.e. old, new, and third tier gas). Drilling incentives are available for newly drilled exploratory gas wells, and are provided a maximum royalty rate of 2.5% for a set amount of production. Recently, the Governments of Alberta, Saskatchewan, along with industry, formed a joint strategic partnership organization called Petrinex. Petrinex is a web-based system to facilitate and simplify accurate and timely reporting of key volumetric, royalty and commercial information associated with the upstream petroleum sector. So in other words, how oil and gas companies report production and pay royalties is exactly the same in both provinces – through Petrinex. Similar to Alberta, Saskatchewan assesses a provincial corporate income tax of 12%. Energy companies in Saskatchewan also must pay 15% federal corporate income tax. Sources: Alberta Energy; Saskatchewan Ministry of the Economy .
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