Alberta set to resume oil land auctions

CALGARY • The Alberta government is expected to resume land sales to oil and gas companies by the end of the year, but the plans are raising questions about whether the province will be able to secure the best value for its leases and licenses in a bearish oil market.

Alber ta paused its twice- monthly auctions in April after the COVID- 19 pandemic knocked out oil demand and forced energy companies to switch to survival mode, leading to a sharp decline in anticipated oil revenues for the province.

“We were in an absolute crisis,” Alberta Energy Minister Sonya Savage said of the government’s decision to cancel land sales in April to prevent selling leased and licenses for little to no value. “We didn’t know how low it would go and how far demand would drop. There was no question that no one was going to be bringing on new drilling.”

Savage confirmed to the Financial Post the province is now planning to resume those auctions, despite the continued downturn in the industry and concerns about the near-term outlook for prices given a potential second wave of coronavirus infections.

“We’re in a different situation now,” Savage said, noting that companies have been urging the province to resume the auctions and that the government also wants to encourage companies to spend money in the province.

“There’s no question we have to open those land sales up otherwise that capital will be going somewhere else,” she said, adding the government is hoping to resume the auction by the end of the year.

The province is considering “modernizing” the auction process to ensure that land isn’t sold too cheaply and to preserve the value for Albertans in a tough oil and gas market, Savage said.

Land sale revenues for the province have imploded in 2020 due to the pandemic, but it has been trending down even before the coronavirus outbreak, which has contributed to the cash woes of the province struggling to balance its budget.

In six lease and licence auctions this year between Jan. 8 and April 8, the province raised just shy of $ 26 million in revenues, the least amount raised since data was first collected in 1977. If the numbers were adjusted to reflect the full year, it would fall short of the previous record low set last year of $119 million.

Since 1977, the province has generated an average of $775 million per year in land sales to oil and natural gas firms and set a record in 2011 of $3.5 billion, auctioning off lease and mineral rights.

To prevent selling land rights at a heavy discount into a depressed market, the province is planning to implement a higher minimum bid to ensure land isn’t sold too cheaply.

Interest in leases and licences rises and falls with oil prices, so minimum bids are a “prudent move” in the current pandemic to ensure that Albertans get value from the land they are selling to oil and gas producers, said Dan Mcfadyen, an executive fellow at the University of Calgary School of Public Policy and former deputy minister of energy in Alberta.

“They don’t want to end up with minimal bids where you’re just giving those lands away,” Mcfadyen said.

However, he said there was more value to the province to selling the land than just the bid amount because oil companies commit to spending money exploring and developing those lands or they lose their leases.

The current minimum bid for a hectare of oil and gas rights in Alberta is $2.50 per hectare, a price that was set in 1977.

Documents obtained by Financial Post show the province is considering a minimum bid of $ 50 per hectare, which the energy department believes is an amount equal to one week’s production from an average oil well in the province and is affordable for even smalland mid-sized oil companies.

The Alberta analysis shows that neighbouring jurisdictions in British Columbia and Saskatchewan use unpublished minimum bids in their lease auctions, which had “a significant effect on pushing up the overall bid amounts in 2019.”

Only 32 per cent of the land parcels in B.C. and only 16 per cent in Saskatchewan sold for less than $ 50 per hectare in 2019. By comparison, 59 per cent of all the land parcels sold in Alberta in 2019 sold for less than $50 per hectare.

But the industry is resisting the province’s move to raise the minimum bid.

“I think that looking at the minimum bid increase as a policy, we can appreciate the rationale to ensure that Albertans are getting value for their resource,” said Ben Brunnen, vice- president of fiscal and economic policy at the Canadian Association of Petroleum Producers, an industry group.

“For just about any bidding process, there’s always an assumption that there would be another bidder. That competition for bidding has generally led to relatively healthy bid prices for land despite where the minimum bid sits,” Brunnen said, adding that CAPP is urging the government to “proceed with caution.”