No Slide Title - Dawson Creek Oil and Gas

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Economic Impact of Oil and Gas
Sector in BC
David Molinski
Assistant Deputy Minister
Oil and Gas Division
Ministry of Energy and Mines
March 15, 2005
Dawson Creek, BC
Objectives of the Analysis
• Identify expenditure patterns of the oil and
gas industry by types of expenditures and
where they are made
• Identify the significance of the oil and gas
industry to both the Northeast and
provincial economies
• Create economic models to assess future
impact of the oil and gas industry price,
fiscal and production scenarios
Key Study Components
• Survey to capture expenditure data
• Construction of BC Oil and Gas Model
• Approach similar to oil and gas supply model
(OGSM) of the US Department of Energy Modelling
System (NEMS)
• Calculates oil and gas production and investment
as inputs to Macroeconomic models
• Macroeconomic models (Northeast &
British Columbia)
• I/O Based General Equilibrium Models
• Identifies the total impact of changes in the oil and
gas sector
Overall Methodology (& component linkages)
Geologic,
Economic and
Other Data
BC Oil and Gas
Model
Economic, Fiscal,
Demographic and
Other Data
Macro Economic
Models:
1. Province
2. Northeast BC
Economic Impac
t
Analysis
Primary Data on
Firm-level
Expenditures
Expenditure
Analysis
Key Findings
• For each $1 additional 1997 dollars investment in natural
gas well development and extraction, $2.5 additional
1997 dollars of GDP are generated in British Columbia.
• For each $1 additional 1997 dollars investment in natural
gas well development and extraction, $1.29 additional
1997 dollars of GDP are generated in the Northeast.
• GDP refers to value of production that takes place within
the province regardless of who actually undertakes the
activity or their place of origin.
Impact per $1 Additional Investment in
Natural Gas Well Development and Extraction
Indicator
GDP (per $ 1 additional 1997
dollar of investment)
- Consumer Expenditures
- Residential Investment
Expenditures
- Non-residential
investment Expenditures
- Net exports
Source: CERI/C4SE
B.C.
2.50
Northeast B.C.
1.29
1.36
0.33
0.79
0.16
1.40
1.08
-0.65
-0.88
Oil & Gas Sector Expenditures in BC
Expenditure (Oil & Gas Sector)
• Oil and gas sector
investment increased
gradually between
1985 and 1999
4000
3000
2500
2000
1500
1000
500
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
0
1985
Million Dollar
3500
• During 1999-2001 it
increased rapidly from
1.6 billion dollars to 3.7
billion dollars.
Oil and Gas Industry Performance
Variable/Year
GDP
1996
1043.1
1997
1080.2
1998
1176.2
1999
1275.4
2000
1431.8
2001
1590.4
2002
1637.8
1055.5
1293.7
1302.1
941.7
1496.1
2455.7
1571.7
Gas Royalties
(Current $)
131.7
174.8
180.1
293.7
876.6
1131.8
787.0
Oil Royalties
(Current $)
72.9
79.6
62.7
76.1
136.4
110.7
107.0
($1997 Millions)
Investment
($1997 Millions)
Source: Statistics Canada and B.C. Government
Oil and Gas Industry shares in Total GDP
in B.C. and the Northeast Region (%)
45
1.5
1.3
40
1.1
35
0.9
30
0.7
25
0.5
1995 1996 1997 1998 1999 2000 2001 2002
North East (Left Axis)
BC (Right Axis)
Source: Statistics Canada and the Center for Spatial Economics
Canada’s Oil and Gas Industry
Conventional oil
and gas
Canada
BC
Capital Inv.
$23.8 B
$3.8 B
Oil Wells
4845
91
Gas Wells
12,951
673
Oil Prod.
1,465 mB/d
.43 mB/d
Gas Prod.
16.9 Bcf/d
2.5 Bcf/d
Revenues
$77.5 B
$6.5 B
$16 B
($1.6 B 2002)
Royalties/Taxes
Canadian Sedimentary Basins
Four Distinct Phases of
Oil and Gas Field Development
Exploration – Searching for Petroleum
– Geophysical, Seismic, Drilling
Development – Drilling wells/Laying Pipe
– Engineering, Drilling, Fabrication, Construction
Production – Recovering the Resource
– Engineering, Operations, Processing, Shipping
Decommissioning - Abandonment – Removal of
Facilities
– Engineering, Environmental, Construction
Oil and Gas Full Cycle Cash Flow
Oil and Gas Business Trends
Affecting NEBC
• Global Nature of Industry -- goods & service
centres
– Industry consolidation – e.g., drilling companies
• Global & North American centres
• Locational & other decision factors influencing
where industry centres develop
– Local service businesses
– Regional service businesses
– National and International service businesses
Principles for Oil and Gas Investment
• Companies generally allocate Budget $’s for
Exploration, Development, Production and
Decommissioning each year.
• Each phase has a local investment and
employment profile e.g. Exploration vs.
Production expenditure profile
• Individual company local vs. non-local
expenditures influenced by business strategy
• Individual provincial local vs. non-local
expenditures influenced by maturity of the basin
CERI Expenditure Analysis
• Based on survey of companies in oil and gas
industry:
– Large, medium and small producers
– Service and Supply companies: (i) drilling, (ii) seismic
and (iii) all other service and supply companies
The Overall Survey Approach
Oil & Gas Producers
Production
Land
Geological
Well
& Operation
Acquisition
&
Drilling &
(including
& Rentals Geophysical Completion gathering &
processing)
Directly Hired
Labor
Construction of
Facilities
Service & Supply Companies
Others
Drilling
Companies
Purchased Goods
Service &
Supply
Companies
Seismic
Companies
Purchased Services
NE BC (%)
Other BC (%)
Out of BC (%)
Labor
Goods
Services
NE BC (%)
Other BC (%)
Out of BC (%)
The Survey Process
Face-to-Face Meetings with
Select Producers and Oil and Gas
Associations
Focus Group Meeting with
Producer & Drilling Companies
Finalization of Survey Instruments
with Input from Ministry
and Industry
Survey Mail- out
Multi-layered Follow-up
Total Expenditures for Oil and Gas Producers
(2002)
Producers -- Average Expenditure Share (%)
Directly Hired Labour
Purchased Goods
Purchased Services
Total
15
24
61
100
Directly Hired labour: Oil and gas producer’s regular employees (i.e., internally hired)
involved in oil and gas activities in Northeast region of BC and directly contracted
fulltime consultants for the same purpose.
Purchased Goods: All goods & services directly purchased by the company. It excludes
goods and services purchased through a service and supply company.
Purchased Services: All goods & services purchased through a service and supply
company.
Activity Shares of the Oil and Gas Producers
(2002)
Activity
Directly Hired Labour
Directly Purchased Goods and Services
Drilling
27%
40%
Production and Operation
28%
18%
Facility Construction
28%
37%
Other *
16%
5%
Total
100%
100%
* Includes land acquisition and rentals, geological and geophysical services etc.
Drilling, production & operation and facility construction account for almost
equal shares in total expenditures on directly hired labour.
Drilling and construction of facilities are main activities in terms of
expenditures on purchased goods (e.g., goods purchased for casing and
cementing; drilling bits, surface mud and chemicals).
Total Expenditures for All Service
and Supply Companies
(2002)
All Service and Supply Companies - Average Expenditure Share (%)
Directly Hired Labor
Goods & Services
Total
51
49
100
Labour: Total labour including directly hired or associated with
purchased services from the third party.
Goods & Services: All goods and services including both directly
purchased or associated with services from the third party.
Components of “All Service and Supply Company”
Expenditures on Goods and Services
Activity
Fuel & Utility Services
Equipment and Machinery
Trucking & Transportation
Others*
Total
Share
9%
66 %
19 %
6%
100 %
*Includes chemicals, medical, safety, accommodation etc.
Major goods and services normally procured directly or through the third
party by the service and supply companies including fuel, equipment and
machinery and trucking and transportation.
Equipment & machinery including construction equipment, part rental, office
supplies, machine parts etc., accounts for two thirds of the service and supply
companies’ total expenditure on goods and services.
Shares of Drilling and Service Rigs
Drilling Rig
Service Rig
Total
Expenditure Share Drilling Rig vs. Service Rig
2002
2001
2000
1999
1998
59
63
58
55
52
41
37
42
45
48
100
100
100
100
100
Drilling activities are divided into two groups based on whether the
activities are related to drilling (drilling rig) or servicing (service rig).
The trend shows that the share of drilling rig is increasing, whereas the
share of service rig is decreasing. This may result from deeper well
drilling over the years.
Shares in the Total Drilling
Expenditures (2002)
Rig Type
Shares by Item in Total Drilling Expenditures (%)
Fuel
Labor Maintenance Others*
Total
& Repair
Drilling Rig
14
55
22
9
100
Service Rig
6
69
20
5
100
Total Rig
11
61
21
7
100
* Refers to insurance, rentals and training
Major drilling expenditure items include fuel, labour, repair and
maintenance.
Labour is a key expenditure item in drilling accounting for about 70% of
total service rig expenditures and 55% of drilling rig expenditures.
Minimal change in the expenditure structure by items has taken place
during the last five years.
Shares by Activity in Seismic
Expenditures (2002)
Seismic Expenditure by Activity (%)
Activity
Land Clearing
Surveying
Downhole
Recording
Labour
37
16
20
2
Goods &
Services
14
5
19
34
Total
19
7
19
26
Others*
26
28
28
Total
100
100
100
* Others includes permit agents and fees, safety,
medical, inspection, accommodation and processing
Seismic includes land clearing (timber damage, cat cutting, slashing line, extra
slash, snow files); surveying (cat push and survey), down hole (trucking,
drilling, drill push, down hole); recording (recording and supervision); and
others (permit agents and fees, safety, medical, inspection, accommodation and
processing).
Other Service and Supply Company
Expenditures by Type - 2002
Other Service & Supply
Goods & Services Shares
Activity
Fuel
Equipment and Machinerya
Trucking & Transportation
Share (%)
14
69
8
Other service and supply
refers to all service and
supplies except drilling
and seismic services.
Goods and service
expenditures include
both directly procured
a
Includes construction equipment, parts rentals,
and third party (or
machine parts, office supplies etc.
b
indirect) purchases.
Includes chemicals, medical, safety, accommodations etc.
Major goods and services normally procured directly or through the third
party by the general service and supply companies include fuel, equipment
and machinery and trucking and transportation.
Othersb
Total
8
100
Where are goods, services and
labour sourced? Why?
• Kinds of goods needed, and where they are
manufactured
• exploration, development, production, abandonment
• Kinds of skills and services needed and where
they are sourced
• exploration, development, production, abandonment
• Influences for expenditure decision making
• Why are producers and service sector
expenditure patterns different
Typical Drilling Expenditures
Major Cost
Items
Expenditure
Estimated
Local
Potential
Spend
Types of Services Involved
Lease Const.
$38,000
100%
Construction and
reclamation of drilling lease
Rig Move &
Transp.
$42,000
100%
Trucking costs to move rig
and transport equipment
Drilling
$3,329,500
50%
Rig Rental, Drill Pipe, Fuel,
Labor, Ancillary equip. costs
Completion
$290,000
85%
Preparing the well for
production
Other
$5,000
0%
Geology, Engineering
services
Total
$3,704,500
50%
Compressor Installation
Major Cost Item Expenditure
Compressor Skid $1,700,000
Estimated
Local
Potential
Spend
0%
Types of Services
Involved
Purchase
Compressor
Equipment
Transportation
$15,000
100%
Transport skid to
site
Field Installation
$1,000,000
50%
Clearing, Site
Preparation,
Welding, Piping
and Electrical
Total
$2,715,000
20%
Producer Direct Expenditures
NEBC
27%
O&G producers (2002)
–
–
–
–
–
30% of direct labour expenditures
made within the province.
North-eastern BC labour is involved in
production, operation, and facility
construction activities undertaken by
the oil and gas producers
12% of direct goods and service
expenditures made within the province
Direct goods and service expenditures
include purchases made directly by oil
and gas producers for drilling,
production & operation and
construction activities.
Direct spending by O&G producers is
39% of total expenditures.
Other BC
3%
Out of BC
70%
NEBC
11%
Other BC
1%
Out of BC
88%
Producer Direct Expenditures (cont.)
• All personnel physically living and working in BC
irrespective of their actual residence is included
in labour sourced from within BC.
• Local purchases include those bought through
local vendors.
• Actual goods manufacturing may take place
outside the region.
“All Service and Supply Company”
Expenditures
Service and supply companies
(2002)
– 63% of direct labour expenditures
made within the province.
– 47% of direct goods and services
expenditures made within the
province.
– Labour sourced in BC includes
those physically working in BC,
irrespective of their origins.
– The service and supply activity
includes all types of service and
supply including drilling, seismic,
construction, well completion and
testing, environmental services
and such others.
Out of BC
37%
NEBC
61%
Other BC
2%
NEBC
45%
Out of BC
53%
Other BC
Expenditure Patterns
Aggregate
Spending in BC
by all Producers
and Service
Sector
Companies
= $1
Total $1 Spent
Labour
45¢
NE BC
22¢
Other BC
1¢
Non-BC
22¢
Goods and
Services
55¢
NE BC
16¢
Other BC
1¢
Non-BC
38¢
=
NEBC
38¢
Other BC
2¢
Non BC
60¢
Of the total expenditures 55% is spent on goods & services and
the remaining 45% is spent on labor
About 40% of the total expenditure is made in the province
Expenditure Patterns (cont.)
39 %
of all producer
expenditures
are direct
expenditures
on goods,
services and
labour
PRODUCERS
Make Initial
Expenditures
61%
of all producer
expenditures are
made to third party
Service and Supply
(S&S) companies
Within BC
Outside of BC
Drilling
Companies
Within BC
Outside of BC
Seismic
Companies
Within BC
Outside of BC
All Other S&S
Companies
Within BC
Outside of BC
Labour Expenditures:
Producer Companies/Service and Supply
Companies
In a context of a rapidly growing industry, labour from
within the province has basically maintained its
participation between 1998 and 2002.
Service and Supply Companies
100%
6
13
4
10
5
9
100%
14
9
80%
Producer Companies
11
7
80%
58
40%
62
65
68
70
3
3
3
35
32
29
27
1999
2000
2001
2002
60%
60%
81
86
86
77
81
40%
20%
20%
2
40
3
0%
0%
1998
1999
NEBC
2000
Other BC
2001
2002
Out of BC
1998
NEBC
Other BC
Out of BC
Summary
• The oil and gas industry has a major impact on the
provincial economy as measured by GDP:
– Per $1 additional 1997 dollars investment in natural gas well
development and extraction, $2.5 additional 1997 dollars of GDP
are generated in British Columbia. For the Northeast, the impact
is $1.29 additional GDP.
• About 40% ($1.4 billion) of all industry expenditures
remain in BC.
• Primary reasons for sourcing labour, goods and services
outside BC are: use of large, national supply contracts;
shortened activity window, labour demand exceeds local
supply; and provincial tax regime.
Sustaining the Growth
• Addressing the availability issue
• Drilling incentives (i.e. Summer Drilling Program,
Deep Drilling Program, etc.)
• Infrastructure Development
• Removing Fiscal Barriers
• Standardised Regulatory Regime in Western
Canada