Oil: Land lust in Alberta

With the New Royalty Framework in place and land sales hitting record levels, the good times are back in the oilpatch.

With a full quarter of the year left to go, oil-and-gas land sales in Alberta hit the $2-billion mark in September 2010, bypassing the record set in 2005 and causing murmurs that another boom — or at least the end of the downturn — may be around the corner.

Land sales aren’t everything, of course. But they’re the beginning of everything. “Land is key. The oil and gas business is based on who has the land where the oil and gas is found,” says Gregg Scott, president of Scott Land &amp: Lease. Players buy land when they think they’ve got a shot at a big, or at least decent, payoff.

Scott’s clients are doing so in record numbers, at record speed. There’s a land sale in Western Canada just about every week right now, with prices frequently hitting record levels. It all adds up to a feeling of optimism that’s been absent from the patch for several years.

The buying spree is aided by the fact that about 40% of the land under lease by oil and gas companies expired during the downturn of 2008???09. That is why it isn’t just a matter of well-financed companies looking to expand their holdings. As Scott puts it, they have to “restock the shelves” just to stay in the game.

Most of the restocking is happening in Alberta. Although southeastern Saskatchewan hasn’t lost its appeal, either, with buyers there also setting records for per-hectare bids and gross bids on tracts of land, the 2010 Alberta spike suggests industry is much happier with the province’s revamped “New Royalty Framework,” which was rolled out in May 2010. Patch players believe the royalty review Alberta launched in 2007 contributed considerably to the 2008 — 09 activity freeze, and effectively helped British Columbia set the Canadian land sales record in 2008 at $2.7 billion. Meanwhile, Alberta barely cracked $1 billion — and that was before the full impact of the world financial crisis hit.

Now, the NRF is effectively in line with British Columbia and Saskatchewan’s royalty regime. Perhaps as important as the NRF’s competitiveness is the belief that the Alberta government is finally finished “tinkering” with the framework. In the oilpatch, change equals uncertainty, and when your business model consists of throwing money down dark holes while at the mercy of world commodity prices, any additional government-created uncertainty tends to drive investors to the sidelines.

Alberta is still primarily a gas basin. But, somewhat ironically, terrible natural gas prices (gas hit record seven-year lows in April 2010) have been helping it too, diverting focus from B.C. shale gas plays in Horn River and Montney and Saskatchewan’s Bakken formation to Alberta’s good old Pembina oilfield. Pembina, with an original estimate of some 7.8 billion of barrels of original oil in place, is Canada’s largest oil reserve as well as its most prolific. Between oil holding steady around $80 a barrel and advances in horizontal drilling and multi-stage fracking technology, conventional oil plays in already milked areas like Pembina have junior exploration companies snapping up previously ignored plays.

The plays and land sales aren’t just about oil, however. The big winners in the patch bet on dark horses, and at least some of them are betting on Alberta gas. “Contrarian oil and gas players are buying up gas-prospective land to position themselves for the recovery when it comes,” says Scott. “If they are right, they will be handsomely rewarded.”

And even if they are wrong, their dark horse bet helps build the momentum of optimism that’s the first necessary ingredient in every oilpatch boom.