Economic Impact of Oil and Gas

1
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

2
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

3
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

4

Overall Methodology ( component linkages)
5
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.

6
Impact per 1 Additional Investment in Natural
Gas Well Development and Extraction
7

Oil Gas Sector Expenditures in BC

• Oil and gas sector investment increased
  gradually between 1985 and 1999
• During 1999-2001 it increased rapidly from 1.6
  billion dollars to 3.7 billion dollars.

8
Oil and Gas Industry Performance
9
Oil and Gas Industry shares in Total GDP in B.C.
and the Northeast Region ()
Source Statistics Canada and the Center for
Spatial Economics
10
Canadas Oil and Gas Industry
11
Canadian Sedimentary Basins
12
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

13
Oil and Gas Full Cycle Cash Flow
14
Oil and Gas Business TrendsAffecting 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

15
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

16
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

17
The Overall Survey Approach

18
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
19
Total Expenditures for Oil and Gas Producers
(2002)
Directly Hired labour Oil and gas producers
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.
20
Activity Shares of the Oil and Gas Producers
(2002)
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).
21
Total Expenditures for All Service and Supply
Companies (2002)
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.
22
Components of All Service and Supply Company
Expenditures on Goods and Services
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.
23
Shares of Drilling and Service Rigs
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.
24
Shares in the Total Drilling Expenditures (2002)
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.
25
Shares by Activity in Seismic Expenditures (2002)
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).
26
Other Service and Supply Company Expenditures by
Type - 2002
Other service and supply refers to all service
and supplies except drilling and seismic
services. Goods and service expenditures include
both directly procured and third party (or
indirect) purchases.
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.
27
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

28
Typical Drilling Expenditures
29
Compressor Installation
30
Producer Direct Expenditures

• OG 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 OG producers is 39 of total
  expenditures.

31
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.

32
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.

33

Expenditure Patterns
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
34
Expenditure Patterns (cont.)
39 of all producer expenditures are direct
expenditures on goods, services and labour

• PRODUCERS
• Make Initial Expenditures

Within BC Outside of BC
Drilling Companies
Within BC Outside of BC
61 of all producer expenditures are made to
third party Service and Supply (SS) companies
Seismic Companies
Within BC Outside of BC
All Other SS Companies
Within BC Outside of BC
35
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 Producer Companies

36
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.

37
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