Economic Impact of Oil and Gas Sector in BC

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. 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 Objectives of the Analysis

3. 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 Key Study Components

4. Overall Methodology (& component linkages)

5. 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. Key Findings

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. Canada’s Oil and Gas Industry

11. Canadian Sedimentary Basins

12. 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 Four Distinct Phases of Oil and Gas Field Development

13. Oil and Gas Full Cycle Cash Flow

14. 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 Oil and Gas Business TrendsAffecting NEBC

15. 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 Principles for Oil and Gas Investment

16. 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 CERI Expenditure Analysis

17. Oil & Gas Producers Land Acquisition & Rentals Geological & Geophysical Well Drilling & Completion Production & Operation (including gathering & processing) Constru-ction of Facilities Others Service & Supply Companies Drilling Companies Seismic Companies Service & Supply Companies Directly Hired Labor Purchased Goods Purchased Services NE BC (%) Other BC (%) Labor Goods Services Out of BC (%) NE BC (%) Other BC (%) Out of BC (%) 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 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.

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. All Service and Supply Companies - Average Expenditure Share (%) Directly Hired Labor 51 Goods & Services 49 Total 100 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. Activity Share 9 % Fuel & Utility Services Equipment and Machinery 66 % Trucking & Transportation 19 % Others * 6 % Total 100 % *Includes chemicals, medical, safety, accommodation etc. 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 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.

31. 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. Producer Direct Expenditures (cont.)

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 ofservice and supply including drilling, seismic, construction, well completion and testing, environmental services and such others.

33. Aggregate Labour NE BC Other BC Non - BC Spending in BC 45¢ 22¢ 1¢ 22¢ by all Producers and Service Goods and Sector NE BC Other BC Non - BC Services C ompanies 16¢ 1¢ 38¢ 55¢ = $1 Total $1 S pent = NEBC Other BC Non BC 38¢ 2¢ 60¢ 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. PRODUCERS Make Initial Expenditures Expenditure Patterns (cont.) 39 % of all producer expenditures are direct expenditures on goods, services and labour 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 (S&S) companies Seismic Companies Within BC Outside of BC All Other S&S 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. 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. Summary

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