Regulations need to change if Quebec wants to attract oil and gas investment

When petroleum companies think about where to invest money in exploration and development of oil and gas, Quebec is far down the list of preferred destinations.

Quebec ranks 101st out of 147 jurisdictions around the world in terms of attractiveness for oil and gas investment, according to the Fraser Institute’s 2012 Global Petroleum Survey. This poor showing confirms a trend that has seen Quebec decline in the rankings since 2009: 92nd place (of 135) in 2011, 77th (of 133) in 2010, and 68th (of 143) in 2009. The depth to which Quebec has now sunk in the minds of investors will be difficult to overcome and it does not bode well for either Quebecers or the Quebec economy.

Quebec is less highly regarded by petroleum explorers and developers than socialist Norway and Denmark – countries which nobody would accuse of being lax when it comes to environmental protection. Further, all the jurisdictions in North America, Australia, New Zealand and Europe that were included, only New Brunswick, Greece, Italy, Ukraine and Russia had worse ratings than Quebec on the Regulatory Climate Index, which is based on responses to six survey questions regarding energy regulation. In particular, the industry is concerned about the inconsistent manner in which petroleum industry regulations are administered in Quebec and uncertainty regarding environmental regulation.

Because shale gas is the only Quebec petroleum resource that has been attracting investor attention in recent years (exploration in the Gulf of St. Lawrence could be of future interest), Quebec’s lackluster performance on these issues appears to reflect the province’s mishandling of policy regarding shale gas development.

Oil and gas investors prefer jurisdictions where energy policies and regulations, including those needed for environmental protection, are clear and unlikely to change much during the life spans of contemplated projects. After giving companies such as Gastem Inc., Questerre Energy Corp. and Talisman Energy Inc. a green light to explore for shale gas resources, and enticing them to do so with what appeared to be a competitive regulatory framework, the Quebec government abruptly placed a moratorium on shale gas development pending further study.

This move was applauded by anti-development lobbyists and others who fail to recognize that natural gas is a much cleaner burning fuel than other petrochemical products. Indeed, you would think environmentalists would view replacing the use of petroleum or diesel for transportation and coal for electrical generation with natural gas as a good thing. Yet this point seems to have been lost in the debate in Quebec.

On the other hand, the moratorium on shale gas development has been a disappointment to companies that invested in geophysical surveys and exploratory wells or were preparing to do so. It is little wonder, therefore, that some have moved on to other jurisdictions. This will be very costly to the people of Quebec who stand to miss out on the benefits from shale gas development.

The geological formations in which shale gas is found vary in size, depth from the surface and physical properties as well as proximity to water supplies and other industrial activities such as farming and residential and commercial areas. For this reason, the extent of environmental protection required in the event of shale gas production varies from one location to the next.

If Quebecers determine that a shale gas industry can be viable with appropriate environmental safeguards and, after examining the potential benefits and costs, they agree that development is worthwhile, the Quebec government must then develop a royalty or production tax that is competitive with other jurisdictions and a regulatory framework that is clear and not subject to changes that would impose unexpected costs on producers. With time, this should attract investment and result in significant economic benefits.