Clean Electricity Regulations: Longhorn Oil & Gas submission

By Brian Zinchuk

Note: Several Saskatchewan oil and gas producers made detailed submissions to the Saskatchewan Economic Impact Assessment Tribunal looking into the federal Clean Electricity Regulations. The tribunal was formed under the auspices of the Saskatchewan First Act, meant to determine what impacts various federal climate change initiatives would have on this province’s economy. The intention is to see whether the provincial government needs to act to protect the Saskatchewan economy.

Longhorn Oil & Gas is a Kindersley-based junior oil producer owned by Gary Becker, who is its president and CEO. In the past, Becker has made similar submissions to a senate committee looking into the federal Impact Assessment Act.

Longhorn was the only junior oil producer to make a submission to the tribunal. This submission in particular was quoted in the tribunal’s report when it considered impacts on the oil and gas sector.

Longhorn Oil and Gas president and CEO Gary Becker, on the edge of one one of his leases north of Kindersley. Photo by Brian Zinchuk

Longhorn Oil and Gas Northern Blizzard battery north of Kindersley. Photo by Brian Zinchuk

Here is Longhorn’s submission, verbatim:

Re: The Impacts of the Proposed Clean Electricity Regulations on Longhorn Oil & Gas Ltd.’s Operations

We are very thankful to have the opportunity to submit and respond to the tribunal on this very important topic and are also very appreciative that the tribunal has been set up and is now operating. The future of the entire province is at risk, not just the oil and gas industry. As you are well aware, the oil and gas sector represents a cornerstone of the Saskatchewan economy, contributing significantly to employment, provincial GDP, and government revenues through royalties and taxes.

The anticipated utility rate increase of 107% by 2035 poses a significant challenge for the industry as a whole but, even more so for older fields that move significant amounts of water. These fields generally have a flatter production profile with long life reserves; however, they are extremely economically sensitive to higher power prices. This memo outlines the potential impacts the utility rate hike would have on Longhorn Oil & Gas Ltd. (Longhorn) and its surrounding communities, including Coleville, Dodsland, Kerrobert, Kindersley, and Luseland, and surrounding rural municipalities.

The sector is a major employer and a critical source of economic activity, driving both direct and indirect job creation throughout the province.

Longhorn currently produces oil and gas at three properties (referred to as Buffalo Coulee, Northern Blizzard, and Smiley.) All industry players will undoubtedly agree that utility costs are one of the most significant operational expenses.

Longhorn’s income statement in 2023, shows utility expenses totaling $3.75M. This accounted for 26.25% of total operational costs. The estimated utility increase would cause utility expenses to rise to $7.78M annually, accounting for 42.43% of operational costs (see Appendix A). This would drastically decrease Longhorn’s profitability.

As the Northern Blizzard (NB) property utilizes the most power of any Longhorn property (11.9 million KwH annually), I would like to highlight the impact the proposed rate increase would have on this property alone (see Appendix B). In 2023, utility expenses associated with the NB property were $2.85M. All other things held equal, a 107% utility increase results in operational expenses more than doubling (by $3.0M). This unreasonable increase eliminates the profitability of the entire NB property and would cause any sensible business owner to question the financial viability of the asset. Moving from a $785K profit to a $1.95M loss would push this property to abandonment status.

Still isolating the NB property, I would like to highlight how abandoning this property would impact various stakeholders including the government, third party vendors, employees, and surrounding communities.

As are all of our production assets, NB is a vital source of royalties and taxes, essential for funding public services and infrastructure. In 2023, NB’s share of federal/provincial tax, SK corporate capital tax, royalties and various Ministry of Energy and Resources levies was approximately $500,000.00.

This reduction in revenue would have negative impacts to the local and provincial economy. Reducing the ability to fund public services, infrastructure projects, and social welfare programs. Those types of revenue streams are very hard to replace. Increased taxation or spending cuts on public services and infrastructure not viable options as Saskatchewan already has a competitive disadvantage being next door to Alberta (no PST and huge oil & gas reserves).

This sets us on a path to having long-term negative effects on economic growth and quality of life here in the province. For example, cuts in education funding can affect workforce quality, and reductions in infrastructure spending can hinder economic efficiency and overall competitiveness.

Our federal government addresses tax revenue shortfalls by borrowing. This is not a long-term solution. In March 2023, the Federal government debt reached $1,423.3B (USD), and while borrowing can help maintain spending levels in the short-term, interest rates are at a 20-year high. Debt service charges are now among the costliest line items in the federal budget.

In 2023, Longhorn paid approximately $7.1M to third party vendors which included contract operators, service providers and rural municipalities. The elimination of these expenses as previously mentioned, would have a ripple effect on the local economy, affecting many other businesses and services.

For example, there are five contract operators responsible for ensuring the NB property is running efficiently ($915,000.00). All would lose their contracts with Longhorn if the NB property were abandoned. Other notable expenses that would be eliminated include surface lease payments to landowners ($460,000.00), property taxes paid to rural municipalities ($560,000.00), repairs and maintenance ($1,750,000.00) and well servicing contracts ($950,000.00).

Eliminating these expenses would cause indirect job losses, affecting local businesses such as retail stores, restaurants, and service providers, leading to further economic downturns within Longhorn’s surrounding communities.

Not only would indirect jobs be lost if the NB property were abandoned, direct jobs too. Without this property, Longhorn would resort to layoffs as the staffing mix would be over capacity. In addition to lower morale among remaining employees, the layoffs have negative implications for consumer spending. The loss of income for the individuals would lead to reduced consumer spending. Local businesses rely on consumer demand, potentially leading to further job losses. Unemployment often leads to increased government spending on social welfare programs such as employment insurance benefits, welfare assistance, and healthcare. This adds pressure to government budgets/spending, and may require increased borrowing, which I have already addressed above as unfeasible.

Historically, Longhorn has been a generous contributor to its surrounding communities. In 2017, Longhorn committed $1,000,000.00 over five years to one of the largest construction projects in Kindersley’s history – the Kindersley Aquatic Centre.

Companies facing financial strain due to increased costs will cut back on their community involvement and charitable contributions as they prioritize core business operations and financial health.

There will be a shift in focus strictly to survival and efficiency, moving resources away from charitable causes to core business operations. This can have a significant impact on the local community, especially for organizations that rely heavily on corporate sponsorship to operate such as local food banks, crisis centres, and youth programs. Drastically increased utility expenses would lead to a significant reduction in community involvement and support, affecting not just the immediate beneficiaries of such efforts but also the broader socio-economic fabric of the community.

The projected increase in utility rates presents a formidable challenge for Saskatchewan’s oil and gas sector. The local economy is interconnected, and money spent by employees, companies, and government circulates through various channels. When a company cuts expenses significantly, it not only affects those directly involved but also indirectly impacts businesses and individuals throughout the local economy due to reduced spending. This multiplier effect amplifies the economic impact of the initial expense reductions.

While eliminating expenses associated with the NB property would be necessary under the proposed Clean Electricity Regulations for Longhorn to remain competitive and financially viable, the broader implications on the local and provincial economy are profound and cannot be overstated!

Current and future employment, local business, government revenues and overall economic health and prosperity of my community and honestly the whole province are at stake.

In summation, I would like to state that Longhorn (being a private, small Saskatchewan operated producer) runs as efficiently as ANY in the province, perhaps Western Canada. If we are unable to operate, I suggest no one can.

We (as have all of us in our industry) have strived and met the “ever changing” emissions regulations reduction targets and in many cases have surpassed them. We know the importance of providing clean and sustainable energy products. Saskatchewan, Alberta, Canada for that matter is leading the world on this front.

We need the world to buy more of our ethically and environmentally produced oil & gas products. Not less. These electrical generation regulations will make it impossible to compete with the likes of the Saudis, Iranians, and Russians.

In my opinion, these regulations will be a death blow to the oil & gas industry here and rural Saskatchewan die along with it. Furthermore, global emissions will rise when the Canadian industry is dead and the continuing demand for oil and gas is backfilled by the aforementioned jurisdictions.

So, what have we actually accomplished? Thank you for your consideration in this extremely important matter.

Sincerely,
Gary Becker
President/CEO
Longhorn Oil & Gas Ltd.