David Ebner

Vancouver — Globe and Mail Update Last updated on Thursday, Aug. 06, 2009 01:57PM EDT

British Columbia is slashing royalties on new natural gas wells in an aggressive bid to win business from rival Alberta and spark drilling in the province's northeast, where companies have spent several billion dollars in the past two years to acquire land to explore.

All wells drilled in B.C. from September through the end of next June will be charged a nominal royalty of 2 per cent for the first year of production.

The move, which includes several other royalty breaks and regulatory changes, vigorously responds to a similar program in Alberta introduced earlier this year that charges 5 per cent on new wells. Like B.C., the program was designed to encourage drilling, work that has slumped during the recession.

“In this day and age capital investment is very fluid and we want to encourage the oil and gas sector to invest in British Columbia,” Energy Minister Blair Lekstrom said in a statement on Thursday morning. He dubbed the program a “stimulus package” that would generate $2.50 for the government in revenue for every $1 of royalty credits.

The major factor that has slowed natural gas NG-FT drilling is the low price for the commodity as supply rose and demand fell.

However, a nominal royalty in the first year of production is a strong incentive, because that is when the well's output is the most flush and a low royalty makes it much more profitable.

B.C. is struggling with a rising deficit and the spectre of big cuts to health care. The province said money from new drilling will go to health and education.

The province's rugged northeast is home to the hot Montney and Horn River gas plays, which have been unlocked with new drilling technology. Horn River especially has intrigued the industry, with Exxon Mobil Corp. XOM-N recently spending more than $100-million to acquire additional land in an area that could become Canada's biggest-ever natural gas discovery.