Brian Zinchuk is editor and owner of Pipeline Online
Most of the rigs drilling in southeast Saskatchewan this past winter were drilling mult-lateral wells. Photo by Brian Zinchuk
There’s something odd about the 2026-27 provincial budget when it comes to oil revenue.
First of all, I must point out that clearly the budget was crafted before the Iran War kicked off. But that doesn’t explain this:
The budget document stated, “The overall outlook is shaped by lower oil revenue, partially offset by higher potash revenue and stable uranium revenue. Oil and natural gas revenue is forecast at $721 million, a decrease of $347 million, or 32.5 per cent, from the 2025‑26 Budget. The decline reflects significantly lower forecasted oil prices and production levels as compared to the prior budget, partially offset by a lower exchange rate forecast.”
And when you look at production numbers, production is expected to be flat. Here’s how I reported the numbers from the budget document:
“Actual production for 2024-25 was 163.1 million barrels (446,849 bpd). Last year’s budget expected 166.9 million barrels (457,260 bpd), but the forecast now expects the year ending March 31, 2026 to come in at 160.3 million barrels (438,178 bpd). For 2026-27, the budget expects 165.7 million barrels per day (453,973 bpd).”
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The price of oil is budgeted to be 15.8 per cent lower than last year’s budget. The differential between West Texas Intermediate is expected to be 2 per cent worse. But production is expected to be almost exactly the same, declining just 0.7 per cent from last year’s budget. But if you take it from the expected realized production for the last year, production is expected to climb 3.3 per cent. And the Canadian Dollar is expected to be 3.3 per cent higher, meaning we will get a bit lower for oil as a result (a lower Loonie means we make more on each barrel. A slightly higher Loonie means we make slightly less on each barrel)
So how do you get such a profoundly lower expected oil revenue, on relatively flat production, even with expected lower oil prices? They’re not expected to be down that much, after all.
What gives?
Minister of Finance and Deputy Premier Jim Reiter, with his second budget on March 18. 2025. Government of Saskatchewan photo
I strongly suspect something I’ve been warning about for a while now is coming home to roost.
The Multi-Lateral Oil Well Program, introduced two years ago, followed by the Low Productivity and Reactivation Program in last year’s budget, were incentives meant to increase oil production towards the stated goal of 600,000 barrels per day. The first program, set for four years, was expected to add 50,000 barrels per day. The second was expected to add 30,000.
Each of them had an especially inviting carrot – a volumetric incentive which would see royalties reduced, from an average of 17.5 per cent (used in the example Pipeline Online worked through with the Ministry in explaining the program two years ago) to 2.5 per cent. For the multi-lateral program, if you maxed out the program, you could get that preferential reduced royalty rate on the first 16,000 cubic metres (100,600 barrels) of oil on a well. Based on a $70 barrel, that was giving up roughly $1.5 million in potential royalties, per program-maximized well.
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The program has proven to be quite popular. Most of the rigs drilling in the southeast these days are drilling multilaterals that would fit this program. It’s not just the fringe areas being developed, as the program was sold, but the core areas that have been consistently drilled. I understand the program has seen success, too. In fact, a year ago I gave a speech in Calgary to the Canadian Association of Geophysical Contractors where I said you’d have to be an idiot if you weren’t drilling these wells. The foregone royalty basically covers the cost of drilling the well.
It’s great for oil companies, great for drilling companies, and a few other services like directional drillers, but it’s a disaster for many oilfield service companies. That’s because in southeast Saskatchewan, at least, for much of the last 17 years, each active drilling rig spent 6-7 days to drill a well, meaning each rig typically drilled four wells per month. That meant each month, for every rig working, the land surveyors would do four surveys. The dirt movers would push four leases. The rig movers would perform four moves. Truckers would bring out casing four times, and the casing hands would run four sets of casing. The well testers would test four wells, and the service rigs would complete four wells. Finally, four pumpjacks would be sold and set up, and eventually flowlines would be pipelined to four wells. Hotshots would be running to the drilling and service rig for four different wells. And that’s an incomplete list of those impacted.
A typical multilateral in the area is 23-42 days, with 30 being a good, round number. That means for all of those services that used to do four activities per rig per month, they’re now doing one, or even less at times. That’s a 75 per cent reduction in activity, or more. It’s brutal, and I’ve already seen one service company come up for auction that was impacted by it.
Most of the rigs working in the southeast this past winter were drilling wells of this type.
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There’s also the issue that a well gets its best production in the first few months of its existence, then tails off from there for many years. That means the oil company, and the province, would generally get most of its revenue in the first few months of a well’s production.
I started warning quite a while ago that a future finance minister could end up looking at his or her revenue and realize a lot of the money they expected is gone. Dropping royalties to 2.5 per cent will do that for you. I strongly suspect that’s why expected oil revenue is down a lot more than the price of oil or volume of production would suggest.
We’re halfway through the multilateral program’s four years now. Did it increase oil production? Clearly not. It may have backfilled declines – that I will freely grant. But the production numbers forecast for this upcoming year are essentially flat, not just for the previous two years, but long, term, since around 2002.
Did the program get more people working? In select fields, like drilling, directional drilling and the like, yes. But ask anyone in those services impacted that I listed above, and you’ll have to look long and hard to find a yes.
The multi-lateral wells were coming, just as surely as horizontal wells supplanted vertical wells. Open hole multi-laterals may not work everywhere, or for every formation, but they are a technology that will spread wide and far wherever it is applicable. And the savings for the oil companies should clearly make it economic, without incentives.
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As the program gains in success, a large cohort of wells drilled in the second half of this decade will end up paying next to no royalties. A lot of wells don’t even get to 100,000 barrels to total production, and even if they do, it’ll take many years to get there. So that large cohort will be like a boa constrictor trying to swallow a large animal. It’ll be a lump in the throat of reduced revenues for a long time to come.
You don’t build many hospitals, schools or highways at 2.5 per cent royalty. And I think the Finance Minister, formerly the Energy and Resources Minister who implemented these programs, may be finding this out.
Perhaps unsurprisingly, there is no new incentive program announced in this year’s budget, just an extension of a minor one. Anyone care to guess why?
The oil price spike caused by the Iran War will result in much higher oil revenues, not just for the tail end of the 2025-26 fiscal year, but for the foreseeable medium term. That might mask this precipitous decline in oil revenues for the provincial government. But it won’t fix the problem. And any expected windfall from higher oil prices will end up being a whimper, at best, from any well under this program – which is to say a lot of wells drilled over the last two years.
The Multi-Lateral Well Program is now at the halfway point. It’s time to take a hard look at it.
Brian Zinchuk is editor and owner of Pipeline Online. He can be reached at brian.zinchuk@pipelineonline.ca.
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