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Alberta veers on royalties

NORVAL SCOTT AND RICHARD BLACKWELL

Wednesday, November 19, 2008

CALGARY, TORONTO — The Alberta government has decided to scale back controversial plans to impose new royalty rates on oil and gas production, citing the risk to jobs in the province after the global financial crisis hammered energy prices and cut companies off from funding.

Alberta estimates that the move will affect about 20 per cent of its conventional wells and cost a total of $1.8-billion in government revenue over the next five years.

The province was due to impose a new commodity-price-dependent royalty scheme on oil sands, natural gas and oil production from Jan. 1, seeking to increase the amount earned annually by the province by 20 per cent, or $1.4-billion.

Companies had long complained that the system, announced in October, 2007, would make Alberta uncompetitive and force them to explore elsewhere. But until Wednesday, the Alberta government had refused to budge in the face of the criticism, insisting that Albertans deserve a “fair share” from the development of their energy resources.

However, it's become increasingly clear that Alberta's oil and gas activity was set to drop dramatically.

Major companies have slashed Albertan investment in favour of exploring in more competitive North American regions, while junior firms have said they will rein in spending as the financial crisis has made it too expensive for them to obtain financing.

As a result, Alberta is introducing a “transitional” royalty rate companies can elect to pay on oil and gas wells drilled after Jan. 1 at a depth between 1,000 and 3,500 metres.

“This is all about a different world position we're in, in terms of credit,” Premier Ed Stelmach told a news conference in Edmonton. “The world has changed, and this is all about creating Alberta jobs.”

The province says the deal is not a royalty holiday. All companies will still have to shift to the new royalty framework by Jan. 1, 2014, while no changes have been made to royalty rates in the oil sands.

David Collyer, president of the Canadian Association of Petroleum Producers (CAPP), said he was “encouraged that the government has taken this action. Directionally, it encourages and stimulates activity. It's a step in the right direction.”

While the details of the change are not yet clear, the transitional rate appears to provide the most benefit to small to medium-sized companies, Mr. Collyer said. Without any changes to Alberta's royalties, CAPP had predicted that the number of oil and gas wells drilled in the province would fall 30 per cent in 2009 to 9,500 wells.

Gary Leach, executive director of the Small Explorers and Producers Association of Canada (SEPAC), said the changes “will certainly help.” SEPAC has been lobbying intensely to have the proposed royalty regime changed, especially after the economic and investment environment darkened in the past few months.

“We're please to see that the government has recognized that Alberta's home-based junior oil and gas sector … needed some help,” he said.

The industry is used to coping with external factors such as the plunge in the price of oil, Mr. Leach said. “But at least the government has realized that the focus has to be on making Alberta competitive for investment. I think we had lost that competitive edge with the new royalty proposals.”

But while the new scheme appears to provide some relief on new production, wells drilled this year won't be eligible for the transitional royalty scheme, and will therefore be at a disadvantage, said Jeff Tonken, chief executive officer of junior oil and gas firm Birchcliff Energy.

“I'm unclear how you can free up cash flow for future drilling if the new royalty regime still comes into effect on [wells we've already drilled],” he said.

Gil McGowan, president of the Alberta Federation of Labour, already rattled by news early this week of plummeting revenues, says changes to the royalties regime may make a bad situation worse.

“While this may – and I underline may – save jobs in conventional oil it almost certainly will make it more difficult to maintain quality services in the public sector,” he said.

The Federation had previously voiced concerns that Albertans were not getting their fair share of energy revenues and now worries that the province will bringing in less money than if it stuck with the old regime.

“Should we be giving away our resources at bargain basement prices in order to create a few more jobs in the short term? I'm not sure that's the most responsible thing for a government to be doing,” Mr. McGowan said.

With files from reporter Dawn Walton in Calgary

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