Alberta revamps oil and gas royalty regime

CALGARY -- Alberta’s energy industry, which has been fighting the province for more than two years over higher royalty rates that eroded its bottom line and pushed investment elsewhere, on Thursday applauded the Stelmach government for unveiling major changes to its royalty structure.

The new rules, which will be accompanied by regulatory changes, mirror the framework that was in place before Ed Stelmach, the Premier, announced significant royalty increases in 2007.

“We’re back to a competitive regime, which we had originally,” said John Dielwart, chief executive of ARC Resources Ltd. “We’ve kind of come full circle. I don’t think our industry can [view this] as anything but positive.”

Mr. Stelmach’s chief political rival, Wildrose Alliance leader Danielle Smith, also approved.

“It looks like they made some pretty good changes,” she told reporters after Mr. Stelmach and Ron Liepert, Alberta’s Energy Minister, wrapped up their press conference in Calgary. Investments, she said, could flow back into the province.

The new royalty structure, which will take effect in January 2011, comes after months of consultation with the energy industry -- a step that was absent when Mr. Stelmach rewrote the royalty framewowrk in 2007.

The maximum royalty rate on conventional oil wells will drop to 40% of revenue from 50%, and shift to 36% from 50% for natural gas.

The current maximum 5% royalty on the first year of a well’s life, unless it hits a production threshold first, will remain intact. This policy was first introduced as a temporary measure -- one of Mr. Stelmach’s five attempts to ease the pain created by waning energy prices and his 2007 royalty revamp.

Royalty rates between the minimum and maximum ends of the spectrum are still being worked out with the help of industry players. Those will be announced on May 31. Royalties for the oilsands were not part of the review.

While government coffers will take an initial hit as revenues from royalties drop, Mr. Stelmach said increased land sales and greater investment in the province will eventually make up for the shortcomings.

“The piece of the pie may be smaller, but we’re growing a much larger pie,” he said. “It is economic activity that makes the difference.”

Alberta will collect $785-million less in royalties in 2012-2013 under the new rules, but $400-million more than it would if the pre-2007 structure was in place, the government calculates.

The province expects oil and gas companies to reinvest an additional 2% of their cash flow, or $700-million per year, as a result of the changes starting in 2012. Companies currently reinvest about 60% of their cash flow.

The plan is projected to create 8,000 jobs in 2011-2012, and 13,000 more jobs annually across the economy, the government said.

Over the next 25 years, conventional oil and gas development in Alberta has the potential to add $2.5-trillion in new economic activity, according to the government’s report.

Mr. Liepert, the energy minister, said he wants the Energy Resources Conservation Board, an industry watchdog, to approve more pilot projects so new technologies can be tested in an attempt to get more oil and gas out of the ground. A report on the province’s regulatory regime is due in 90 days.

The Stelmach government launched this competitive review last summer, and many cautioned that further changes would be met with skepticism given the government’s habit of amending energy policy on the fly. But Mr. Dielwart, the CEO, think the Conservatives have learned their lesson.

“I believe this government, opposition parties, and the people of Alberta have learned the hard way how important a viable oil and gas industry is,” he said. “Therefore I think it will be much more difficult for a similar decision [like that in 2007] to be made.”

Financial Post

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