| 12/17/2007 - Alberta's New Energy Royalty Regime |
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By Roslyn McMann Earlier this year, after an eight month review, the Government of Alberta finally released a ‘New Royalty Framework’ for energy sources. This will have implications for all energy users in Canada since it will impact the economics of the oil and gas industry, which will, in turn, affect supply and pricing for end-use customers. Before explaining its implications in more detail, it is probably best to start by reviewing what we mean by ‘royalty’ in this context... The Alberta department of energy explains a royalty as “…the price that an owner of a natural resource charges for the right to develop the resource.” 1 The ability to charge for development in the resource hinges on the ownership of the resource. “In Alberta, 81% of the subsurface mineral rights are owned by the Crown (i.e., Alberta Government). The remaining 19% are owned by the Government of Canada in national parks or held on behalf of First Nations and by individuals or corporations as a result of land grants made by Canada in the 1800s.”2 This means that Alberta is able to collect royalities on 81% of the subsurface mineral rights. It comes as no surprise that oil and gas revenues accounts for about one third of Alberta’s total revenue and about one in six workers in the province are directly or indirectly employed in the Oil and Gas sector .3 The royalties collected by the province to date are shown in the table below. It is interesting to note that although most news stories focus on the success of Alberta oil, the majority of royalties continue to come from gas.
The magnitude of the money collected, and the implications for provincial prosperity make the royalty regime of great interest to companies, investors and provincial inhabitants alike. And so there were high expectations when, on October 25th 2007 after an eight month review, the Government of Alberta released the ‘New Royalty Framework.’ It makes noticeable changes to the previous royalty regime, which was developed in the early 1970’s and last amended in 1994. According to the Government of Alberta “…a system that worked extremely well for oil prices up to $30 per barrel and natural gas up to $4/GJ will not work as well for gas prices that can vary from $5/GJ to $14/GJ, and oil prices up to $90 per barrel.”4 The review was one of Premier Ed Stalmach’s promises to Albertans to ensure they are getting a fair return on their resources. The government factored three principles into its decision making around regime change:
Following is a summary of the key changes in the three key resource areas: conventional oil, natural gas and oil sands.
Conventional Oil
Natural Gas
Oil Sands The current structure was implemented in 1997 to attract international investment to the oil sands….it worked – over $60 billion of investment has been attracted. The government believes that the old structure (start up royalty rate of 1%, post-payout royalty of 25%) is no longer needed to attract investment.
(For further information on the Alberta Oil sands read “Buried Treasure: the solution to North America’s Energy Problem?”) The new royalty regime will come into effect in January 2009. The question is, is this good for Alberta? The responses are mixed… Some consider it too much: The Small Explorers and Producers Association of Canada (SEPAC) states that “the overall impact of the changes will be negative for the junior sector. Particularly hard hit will be companies focused on exploring for light conventional oil and medium depth gas.” 5 Some are expected to consider it business as usual: For larger producers, analysts feel that the reduction in corporate cash flow is expected to be modest, with UBS securities suggesting that the new 2009 cash flow will net out to almost no changes when taking the royalty increase and low well productivity decrease in royalty into account . However, there is reason to believe that larger companies will not respond as expected: on 12th December, The Globe and Mail reported that a number of Canadian companies have indicated plans to spend less in Alberta in 2008 than 2007, with several migrating to the U.S., British Columbia or Saskatchewan. The day previously, EnCana Corp., Canada's largest energy firm, cited high royalties as one of the reasons behind its decision to cut back its spending on natural gas and oil sands exploration in Alberta by about $500-million. 6 Some consider it not enough: “Alberta Premier Ed Stelmach's decision on royalties will cost Albertans billions of dollars for every oil sands project.”7 Some consider it just right: “Government analysts project royalties will increase approximately $1.4 billion in 2010, an increase of 20% over revenues forecast for that year under the current regime.” 8 It brings to mind the old adage “when you try to please everybody, you end up pleasing nobody.” It remains to be seen what will actually happen to Alberta Non-Renewable Resource Revenues after January 2009. 1http://www.energy.gov.ab.ca/Org/pdfs/InfoSeries-Report1-Royalty.pdf |
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