Alberta slashes royalty rate

CALGARY - The Stelmach government announced Thursday it is sharply reducing royalties paid on conventional oil and natural gas that could potentially cost the government hundreds of millions of dollars in lost revenue by 2012-13.

The Tory government released its long-awaited competitiveness review – as well as the province’s response and associated policies – at Calgary’s McDougall Centre and, as expected, is slashing royalties paid on conventional oil and gas.

Effective January 2011, the province will reduce the maximum royalty rate for conventional oil to 40 per cent (from the current 50 per cent), and slicing the top natural gas rate to 36 per cent (from the current 50).

The current incentive program that sees energy producers pay a five per cent royalty rate in the first year of new conventional oil and gas wells will become permanent.

The revamp essentially rolls back royalty rates on conventional oil and gas to old rates before the current framework was implemented in 2009. Provincial officials expect the new royalty regime (to be implemented in 2011) will generate more cash than the framework in place prior to 2009, but snare less than current system that was adopted last year.

New royalty curves tied to the changes (affecting at what prices rates will increase or decrease) will be finalized and announced by May 31.

"The world has changed, the realities of the energy sector have changed, and Alberta must change, too, or risk losing its competitive edge in an industry that has given us so much," Stelmach told reporters, ” Premier Ed Stelmach told reporters.

"Energy development in Alberta is a partnership. It's a partnership amongst Albertans, who are the resource owners, the goverment and industry, which develops the resources on Albertans' behalf.

"I believe the changes we are announcing today will make that partnership even stronger."

The province expects the changes will create an additional 8,000 jobs in 2011-12 and 13,000 more jobs annually across the economy. But the additional jobs will come at a cost of reduced royalty revenue.

In 2010-11, royalty revenue is expected to decline $27 million, but would be offset by an additional $55 million in land sales, In 2011-12, government projects royalty income from the changes will drop an additional $16 million, but be more than offset by an additional $49 million in additional revenue from increased activity, as well as $107 million more from land sales and extra tax revenue.

But by 2012-13, forecast royalty revenues are expected to drop $785 million due to the changes, but will be partially offset by an extra $131 million in revenue from increased activity, as well as an additional $291 million from land sales and tax revenue.

“We can’t pretend that oil and gas investment levels haven’t eroded or that we don’t have a responsibility to current and future generations of Albertans to address that,” said Energy Minister Ron Liepert.

In an effort to streamline the regulatory burden, the province will launch a cross-ministry task force that will report back within 90 days on regulatory advancements, changes to support innovative technologies and how to proceed with a comprehensive review of the regulatory system.

Stelmach and Liepert had already said royalties will be overhauled and that some of the temporary drilling incentive programs could be made permanent.

The government, oilpatch and opposition parties have been almost united in declaring major changes are needed to keep Alberta and its most important industry competitive.

The provincial Tories had said the review will ensure Alberta’s royalty and tax rates are among the lowest three of competing jurisdictions, which has sparked some concern about a fire sale on provincial oil and gas plays.

Following widespread oilpatch outrage after the last royalty review, the Stelmach government has offered up a host of drilling incentives to industry that are expected to cost the government more than $1.5 billion in lost revenue over three years.

The province’s push to keep royalties among the lowest in North America, however, comes as it already has failed, for several consecutive years, to reach its own target of collecting 20 to 25 per cent of the industry’s net operating revenue from energy development.

Instead, the figure has been 19 per cent, but is being re-evaluated under the current royalty framework that took effect in 2009. The plan was originally designed to snare an additional $1.4 billion annually in economic rent for Albertans, but likely won’t come anywhere near that.

The Energy Department came under fire this week in the legislature’s public accounts committee for failing to “clearly describe and publicly state” the targets, objectives and performance measures of Alberta’s royalty regime – as requested three years ago by the provincial auditor general.

Energy economists, meanwhile, who’ve been previously called upon by the province say Alberta is already competitive internationally and shouldn’t lower royalties yet again.

“From where I sit internationally, I think Alberta is doing fine,” Pedro van Meurs, a world-renowned oil and gas economist, said Wednesday from London, England. “I think Alberta is competitive the way it is. I don’t see any reason for change.”

Van Meurs, who’s worked closely with the provincial government in the past, said he’s a little bit surprised to hear Alberta is reducing royalties once again, noting various drilling incentive programs over the past two years have already offered up breaks for industry and spurred activity.

He expects natural gas prices will remain low for an extended period due to the explosion of shale gas plays in the United States and British Columbia. However, he still believes the province’s gas sector is in good shape and that the price- and production-sensitive royalty framework “already accounted” for changing conditions.

Andre Plourde, energy economist at the University of Alberta and member of the government’s last royalty review panel, said the province has failed to act in the best interest of Albertans – the owners of the resource.

The government is more interested in generating short-term activity than snaring the most royalties possible over the longer term, he said, and has failed to adequately consult Albertans on the changes.

“What concerns me in all of this is who’s speaking for the owners? It’s clear the government is not and hasn’t been for some time,” Plourde said. “You sit here as an owner and say it’s a shameful performance.”

But Sue Riddell Rose, chief executive of natural gas producer Paramount Energy Trust, said the government’s current royalty framework is flawed and doesn’t account for the many economic challenges facing industry. She was hoping the government’s review would redress those concerns.

“Things need to be done to recognize the risk profile of the industry,” she said.

The oilpatch has Alberta’s opposition parties, for the most part, on its side in its fight to improve Alberta’s competitiveness and slice royalties.

“We have to bring back some certainty and stability to the oil and gas sector in the province of Alberta in order to attract the investment dollars that have gone elsewhere,” said Liberal energy critic Dave Taylor.

Wildrose Alliance Calgary MLA Paul Hinman, who calls the government’s 2007 review “the great royalty robbery,” said the simple fact is that Alberta must become more competitive on energy development compared to other jurisdictions.

“I don’t know if this government really understands what being competitive is,” Hinman said. “The real litmus test is where does the money go?”

The government, meanwhile, has prepared its response to the competitiveness report without letting the Tory caucus thoroughly review it, which seemed to catch some Conservative MLAs off-guard.

“If they were releasing the government’s response to it, then I might have a few concerns because I wouldn’t have had the chance for input,” Battle River-Wainwright MLA Doug Griffiths said Wednesday.

jfekete@theherald.canwest.com