Royalty review has energy industry seething

By Don Patterson
Staff Reporter

Highwood MLA George Groeneveld said he’s been inundated with responses to a recently released report saying royalties received from energy companies to develop Alberta’s oil and gas resources should be increased.
“I’m getting opinions from both sides high and low on this. It will take some time to sort this through,” he said. “We’ll certainly have an interesting debate in caucus.”
The province is currently weighing its options over the report, which recommends royalties be raised to increase revenues from the industry by $2 billion.
The report is blunt in its assessment of current system: “Albertans do not receive their fair share from energy development. The royalty rates and formulas have not kept pace with changes in the resource base and world energy markets.”
Energy companies pay royalties in exchange for exploration and development rights.
A major focus of the review process is the province’s growing oil sands projects. Under existing rates, companies pay one per cent of gross revenue from oil sands projects until the payout point - where they recover allowable start-up costs. Upon reaching payout, the royalty rate increases to 25 per cent of net revenue (gross revenue minus allowable costs) or one per cent of gross revenue.
The report recommends increasing royalties to 33 per cent after project costs have been recovered.
The report also recommends against grandfathering existing projects – exempting existing projects from new rules, eliminating accelerated capital cost allowances for oil sands, creating an oil sands severance tax, reducing royalties for low producing wells and increasing royalties on high production wells.
Groeneveld said the Province will take a month to study the issue before making a decision in the best interests of all Albertans.
“To me, it was a very concise and very good report. They really did their homework on that part of it. It’s up to us now to analyze this and figure out, for the majority of Albertans, where they figure this should be,” said Groeneveld
The existing royalty system was created in 1997 to spur investment in the oil sands when provincial and federal incentives were created to ease financial barriers for the projects. However, now that the oil sands have emerged as the leading element in Canada’s energy future, the report says it’s time to “rebalance” the system once again.
Chris Severson-Baker, director of the Pembina Institute’s Energy Watch Program, said the government should quickly implement the report’s recommendations.
“We’ve already waited for years and, clearly, the report indicated we’ve been losing money for years,” he said. “Everyday that goes by, we calculated Albertans are losing $5 million per day.”
Severson-Baker said oil sands projects are long-term developments that companies will profit from for a long time into the future.
“The thing that is slowing it down is access to people and materials,” he added.
He said companies are using large profits to be the first to get their projects into production, resulting in an even tighter labour and supply market.
The response from industry was swift against the report, including EnCana recently threatening to cut back on investment by $1 billion. In addition, stock prices for major stakeholders in the oil sands dropped in the report’s wake.
While the oil sands may make up a large component of the report, Don Herring, president of the Canadian Association of Oil Well Drilling Contractors, said its impact will be felt in all levels of the industry, particularly drilling operations.
He said drilling activity is down 35 per cent so far this year, compared to last year, and the report will only precipitate a further decline.
“What we’re seeing already is a significant decrease in drilling activity,” he said. “Our fear is it will take this significantly declining activity and really add to the problem.”
According to the report, conventional oil and gas drilling will face declining production in the future and royalties on low producing wells should be reduced to reflect this. It states between 57 per cent of Alberta’s conventional oil wells and 83 per cent of its natural gas wells will see lower royalties.
At first glance, Herring said this suggestion may appear to be a good move, but won’t make much of a difference.
“We thought there may be something contained in that recommendation,” he said. “In fact, the price assumption that’s included in the numbers is such that there is no benefit to low productivity wells.”
According to Herring, energy companies are most likely to cut back on drilling operations first. If they opt to pull back on investment because of the report it will hit the rigs and their crews hard, he added.
“We are viewed as discretionary dollars. The oil company is the investor and they make choices of how they’re going to invest their money. If they choose not to, we are the first place they cut back,” he added.

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