Canadian Manufacturing

Alberta oil and gas royalty review keeps oilsands rates in place

With little change for the oilsands, there will be tweaks to the royalty framework for conventional oil and natural gas wells



Athabasca Oil's Hangingstone project sothwest of Fort McMurray, Alta. PHOTO Athabasca Oil Corp.

Athabasca Oil’s Hangingstone project sothwest of Fort McMurray, Alta. PHOTO Athabasca Oil Corp.

CALGARY—Pent-up anxiety over changes to Alberta’s oil and gas royalties dissipated Jan. 29 after the provincial government revealed it’s keeping the status quo for oilsands players and simplifying the system for conventional oil and gas wells.

A four-member panel led by Dave Mowat, head of Crown-owned bank ATB Financial, has spent the last five months studying Alberta’s royalty system—amid a worsening outlook for oil prices.

Rachel Notley’s NDP government accepted the panel’s recommendations.

“Our new royalty framework recognizes the reality of our economy today,” Notley said.

“It responds to the pain and the uncertainty that workers and families are feeling across our province. It is designed to encourage more investment and more jobs than we’d otherwise have.”

Oilsands projects in their early stages pay royalty rates on gross revenues of between one and nine per cent, depending on oil prices. Once they’ve recovered their upfront costs, they pay whichever is higher: the aforementioned formula, or 25 to 40 per cent of net revenues, which take into account certain costs.

Mowat said the focus of the panel was less on rates and more on how to make the system work better.

The formula for conventional oil and natural gas wells will be changed to look more like the one for oilsands, accounting for upfront costs.

The new system will take effect in 2017. Wells drilled prior to that will be subject to the existing rules for 10 years.

A flat five per cent royalty rate will be applied on those wells until their revenues equal a cost allowance, after which rates will rise.

The province will determine in the coming months how those cost allowance numbers will be crunched, and is expected to announce more details before the end of March. The system is designed in such a way that companies whose costs are lower than the industry average will enjoy lower rates for longer.

The new system will also be more “agnostic” about resource type. Under the old system, oil and natural gas operate under two different formulas, making companies reluctant to explore if they don’t know ahead of time what kind of resource their drill bits will hit. The new one will apply the same rate regardless of whether oil, natural gas or natural gas liquids are coming out of a well.

Tim McMillan, head of the Canadian Association of Petroleum Producers, said he’s pleased to see a system that’s “durable.”

“It was designed to handle lower prices and higher prices,” he said.

“We think that’s a very important message for Albertans to know and for the markets, as we’re trying to attract capital.”

More certainty for oil and gas producers is good for the service companies they hire to drill wells for them, according to one oilpatch boss. Precision CEO Kevin Neveu said he’s “moderately hopeful” about the prospects for the business as a result.

The Canadian Association of Oilwell Drilling Contractors registered some disappointment.

“Today’s report does not make significant changes to the overall royalty take by the province. However, it falls short of our recommendation to reduce rates in order to incent drilling activity and offset higher provincial taxes,” said CAODC president Mark Scholz.

“Furthermore, the recommendations do not address Alberta’s competitiveness gap with other Canadian oil and gas jurisdictions such as Saskatchewan and British Columbia.”

For an industry beleaguered by dismal oil prices and political roadblocks in getting its product to markets, the results of the royalty review are welcome, said Trevor McLeod, with the Canada West Foundation.

“There was nothing really that they would do today that would put 50,000 people who lost jobs back to work. But they brought the confidence and the certainty that was needed.”

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