ALBERTA’S ROYALTY REVIEW – 2016

For those expecting a day of either hand wringing or high fives among the industry, Friday’s release of the new royalty plan for Alberta’s energy producers instead brought shrugs.

Months of angst over whether Alberta’s NDP government would “modernize” the industry right out of business – so hellbent was the province on updating how it extracts its “fair share” of revenues from the resource sector – have all been for naught. The royalty review is titled, “Alberta At A Crossroads,” and for all intents and purposes, the government is choosing to stick to the road most recently traveled.

Very little will change when the new royalty structure takes effect in 2017. Since day one, the Rachel Notley government has openly lamented the province’s reliance on oil revenues and emphasized diversifying Alberta’s economy instead. And since day one, critics have accused the Notley government of harboring hostility towards the energy sector, and many predicted this review would amount to a ransacking of resource company coffers, spiking the rents on oil producers to enrich a heavily indebted provincial government. Yet, what those critics appeared to overlook is that any hike in royalties would only have left the government more reliant on oil and gas revenues, not less.

Clearly that wasn’t the plan of the Notley government, and today’s review proves that. The province’s overall take under the new regime will remain essentially unchanged for years to come, until average well costs drop significantly, and oil prices and cost-efficiencies increase. A new flat royalty rate of five percent will be extracted from each new oil and gas well until the cumulative revenues from the well equal that year’s average drilling and completion cost allowance. That will incentivize companies to lower their production costs on new wells in an effort to remain under or close to the average, according to the panel report. The existing royalty structure bases its take instead largely on barrel counts from the well, which could be either a blessing or a curse depending on where oil prices are. Existing wells will still be charged under the current royalty system for at least 10 years.

For the oil sands, there will be no change to the existing regime of a one-percent to nine-percent royalty rate for new projects in the pre-payout phase, and 25 to 40 percent for those in the post-payout phase. Encouraging more transparency among big oil sands producers is also a goal of the review, which cites “anecdotal evidence” that “oil sands operators push the boundaries when it comes to costs, and that the province has not enforced the rules with the ‘iron fist’ that Albertans might expect.” It remains unclear how the government will foster a greater relationship of trust among rival oil sands companies, but mandating honest annual cost reporting to the government is one area the review emphasizes.

Premier Notley described Alberta’s energy industry today as in an “existential” crisis, partially caused by high Middle Eastern oil production, but primarily caused by the U.S. “Our big challenges include more than just Saudi Arabia’s desire to flood the market with cheap oil. Our biggest challenge,” Notley said, “is that our largest market is becoming our largest competitor. And that competitor has a lower cost structure that delivers greater net revenues for their public and their industry to share.”

This review won’t do much to lower overhead costs for Alberta’s producers – most were already laser-focused on doing that anyway. The most important takeaway for the industry is that this is a stable regime, if not really a different regime. The most important thing for the Alberta NDP government is that, while this is may not be a different regime, it is at least theirregime. For everyone else, the most important thing about this review is that it’s over.

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