The government of Alberta has announced it will reduce royalties on new conventional oil and gas wells to 5% or less for the next year, and extend an additional year should the current downtown continue. The 5% applies only to the first 50,000 barrels of oil or 500 million cubic feet of natural gas. But perhaps the doctor has delivered the medicine too late.
The reduced royalties on the front end may not make up for the reduced price of oil and natural gas and does not change the cash position of the producer. British Columbia on Monday announced another increase in royalty breaks to $120 million for companies building roads and pipelines to develop new discoveries like the Horn River basin and Montney basin. So instead of gaining lost competitiveness, many believe Alberta’s move makes the province’s royalty regime more complicated and will only benefit the largest operators.
The campaign to increase royalties for drillers in Alberta started the day Ed Stelmach started campaigning to be Alberta’s Premier. Premier Stelmach kept good on his promise, ignored the warings and advice of industry leaders and increased the royalty payments. And as warned, many operators redirected their drilling budgets towards more attractive royalty programs available in British Columbia and Saskatchewan. The Alberta government lost the confidence of the energy sector.
This latest about face is not in response to industry advice but a reaction to the economic downturn which is unlikely to regain the confidence of most drillers. The point here is that the Alberta government has now changed the royalty program four times in the last two years in good times and in bad. There is a saying in Calgary about the city’s infamous “chinook” weather… “If you dont like the weather… wait a minute and it will change”. Drillers are starting to feel the same way about the Alberta royalty regime.
Calgary Herald: New royalty regime lies in shambles
The following comment to your story appeared today on my website:
Alberta is reducing royalties to increase investment and the writer concludes that, “…perhaps the doctor has delivered the medicine too late.” Alaska’s tax/royalty burden in a more remote, climatically harsh jurisdiction is even more oppressive on industry, and, to continue the analogy, the legislative doctors have hardly recognized the symptoms of economic malaise, have not identified a medicine and have no plan to deliver that medicine. Prediction: Alaska is approaching a perfect storm of economic crisis: 6-7% annual TAPS throughput reduction, reduced oil prices, the second year of dramatically increased oil taxes, unquenched thirst for government growth and spending, a national recession, and a North American natural gas price south of $4 which provides gloomy basis for ANS gas pipeline projects. Lawmakers had better start reducing industry taxes fast, while reducing government spending and aggressively supporting off-shore oil and gas exploration which could provide hundreds of thousands of jobs in Alaska and throughout the nation for the next 50 years. If they don’t move fast, state savings accounts will dwindle as investments here slow to a trickle amid national economic peril and a lack of political discipline which permits runaway spending to continue….