Alberta to slash royalty rate on conventional gas and oil

In an effort to attract investment back into the energy sector, Alberta is once again changing their royalty scheme and cutting royalty rates on natural gas and oil. Under the new plan, Alberta will lower its maximum royalty on gas production to 36%  from 50% and on conventional oil to 40% from 50%. These changes will take effect early next year.

It was only two years ago that Premier Ed Stelmach ignored industry warnings and began the process of increasing royalty rates so that the province could receive a greater share of the industry’s profits. Stelmach moved forward with his increase in royalties and the industry started to redirect capital to British Columbia and Saskatchewan. That was when oil was $145 a barrel and natural gas was $14.50.

Stelamch’s timing could not have been worse. When the  royalty hike came into effect on Jan. 1, 2009, the world was in a financial and economic crisis. World economies were retracting and demand for oil and natural gas was in decline. Oil prices subsequently tumbled from their lofty peak to $35 (U.S.) a barrel while natural gas was in the tank at below $3.00. In an effort to attract investment during 2009, Alberta changed its royalty structure a dozen times further damaging confidence within the investment community and energy industry.

The fall out has gone beyond the energy industry and into politics as the Wild Rose Party has leveraged the original royalty hike to their political advantage and are showing equal support in the province according to recent polls. Wildrose Leader Danielle Smith, is quoted “It’s probably been the most devastating policy decision this province has seen since the National Energy Program.”

However, Danielle Smith – and Alberta voters – should take note, that increasing the province’s royalty rate was a popular key component in Premier Ed Stelmach’s 2008 election campaign in which the voters gave Stelmach a majority. Be careful what you promise to voters. They can change their minds quickly.

Reuters: Alberta to cut royalties on oil, natural gas