Changes to Alberta royalty regime anxiously anticipated

CARRIE KELLY

Western Canadian Pipeline

What is old is becoming new again as the Alberta government unveils some major modifications to its royalty regime.

The revamped structure has similarities to the one in place before the “Our Fair Share” framework was announced in 2007.

While all the details won’t be released until May 31, the Stelmach government has announced some general changes and admits the current structure isn’t working.

“We can’t pretend that oil and gas investment levels haven’t eroded or that we don’t have a responsibility to current and future generations of Albertans to address that,” says Energy Minister Ron Liepert. “Being competitive has a positive impact far beyond the energy sector. It contributes greatly to our communities, our standard of living, and our prosperity as a province and as individuals.”

The government announced it will modify conventional oil and natural gas royalty rates, promote more innovation and use of new technologies, and reduce unnecessary red tape while improving coordination of

regulatory processes.

Those in the industry are cautiously optimistic about the upcoming changes.

Darren Gee, president of Peyto Energy Trust is taking a wait and see approach on just how beneficial the new royalty structure may be for the industry.

But he believes the government has been listening to industry as a result of recent consultation and looks forward to learning all the details at the end of May.

Peyto Energy Trust just completed its 11th year of operations and operates 500 to 600 gas wells in Alberta.

“Having the permanent incentive program of five per cent for new natural gas wells is a good one,” says Gee. “But I think it needs some modification in that it doesn’t encourage drilling of deeper wells when you can get the same amount of royalty credit for the ones that are easier to drill.”

He hopes the government will maintain an open dialogue with producers because Alberta is heavily reliant on natural resources.

“A royalty program has to be a fluid thing. It’s never going to be perfect. And if they get it wrong this time, we’ll

keep talking,” Gee says.

The old regime, before the changes were announced in 2007, was fluid, Gee continues.

“The old regime was an evolutionary system and had so many layers of drilling incentives. I thought the old system was working just fine before they made the changes.”

The key recommendations for royalty adjustments will become effective on a permanent basis for the January 2011 production month.

The changes being made by government are based on a Competitiveness Review that included an extensive technical analysis of Alberta’s competitive position.

The maximum royalty rate for conventional oil will be reduced at higher price levels from 50 per cent to 40 per cent. The maximum royalty rate for conventional and unconventional natural gas will be reduced at higher price levels from 50 to 36 per cent.

According to calculations by the government, the province will collect $785-million less in royalties in 2012- 2013 under the new rules, but $400-million more than it would if the pre-2007 structure was in place.

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WESTERN CANADIAN PIPELINE | SPRING 2010

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