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Alberta to Limit Oil, NatGas Royalties in Effort to Compete With U.S. Industry Rivals

The next generation of Alberta natural gas, liquids byproducts and oil wells will be granted reprieves from provincial royalties by a government attempt to make Canada’s chief producer jurisdiction competitive with the United States.

“It’s not the time to make a big money grab,” Premier Rachel Notley said in announcing the changes Friday. She set aside election campaign promises by her New Democratic Party to reach for a higher “fair share” of production revenues as outdated leftovers from the fat years of US$100-plus/bbl and US$8.00-plus/MMBtu gas.

As of 2017 the new regime will limit royalties to a nominal 5% until drilling costs are recovered. Costs will be publicly posted as an annually calculated industry average. Companies that are more efficient than the average will be allowed to keep the savings. Royalty rates for wells drilled before 2017 will remain frozen for 10 years.

The amendments soften a traditional regime that skimmed away revenues with a formula driven solely by price and output volume as soon as wells went into production. The government said the new approach mimics Alberta’s encouraging “net-profit” oil sands regime that defers royalties until plant construction costs are recovered, only takes shares in revenue after expenses and thereby follows most global practice with private and publicly-owned resources alike.

“The energy landscape has fundamentally changed,” says a 209-page report by a royalty review panel that Notley appointed soon after the NDP toppled the Conservative regime that had held power in Alberta since 1971 in a provincial election upset last May.

“We cannot continue to operate with a perspective that the world needs to come to Alberta if it wants oil and gas,” the report warns.

“The U.S. is now a rejuvenated force in oil and gas production, one that poses huge risks to Alberta’s market share. This is problematic, since we have long relied on the U.S. as our primary -- and to some extent, only -- customer, and we do not have sufficient means to move and sell our oil and gas to other countries.”

Pipeline proposals for escape routes to new tanker terminals on Canada’s Pacific and Atlantic coasts remain years of regulatory ordeals and multibillion-dollar construction away. U.S. rivalry arrived with the spread of horizontal drilling and hydraulic fracturing, exposing Alberta as a high-cost competitor even using old conventional well technology and before adapting the initially more expensive new technology to Canadian conditions.

Oil and gas companies applauded the government for realism, potentially at the political expense of disillusioning supporters who had a traditional Canadian view of the NDP as an ideal leftist alternative to Conservatives and Liberals. Western New Democrats prefer to think of their party as “progressive” and reasonable rather than doctrinaire and more like Franklin Roosevelt-era New Dealers than European socialists.

“The new royalty framework is principle-based and provides a foundation to build the predictability industry needs for future investment,” said a statement by Tim McMillan, president of the Canadian Association of Petroleum Producers.

Alberta has public ownership of 81% of its gas and oil deposits by geographic area, and nearly 100% by energy content because the government mineral rights include virtually all the oil sands.

But development is almost entirely done by investor-owned or international corporations and the NDP built sensitivity to market conditions into the Alberta royalty review. Inquiry panel chairman Dave Mowat is president of ATB Financial, a government-owned savings and loan bank with a large clientele among the energy industry’s homegrown Alberta firms. Panel member Peter Tertzakian is chief energy economist with ARC Financial Corp., a prominent Calgary private investment bank with deep roots in the oil and gas sector.

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