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Alberta's NatGas Royalties Take Big Plunge

July 8, 2013
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Alberta natural gas royalties, a health benchmark of the Canadian supply industry, plunged to their lowest level in a generation in the government fiscal year that ended March 31.

The provincial treasury's annual gas revenues sank to C$955 million in 2012-2013, according to a newly released annual report of the finance department, a document formerly known as the Alberta Public Accounts. It was the first time since the lean 1990s that the gas take fell below C$1 billion, and a drastic drop from the first decade of the 21st century.

The 2012-2013 Alberta gas royalties were 89% less than their peak of C$8.3 billion in 2005-2006. The treasury's gas income last year was also less than 20% of the annual average C$5.4 billion in the fiscal decade 2000-1 through 2009-2010.

The bleak results highlight a feature of the revenue regime crafted by the province's 42-year-old Conservative regime that is rarely acknowledged or debated in public but is a critical item in its friendly relations with the industry. Drops on gas markets inflict a double hit on the Alberta treasury because the royalties are determined by sliding scales of commodity prices, well productivity and royalty rates. Falling prices not only erode the total value of production; corresponding reductions in royalty rates cut the percentage share collected by the province.

In the bumper provincial fiscal year 2005-2006, when the government-calculated "reference price" average for Alberta output was C$7.87/gigajoule (GJ) (US$8.26/MMBtu), the treasury's effective gas royalty rate was 20.6%. Since 2009, when the Alberta reference price fell into a range of C$3.25-3.65/GJ (US$3.41-3.83/MMBtu), provincial royalty rates have languished at 8.5-9.8%.

Royalties on the Alberta product with the highest international public profile, oilsands bitumen, have yet to approach the bygone value of gas for the province despite proliferating output that has grown to about 1.7 million b/d. The difference is that the gas royalty is a share of gross production revenues. Alberta's bitumen royalty is a "net-profit" system in which rates are levied only on revenues after deduction of production expenses.

Despite high and rising bitumen output, Alberta's royalty revenue from the oilsands product was C$3.56 billion in 2012-2013 -- still well below gas in its good years, and down from the treasury's bitumen earnings of C$4.5 billion in 2011-2012.

Outside the industry minority of mostly senior and international producers with oilsands plants, independent companies that formerly thrived on gas saw fresh hope in the new climate change policy announced last month by President Obama (see NGI, July 1). The policy's declared intentions to set carbon emissions standards for old coal-fired thermal power plants were seen in Canada as at least potential encouragement for fuel-switching to cleaner natural gas, resulting in a reduction of the glut that has held prices down for the past five years.

The hope crept into reactions to Obama's announcement by Alberta government leaders as well as the industry independents in the Explorers and Producers Association of Canada. The province's Minister of International and Intergovernmental Relations, Cal Dallas, momentarily took a wider view than reciting grievances against Washington, DC delays in approving the Keystone XL pipeline construction to increase U.S. bitumen imports from Alberta.

"The Government of Alberta welcomes President Obama's climate change policy, which intends to make real reductions in greenhouse gas emissions," said Dallas. "The president's speech was about much more than just one piece of infrastructure. Like President Obama, we believe that North Americans should never have to choose between jobs, economic growth, energy security and strong environmental protection."

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