NGI The Weekly Gas Market Report
With nearly a year to go before announced increases go into effect, Alberta royalties and faltering natural gas drilling swiftly emerged as an issue after Conservative Premier Ed Stelmach called a provincial election for March 3.
Opposition Liberal leader Kevin Taft called for a shuffle of the burden, suggesting that gas royalty rates should be reduced to counter depressing Canadian market developments but the treasury should be kept whole by increasing charges on oilsands production.
New Democratic Party chief Brian Mason called for reopening the entire issue, claiming that a government-appointed royalty review panel was denied access to crucial information about the system. His left-of-center party maintains that even the government’s announced 20%, C$1.4 billion annual increase falls short of the public share deserved by the province.
The Conservatives, repeating a promise made at the time the changes were announced last fall (see NGI, Oct. 29, 2007; Sept. 24, 2007), said a fresh review of details will be done prior to implementing the complex new formulas as of Jan. 1, 2009. News of the royalty rate hikes has Canadian producers threatening production slowdowns (see NGI, Oct. 8, 2007).
“Unintended consequences,” such as a worsening of flat gas field activity, will be avoided, the ruling party pledged. Open letters to the industry have promised special attention to fields deemed to need help such as deep drilling, but there are no pledges to take special overall action to counter gas market conditions beyond provisions already built into the system.
The political flurry left industry groups, such as the Canadian Association of Petroleum Producers and the Petroleum Services Association of Canada, largely speechless. It was impossible to know who meant exactly what on the opposition side while the government added nothing to well known positions, officials said privately. At worst, financial analysts suggested the fuss may only further tarnish the chief Canadian gas producing province’s former reputation for stability and reliability.
Oil and gas royalties, plus allied sales of leases to the 80% of mineral rights owned by the provincial government, are the mainstays of Alberta provincial finances. The take rises to as much as 40% of treasury revenues in good years. Gas accounts for up to 75% of the total.
The Alberta royalty system is a complex web of formulas that make collections vary on sliding scales of production volumes and prices. All three political parties fundamentally agree that the planned 20% increase is the minimum the industry should pay to catch up to increased prices since the system was last overhauled in the early 1990s. Opinion polls show nearly 90% of voters agree that the public share of oil and gas revenues should increase, including residents of the Canadian gas capital of Calgary.
Taft’s talk of going easy on gas was widely viewed as an attempt to court votes in rural and small-town Alberta, where drilling and other contract field services account for large shares of local employment, taxes and winter-season cash income for farmers.
For practical purposes, producers were left guessing about Liberal policy. The party leader’s remarks were off the cuff. He did not, for instance, articulate a policy for reshuffling the royalty burden when times change again and gas prices bounce up relative to oil, restarting drilling while slowing down plant construction in the northern bitumen belt.
When Stelmach called the election, standings in the 83-seat legislature were 60 Conservatives, 16 Liberals, four New Democrats, one Wildrose Alliance, one independent and one vacancy. The conservatives held a 32% lead in opinion polls over the Liberals’ 18%, the New Democrats’ 7% and the far-right Wildrose’s 5%. But the undecided category stood at 27% and the Conservatives’ lead was sharply reduced from previous elections. The polls and lively debates led to speculation that Alberta could be headed for at least a more evenly divided legislature in the March 3 vote.
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