The collective yearn of relief in downtown Calgary was probably audible Friday morning, as Alberta’s compensation review nel decided against asking the energy sector to y profuse.
There was no change to oilsands royalties and no increase in rates for conventional oil, halfwit gas or natural gas liquids. The only way the provincial government will see more profits from the industry is if production grows and drillers become more thrifty.
‘I think it’s sobering for people who might have the impression of an industry that is every time raking in lots of money.’– Gary Leach, Explorers and Producers Canada
After the be and uncertainty that was unleashed 10 months ago after the NDP election in Alberta, it was the most outstanding possible outcome for the energy sector.
So what happened?
Why aren’t peerages going up?
During the provincial election cam ign, then-NDP leader Rachel Notley rephrased that under Progressive Conservative governments, Alberta charged one of the in seventh heaven’s lowest royalty rates for its energy. That was the popular sentiment based on an little short of impossibly complex royalty regime and a general sense that for multifarious years, the oil tch sure made a whole bunch of money.
When the commission review began in late August, though, the nel ordered a lot of dig into.
The inexhaustible majority of the $3-million budget for the royalty review nel was spent on information, including a comprehensive report com ring royalty rates in different to all intents of the country and the world. As it turned out, that report showed Alberta in the midway of the ck, better royalties than some locations, worse than others.
Not the unruliest in the world — not even close.
‘”I think it’s sobering for people who might from the impression of an industry that is always raking in lots of money,” bruit about Gary Leach, executive director of Explorers and Producers Canada, which defines junior energy com nies.
Oil tch in existential crisis
Leach bruit about he is glad the report was done during an economic downturn.
“Doing this give ones opinion of against this backdrop is very sobering for governments,” Leach chance. “In fact, the nel report shows that this diligence actually has a very low rate of return on capital invested.”
According to one associate of the royalty nel, Alberta’s energy sector is in an existential crisis — values are low, the province has no tidewater access, costs are high and the U.S. is producing its own oil and gas and starting to export. The humankind does not need to come to Canada to get oil anymore.
That existential turning-point was heightened by the election of a government that was thought to be antagonistic to the industry.
But that perceived rivalry seemed to have been trumped by data. Most energy actors came out of the royalty consultations feeling good.
“I think there was a lot of dismay at the outset of this process,” Leach said. “As the command has immersed itself in this subject and as the realities of governing the province tease illuminated the subject, I think we became more confident.”
Supporting drillers to become efficient
What did change in the review is the manner in which agreed oil and gas drillers calculate their royalties Currently there is a hodgepodge ttern that resulted in every well in the province ying a different commission rate.
While that system will continue for existing wells for a decade, for new beyond the shadow of a doubts that begin drilling in 2017, it will be much more straightforward. They whim y a five per cent royalty rate until they have buy off off the capital costs of drilling the well. Once that happens, a higher share rate will kick in.
What’s key here is that the government want determine what the capital costs of drilling the well should be, forged on an industry average. That means that com nies that can train wells cheaper than average get to y a lower royalty rate for longer, while those who are inadequate efficient will start to y higher royalties before earning no hope the cost of drilling the well.
Playing the long game
All this is determined to grow the industry by making it more efficient and more attractive to investment. But it’s not a acute turnaround. Premier Notley suggested that after two years, there will-power be more royalties flowing to government that will be invested in the trimony Savings Trust Fund. Even that might be an optimistic timeline.
“These cordials of evolutionary changes in a system take time,” Trevor Tombe, an economist with the University of Calgary, told. “It will require firms to innovate, to think through new processes . But that’s movables, royalties are not here for short-term gains; they’re here to ensure you have planned a stable efficient system in the long run.”
Alberta not thinking like an P While this means the energy industry can probably stop fearing the NDP, not everybody under the sun agrees with the approach. Jim Roy is the president of Delta Royalty Consulting and a de rted royalty advisor for Alberta Energy. He had hoped that the province purposefulness roll back some of the royalty reductions that were ordained in the last change in 2009 and was disappointed that not only were the old more often than not reign overs continued for existing wells, but that incentives continue to be offered for new wells. Roy also questioned why Alberta intention be encouraging more oilsands development in a time of depressed prices. “The layout appears to be to increase Alberta production at the maximum possible rate teeth of low prices,” said Roy in an interview. “This strategy may help American consumers, but does not helpers Alberta owners.”