The collective exhalation of relief in downtown Calgary was probably audible Friday morning, as Alberta’s yment review nel decided against asking the energy sector to y more.
There was no revolution to oilsands royalties and no increase in rates for conventional oil, natural gas or natural gas liquors. The only way the provincial government will see more revenue from the energy is if production grows and drillers become more efficient.
‘I think it’s sobering for people who energy have the impression of an industry that is always raking in lots of shekels.’– Gary Leach, Explorers and Producers Canada
After the fear and uncertainty that was unleashed 10 months ago after the NDP voting in Alberta, it was the best possible outcome for the energy sector.
So what chanced?
Why aren’t royalties going up?
During the provincial election cam ign, then-NDP princi l Rachel Notley said that under Progressive Conservative administrations, Alberta charged one of the world’s lowest royalty rates for its energy. That was the everyday sentiment based on an almost impossibly complex royalty regime and a non-exclusive sense that for many years, the oil tch sure made a generally bunch of money.
When the royalty review began in late August, albeit, the nel ordered a lot of research.
The tremendous majority of the $3-million budget for the royalty review nel was spent on matter, including a comprehensive report com ring royalty rates in different districts of the country and the world. As it turned out, that report showed Alberta in the bulls-eye of the ck, better royalties than some locations, worse than others.
Not the worst in the society — not even close.
‘”I think it’s sobering for people who might have the depression of an industry that is always raking in lots of money,” clouted Gary Leach, executive director of Explorers and Producers Canada, which illustrates junior energy com nies.
Oil tch in existential crisis
Leach asserted he is glad the report was done during an economic downturn.
“Doing this scrutinize against this backdrop is very sobering for governments,” Leach predicted. “In fact, the nel report shows that this perseverance 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 — bounties 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 age does not need to come to Canada to get oil anymore.
That existential disaster was heightened by the election of a government that was thought to be antagonistic to the industry.
But that deciphered antagonism seemed to have been trumped by data. Most determination com nies came out of the royalty consultations feeling good.
“I think there was a lot of uneasiness at the outset of this process,” Leach said. “As the ministry has immersed itself in this subject and as the realities of governing the province beget illuminated the subject, I think we became more confident.”
Promoting drillers to become efficient
What did change in the review is the manner in which stuffy oil and gas drillers calculate their royalties Currently there is a hodgepodge scheme that resulted in every well in the province ying a different kingship rate.
While that system will continue for existing wells for a decade, for new wells that set up drilling in 2017, it will be much more straightforward. They on y a five per cent royalty rate until they have disperse off the capital costs of drilling the well. Once that happens, a far up royalty rate will kick in.
What’s key here is that the sway will determine what the capital costs of drilling the well should be, positioned on an industry average. That means that com nies that can repetition wells cheaper than average get to y a lower royalty rate for longer, while those who are infinitesimal efficient will start to y higher royalties before earning invest in the cost of drilling the well.
Playing the long game
All this is intended to grow the industry by making it more efficient and multifarious attractive to investment. But it’s not a quick turnaround. Premier Notley suggested that after two years, there wish be more royalties flowing to government that will be invested in the Birthright Savings Trust Fund. Even that might be an optimistic timeline.
“These kidneys of evolutionary changes in a system take time,” Trevor Tombe, an economist with the University of Calgary, said. “It hand down require firms to innovate, to think through new processes . But that’s solicitous, royalties are not here for short-term gains; they’re here to ensure you should prefer to a stable efficient system in the long run.”
Alberta not thinking appreciate an owner While this means the energy industry can probably suppress fearing the NDP, not everyone agrees with the approach. Jim Roy is the president of Delta Royal house Consulting and a former royalty advisor for Alberta Energy. He had hoped that the section would roll back some of the royalty reductions that were ratified in the last change in 2009 and was disappointed that not only were the old on the wholes continued for existing wells, but that incentives continue to be offered for new wells. Roy also questioned why Alberta devise be encouraging more oilsands development in a time of depressed prices. “The intend appears to be to increase Alberta production at the maximum possible rate regardless of low prices,” said Roy in an interview. “This strategy may help American consumers, but does not daily help Alberta owners.”