Producers cautious about Alberta royalty proposals

Sept. 25, 2007
The Canadian oil and gas producing industry is responding cautiously to recommendations for large royalty increases in Alberta.

By OGJ editors
HOUSTON, Sept. 25 -- The Canadian oil and gas producing industry is responding cautiously to recommendations for large royalty increases in Alberta.

The Canadian Association of Petroleum Producers labeled as "flawed" the recommendations of the Alberta Royalty Review Panel, which was established in February (OGJ, Sept. 10, 2007, p. 17).

"We are committed to staying focused on the facts and working constructively with government throughout this process," said CAPP Pres. Pierre Alvarez.

The panel made its recommendations, which include a new layer of royalty on rapidly growing production from Alberta's oil sands, to Alberta Minister of Finance Lyle Oberg.

"The basic assumption is that the size of the 'pie' will not change," Alvarez said. "Past experience, in this country and around the world, just doesn't support the panel's view."

The changes would raise the total government take—the federal and provincial governments' share of total profits from royalty and taxes—to 64% from the current 47% for oil sands, to 49% from 44% for conventional oil, and to 63% from 58% for natural gas.

Wood Mackenzie Ltd., Edinburgh, estimated that if implemented in full, the changes would cut the net present value of current and planned oil sands projects, discounted at 10%/year with a long-term Brent crude price of $50/bbl, by $26 billion.

"The higher than expected level of new taxation will cause concern among oil sands industry players already struggling to cope with spiraling costs," said Derek Butter, WoodMac head of corporate analysis. "This will further raise the already high economic break-even price of these projects, significantly raising the level of risk on what are huge initial capital outlays.

In addition to restructuring the Albertan oil and gas royalty regime, the panel recommended that the provincial government "implement the means to gather and assess the workings of all aspects of revenue policy and collection associated with energy resources in the province." This, it said, could take the form of a "super-ministry" or deputy leader reporting directly to the premier.

While the proposed accountability function would be expensive, the panel said, "The lack of having such a capability has had consequences that, in the panel's view, have been very costly along several dimensions."

It said a "data vacuum" and "seeming absence of oversight" became "obvious" during its review.

Major changes
Among the panel's major recommendations is an oil sands severance tax (OSST), applied at a rate of 1-9%, depending on the price of crude oil, beyond royalty.

The panel also recommended raising the net royalty rate after payout on oil sands production to 33% from 25% and adding a royalty credit based on 5% of the cost of upgrading facilities built in Alberta.

For conventional oil and gas production, the panel recommended generic royalty formulas based on production and prices.

Under the recommendations, royalty rates on small wells would decline while those on more prolific wells would rise.

CAPP pointed out that, at prices expected over the next year, all gas wells would pay higher royalties, "which will only make the current drilling downturn worse."