Canadian petroleum companies have welcomed a revamp of Alberta's royalty structure but say it falls short of what is needed to revitalize activity in the province.
The changes will give producers a cut in royalties of at least $170 million (Canadian)/year, offer incentives for new drilling, and index royalty levels to prices.
The new royalty plan also will reward companies that funnel more capital into increased exploration programs.
CAPP VIEW
The Canadian Association of Petroleum Producers, representing companies that produce more than 95% of Canadian oil and gas, said more cuts will be needed before the financial burden on producers is appropriate.
CAPP Chairman Irv Koop said the base royalty cut of $170 million for oil and gas is about 6-8% of gross royalties collected in 1992. The industry had sought cuts of about $500 million,
Koop said it is important for the public and government to understand the industry has been fighting depressed commodity prices and rising operating costs for a long time.
The industry association said new royalty rates tied to prices could increase royalties if prices rise above $26 (Canadian)/bbl for oil and $1.70 (Canadian)/Mcf for natural gas. Royalty take would decline below these prices. Oil prices currently are near that $26/bbl level.
CAPP said it is difficult to assess the effects of the royalty changes in reactivating shut-in wells and increasing production from marginal wells.
It praised provincial plans to slash paperwork and costs in reporting royalties on natural gas. This change won't take effect until Jan. 1, 1994.
OTHER VIEWS
Alberta Energy Minister Rick Orman said the existing system is a disincentive to investment.
Orman said the government is concerned about the stagnant nature of the industry and a tendency to shift focus overseas to look for oil.
The energy minister estimated the new rules will create more than 850 jobs in the coming winter drilling season and add 500-520 wells/year the next 6 years.
Canadian Association of Oilwell Drilling Contractors said the changes could trigger additional drilling of 500 wells/year.
Small Explorers & Producers Association of Canada said the new royalties will provide a shock absorber for industry at low prices with government gaining at higher prices.
DETAILS OF ROYALTY CHANGES
A main feature of the revised royalty structure is the linkage to oil and gas prices.
An existing royalty of 24.5% for gas at a price of $1/Mcf would fall to 15.7% under the new structure. Current royalties of 25.3% for gas priced at $1.50/Mcf would slip to 23.8%.
There is a big cut in royalties for oil discoveries made after Sept. 30. These discoveries will be called third tier oil. Royalties of 24.7% on oil priced at $25/bbl will fall to 10% under the new regime.
Oil discoveries after Oct. 1 will get a permanent 1 year royalty holiday of as much as $1 million/well.
The province said these changes could produce oil royalty savings of $88 million in 1993, rising to $279 million by 1997-98 if companies invest in exploration.
There are also royalty reductions on synthetic oil sands production and to encourage new enhanced recovery technology. Rates will be cut for weds producing 15 b/d or less. There are also royalty incentives for reactivating suspended wells for increased production by drilling horizontally from an existing well bore.
The Saskatchewan government said it is studying the Alberta changes but has no immediate plans to match them.
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