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Getting an abrupt wake-up call Alberta starts full-scale royalty review against backdrop of forecast nosedive in revenues, internal study points to declining take Gary Park For Petroleum News
The days of breathtaking budget surpluses and rampant growth appear headed for a slowdown in Alberta, the economic powerhouse of Canada over the past decade.
The latest provincial budget delivered a jolt of reality, projecting a decline in oil and gas revenues from a peak C$14.35 billion in 2005-06 to C$7.8 billion in 2009-10.
“We have money, yes, but looking five, 10, 15 years out, we have to decide if that money is going to be there,” said Finance Minister Lyle Oberg, in the most sober assessment of their financial outlook that Albertans have heard in years.
There is no secret about the factors at play. Conventional oil and gas production is in decline, land sales are in retreat and natural gas prices have been sluggish.
The timing becomes even more significant as the Alberta government embarks on the most comprehensive public review yet of its entire royalty structure.
While industry leaders have repeatedly cautioned against taking any action that could undermine investment there are signals from cabinet ministers that change is possible.
Report makes case for royalty hikes A government report entitled Prosperity for Our Future Generations, that made a persuasive case for royalty hikes, was quietly tabled in the Alberta legislature in mid-April.
The document estimated “future oil sands royalties will be in the order of C$1.2 billion when production reaches 3 million barrels per day in 2020, essentially the same as the value for 2004-05” when output was only 1 million bpd.
It blamed the “relatively low royalty” on the ability of oil sands producers to switch the base for their royalty valuations from upgraded synthetic crude to raw bitumen.
That gave further weight to the case made by Premier Ed Stelmach and other politicians for charging a higher royalty on bitumen exported to U.S. refineries for upgrading than that processed in Alberta.
The review concluded that Alberta’s royalty share is 19 percent of the industry’s net operating revenue, down from 23 percent in 2001 and 2002, and well outside the government’s target range of 20-25 percent.
The report noted that while Alberta’s royalties are comparable with those in some U.S. states, Texas averages 25 percent, climbing to 40 percent in some price environments.
Budget: natural gas production shrinking The budget came only days later with its blunt forecast of a sharp decline in oil and gas revenues over the next three years.
Oberg said that reflects lower production, lower returns from land license and lease sales (projected at C$1.2 billion in 2009-10 compared with C$3.5 billion in 2005-06), higher production and processing costs and an increased share of oil royalties paid on bitumen rather than conventional or synthetic crude.
Natural gas production, which generates two-thirds of resource income, is shrinking by an average 4.3 percent a year, with gas royalties predicted to slump to C$4.6 billion in 2009-10 compared with C$8.4 billion in 2005-06.
Royalty rates decline to as little as 5 percent as output falls — a government policy designed to encourage industry to squeeze the last reserves from aging fields rather than walking away from those wells.
The government estimates that 89 percent of Alberta’s 92,000 gas wells currently pay the “low-productivity rate,” leaving only a small number paying the maximum rate of 25-30 percent.
Conventional oil royalties are predicted to slump to C$2 billion in 2009-10 as production slides, compared with C$3.8 billion in 2006-07, while oil sands royalties are projected at C$1.2 billion in 2009-10 compared with C$2.4 billion in 2006-07.
Budget targets US$58 per barrel oil prices The budget is targeting average oil prices of US$58 per barrel this year, US$54.25 in 2008-09 and US$52.50 in 2009-10. Gas is forecast at C$6.75 per gigajoule in the current fiscal year, C$6.50 in 2008-09 and C$6.25 in 2009-10.
Faced with these trends, both Oberg and Energy Minister Mel Knight are leaving no doubt that the royalty review, which will cover all oil and gas sectors, is needed.
Knight said the information available from the government report “would indicate to me … that a royalty review is timely. Let’s ensure Albertans get a fair share.”
But both emphasized the importance of striking a fair balance.
Hugh MacDonald, energy spokesman for the opposition Liberal party, was less sympathetic to the industry’s point of view, claiming Alberta is losing “billions and billions of dollars. … We are certainly not getting our fair share.”
Greg Stringham, vice president of the Canadian Association of Petroleum Producers, told the Calgary Herald that any royalty changes could harm the industry at a time when capital costs are soaring.
“Certainty and stability are key parts of the investment,” he said.
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