Providing coverage of Alaska and northern Canada's oil and gas industry
February 2016

Vol. 21, No. 6 Week of February 07, 2016

Alberta spares oil sands

NDP bases royalties on ‘revenues minus cost,’ opting for stand-pat in oil sands


For Petroleum News

For decades as it groped around in Alberta’s political wilderness, the New Democratic Party was free to lash out at the province’s petroleum industry.

And it did so with abandon, accusing companies of greed, blaming successive Conservative administrations for pandering to the industry and telling Albertans they were being deprived of their rightful share of revenues.

On getting elected last May, the NDP under Premier Rachel Notley wasted no time appointing a panel to review and recommend a possible overhaul of the royalty regime.

However, through no fault of its own the NDP government was caught in a downdraft - facing one of the most stunning declines in oil prices on record, leading to thousands losing their jobs with little hope of ever again working in the oil patch.

The review panel findings were released Jan. 29, having been accepted in whole by the Notley government which has largely opted for the status quo.

In a nutshell: There will be no changes to oil sands royalties; a flat royalty of 5 percent will be charged to conventional producers until capital costs are paid off, after which royalties will be price sensitive and reflect expected returns over the life of a well; and for all wells drilled before 2017, existing royalty rates will be preserved until 2026.

The panel also called for “recalibrating” costs each year to ensure the industry remains up to date with realities and implementing strategic programs for enhanced recovery and high-risk wells to promote increased production.

Notley said the government will study ways to expand the province’s petrochemical industry as well as accelerating development and commercialization of new bitumen upgrading technology to capture the value-added end of oil sands production.

Time needed

But she the government will need time to decide what incentives might be required to spur the construction of refineries and upgraders.

Notley said the overall framework “recognizes the reality of our economy today.”

“Now is the time to work together as partners, to still bring about change, to bring about innovation,” she said. “But it is not the time to reach out and make a big money grab, because that is not going to help Albertans.

“I feel quite confident that this is the right direction to take,” said Notley.

“The fact of the matter is the environment has changed profoundly even in the last 12 months and so that is what is driving our decision making at this point.

“We have tremendous uncertainty in the industry. We have an unprecedented low level of oil prices with some concerns about how quickly they will recover, which is different than anything we have faced, frankly, for the last 25 years.”

In serving up a large dose of reality, Notley said Alberta’s biggest challenge is not Saudi Arabia’s “desire to flood the market with cheap oil.”

“Our biggest challenge is that our largest customer (the United States) is becoming our largest competitor,” referring to the rapid progression of the U.S. towards oil self-sufficiency and a return to exporting.

Formula subtracts costs

In the shale oil and gas sector, Alberta will charge royalties based on a formula that subtracts a number of costs, including those incurred from horizontal drilling.

The updated “revenue minus cost” approach is designed to give the government revenues based on the industry’s average returns rather than royalties tied to the price of oil and gas.

To that end, the government will require increased disclosure including an annual accounting of capital costs, as well as revenue, expenses and royalty information.

Dave Mowat, who chaired the panel, said the new regime will give investors and companies the predictability they have urged, while shifting the focus to costs from commodity prices.

Tim McMillan, president of the Canadian Association of Petroleum Producers, said the proposals are “fair and credible” and recognize the increasingly competitive landscape for oil and gas.

He said the framework is “principle-based and provides a foundation to build the predictability the industry needs for future investment.”

MEG Energy Chief Executive Officer Bill McCaffrey welcomed the government’s conclusion that existing oil sands royalties “provide the appropriate share of value to Albertans.”

“Industry and government can now focus on initiatives to lower costs, improve efficiencies and enhance environmental performance ... all with the goal of getting Albertans working again.”

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