Alberta royalties — New, old and proposed

Here’s a snapshot of Alberta’s new royalty framework laid out Oct. 25 by Premier Ed Stelmach, compared with what currently exists and how it varies from what the government-appointed royalty review panel recommended:

• Changes will be implemented Jan. 1, 2009, a year later than the review panel wanted.

• The new system is projected to boost the royalty take by C$1.4 billion, or 20 percent, by 2010. The panel proposed an immediate 20 percent hike or C$1.9 billion a year, with the increase rising to 26 percent by 2010.

• For conventional oil, the government plans a single sliding rate formula, with royalties rising to 50 percent at an oil price cap of C$120 per barrel, compared with current maximums of 30 percent and 35 percent for old and new oil, with the price cap set at about C$30 per barrel. By 2010 the change is expected to generate an additional C$460 million from 2006 returns, compared with the panel’s estimated C$456 million.

• For natural gas, royalty increases will range from 5 percent to 50 percent from the current 5 percent to 35 percent, with rate caps set at C$16.59 per gigajoule (compared with the existing cap of about C$3.75 per gigajoule), boosting 2010 revenues by C$470 million from current levels, compared with the panel’s recommended C$742 million hike. The government also plans to revamp a deep gas drilling program and apply lower royalty rates over a wider price range for less productive wells.

• The government estimates that 88 percent of all gas wells and 57 percent of conventional oil wells will see a reduction in royalties.

• The government said it intends to implement a “shallow rights reversion” to maximize extraction of natural gas. Under this policy, mineral rights to undeveloped geological formations above zones that are being developed will be returned to the government and made available for resale. The objective is to maximize recovery of known gas resources which are being bypassed by operators pursuing deeper targets.

• For the oil sands, base royalty rates during the period when developers recover their capital costs, will start at 1 percent when the West Texas Intermediate price is C$55 per barrel and climb with each C$1 per barrel rise in oil prices to 9 percent when WTI reaches C$120 per barrel. The current pre-payout rate is a flat, 1 percent of gross revenues After developers recover their capital costs, royalties, currently at 25 percent of net revenues, will be 25 percent starting at WTI prices of C$55 per barrel and grow to 40 percent when oil hits C$120 or higher.

• Scrapped from the review panel’s recommendations is a new Oil Sands Severance Tax that would have started at 1 percent when oil prices were C$40 per barrel and built to a peak of 9 percent.

• The government will consider taking oil sands “royalties in kind” rather than cash in an effort to stimulate the construction of projects in Alberta to upgrader bitumen into synthetic crude. As part of that review it will consider a new royalty credit, allowing developers of upgraders and refineries to charge 5 percent of construction costs against royalties.

• In what shapes up as the most controversial issue, the government will attempt to rewrite agreements with oil sands pioneers Syncrude Canada and Suncor Energy. Those contracts expire 2016, but the government wants the two companies to be under a new royalty regime by 2009. If there is no deal within 90 days, the government “will take other measures to ensure a level playing field for all industry stakeholders.”

—Gary Park