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Alberta premier promises royalty balance Wants fair share for residents without overturning internationally competitive regime; will also recognize shifting priorities Gary Park For Petroleum News
Alberta Premier Ed Stelmach offered some soothing words to one of the year’s largest industry gatherings June 19: His government will keep its balance on the razor-thin edge between ensuring Albertans get a fair return from their oil and gas resources without endangering the province’s competitiveness.
Making his first major appearance before industry decision-makers since getting elected six months ago, Stelmach pledged to “ensure Albertans continue to receive a fair share from (resource development) … and preserve an internationally competitive oil and gas system, which is critical to our continued prosperity.”
But Stelmach would not “speculate” on whether the current royalty review will recommend royalty adjustments.
He said the government will “recognize changes in the industry, such as the shift to unconventional resources, increasing cost pressures and the impact of a much stronger Canadian dollar.”
That echoed remarks made in May by Finance Minister Lyle Oberg, who said the changed climate this year, including a dramatic downturn in drilling, could undermine provincial revenues if royalties and taxes were increased.
Pierre Alvarez, president of the Canadian Association of Petroleum Producers, said Stelmach provided a “high-level message about competitiveness … about governments not playing with the marketplace.”
Stelmach told reporters that his government’s objective is to find a balance between Albertans, who own their natural resources, and “the security and certainty of an investment climate that is investing millions of dollars in a very volatile marketplace.”
Industry groups make final case In the concluding stages of the royalty review, leading industry groups — CAPP, Small Explorers and Producers Association of Canada and the Petroleum Services Association of Canada — made a final case against interfering with what they see as a fair and competitive royalty regime.
A joint submission by CAPP and SEPAC said the pressure for royalty increases has neglected to take into account the escalating costs of drilling that have outpaced the rise in commodity prices.
“It is important to look at both costs and prices together as it is revenues less costs that drive economic development,” the report said.
It also noted that a change last year in Alberta hiked royalties by C$300 million a year, significantly lowering Alberta in “the international ranking of competitiveness.”
Despite the heavy focus on the oil sands, conventional oil and gas investments across Canada are forecast to reach C$28 billion this year, compared with C$17 billion for the oil sands, the report noted.
While the conventional sector provides greater benefits and opportunities to the economies of Alberta and Canada, those returns become “increasingly challenging to maintain as the basin matures with pools that are smaller, more costly, less productive and more remote.”
New gas development at C$7-$8 per thousand cubic feet By combining costs and commodity prices, new spending on natural gas and conventional oil are now on the economic margin, the submission said, estimating that at current cost levels the threshold for new gas development in Alberta is C$7-$8 per thousand cubic feet.
“This year’s current and significant slowdown in the natural gas industry clearly demonstrates this principle in action,” CAPP and SEPAC said — a sentiment echoed by PSAC, which warned that even without a hike in royalties, the drilling and service sector could see the workforce of about 100,000 cut by 10 percent.
“The more the government collects in royalties, the less that remains for field activity,” PSAC told the review panel.
The CAPP-SEPAC report said the latest statistics show the average output from conventional gas wells has declined by a factor of three over the past 12 years, while the total number of gas wells drilled has risen four-fold.
For conventional oil, total production at the end of 2005 was 15 billion barrels, or 75 percent of the ultimate potential, but productivity is in sharp decline.
Alberta has more than 20,000 oil wells pumping an average of just six barrels per day, compared with 600 bpd in Alaska and 6,000 bpd in Norway.
Conventional oil royalties range up to 40 percent of production and gas royalties are up to 35 percent.
“At these maximum rates, the absolute royalties collected continue to rise at higher prices,” the study said, arguing that the essential part of the royalty regime in a maturing basin where well productivity continues to fall is an adjustment for lower productivity to encourage continued production as long as possible from fields near the end of their economic life.
The joint report said the challenge today is “to ensure the royalty structure maximizes delivery (from older wells) through support for both continued extraction from existing wells and incremental investment in new low-rate wells.”
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