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Alberta rethinks royalty credit Wants to better align program with current markets and prices; payouts to producers total billions of dollars since 1974 Gary Park For Petroleum News
The Alberta government, accused by political opponents and special interest groups of short-changing taxpayers by taking a soft line on oil and gas royalties, is taking a small step towards updating a structure critics say is out of line with prevailing commodity prices.
Energy Minister Greg Melchin has directed his department to determine whether the Alberta Royalty Tax Credit still meets its original purpose.
Introduced in 1974, the tax credit is designed to help oil and gas producers and promote exploration and development and has returned billions of dollars over those 32 years.
He said in a statement it is time to decide whether to simplify or replace the credit.
“Any changes (which would take effect Jan. 1, 2007) will be designed to better align Alberta’s policies with today’s markets and prices,” Melchin said, noting that the province’s royalty structures are intended to maximize recovery of conventional oil and gas resources in an aging basin.
Eligible companies get a credit on their income tax for a percentage of the first C$2 million of royalties paid.
The percentage varies over time as the program is adjusted to remain in line with market changes and trends and has ranged from 75 percent to 25 percent. It is currently at 25 percent.
In 2005-06 about 2,000 companies and 1,300 individuals and trusts shared about C$113 million in benefits, while the province collected C$14.4 billion in total resource revenues.
Industry: prices vs. costs Industry spokesmen concede that since the last review of the program three years ago there has been a dramatic change in oil and gas prices, but the industry has also been hit with sharply higher E&P costs in what is now rated as the most expensive basin in the world.
Melchin said the government is concerned about the tax credit program “as it is now constituted” — a view shared by the Small Explorers and Producers Association of Canada and the Canadian Association of Petroleum Producers, who say the structure is complicated and places a heavy burden on producers.
Hugh McDonald, energy spokesman for the opposition Liberal party, said that rather than wasting time on a review the province should immediately eliminate a program that is not needed at a time of high prices and high profits.
He has the backing of government-appointed Auditor General Fred Dunn, who last year challenged the value of paying out millions of dollars to companies enjoying record cash flows.
In 1999 the government weighed disqualifying larger producers and limiting credits to 10 years per well, but backed off in the face of industry pressure.
Liberals: percent of net revenues dropping It is currently engaged in an internal examination of royalties against a background of criticism from the Liberals, who released documents showing producers paid 19 percent of net operating revenues in 2004, down from 23 percent in 2001 and 2002, and short of the government’s own target of 20-25 percent.
Melchin believes Alberta’s overall royalty regime is “pretty good,” although he has previously said the government is “looking at a whole pile of factors.”
Part of the process will also involve educating the public on the royalty structure, but he has rebuffed Liberal attempts to make public reports on royalty rates in the Lower 48 and on a proposal to increase rates.
While Melchin said he has no plans to release a formal report from the current internal review, McDonald said the minister is “showing complete contempt to the citizens who own the resource.”
The existing royalties are grossly inadequate, given that they were developed in the early 1990s at a time of low energy prices when Alberta needed to attract investment, he said.
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