Alberta dangles new industry incentives

The Alberta government has done a full about-turn from its original threat to hike oil and gas royalties by introducing two new royalty programs to stimulate spending on early-stage developments and squeeze more revenue out of underutilized existing operations.

Energy Minister Marg McCuaig-Boyd said that based on collaboration with the industry her government is confident that “modernizing” the regime will put more rigs to work and boost the revenue flow into public coffers.

The incentives involve a flat royalty of 5 percent on crude oil, natural gas and natural gas liquids for up to 90 months, after which rates will return to normal levels.

McCuaig-Boyd said there will be no further royalty reviews, although annual assessments will be conducted to ensure the rates are competitive.

“We want to make sure we have positioned Alberta to be globally competitive and we believe this new royalty framework will do that,” she said.

Alberta’s royalty returns are currently at levels not seen in 40 years, with the 2016-17 budget predicting revenues from non-renewable natural resources at C$1.36 billion, compared with almost C$9 billion in 2014-15.

The revised programs target projects that use enhanced recovery methods and projects in “emerging” new plays by making “difficult investments economically viable,” the government said.

The industry is guarded in its view of how successful the adjustments will be, with the Canadian Association of Oilwell Drilling Contractors doubting the changes will return capital that has left Alberta for other jurisdictions.

A spokesman for CAODC said the incentives may not be sufficient to offset hikes in corporate taxes or the province’s coming carbon tax.

He said only 65 rigs were active in June, while 606 were idle - a 9.5 percent utilization rate that is the toughest in CAODC’s history.

Kevin Neveu, chief executive officer of Precision Drilling, said the government move is a “step in the right direction” to improve costs, but he noted that low oil prices, pipeline bottlenecks and stricter environmental laws are choking off new investment in Alberta.

Mark Salkeld, president of the Petroleum Services Association of Canada, said the new royalties could attract interest in deep natural gas reserves in the Canadian Foothills region, where “nobody” is willing to develop known reserves because of the costs involved in building roads, pipelines and compressor stations.

The Canadian Association of Petroleum Producers welcomed the incentives at a time when companies have diverted spending to projects in the United States, noting that capital will go where it can “get the best rate of return.”

- Gary Park