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Alberta to Boost Oil, Gas Royalties by $1.4 Billion

Reuters
Oct 26, 2007


CALGARY, Alberta—Alberta said on Thursday it will boost oil royalties as crude prices surge, but the Canadian province backed away from some of the more contentious recommendations in a review panel's report that the industry sought to discredit.

Under the new measures, Alberta's take from the oil and gas industry will increase by $1.4 billion, or 20 percent above projected 2010 revenues.

The panel, which Premier Ed Stelmach appointed to look at ways to overhaul a royalty system some Albertans saw as too sweet for the booming industry, had urged a $2 billion increase over 2006 revenue.

The prospect of higher royalties has proven divisive in the province, whose oil sands resources represent the largest oil deposits outside the Middle East. The world's oil industry has watched the developments closely.

The changes spurred angry comments from oil-sector officials who charged the government is grabbing too much in a high-cost operating region, but also from left-wing think tanks, which said Stelmach caved to industry pressure.

Stelmach rejected the notion that his new fiscal regime was a compromise after intense industry lobbying. Companies have threatened big cuts in spending and job losses.

"I'm confident we've got this right," he said.

The new measures are to be implemented in January 2009.

The revamped system, which is largely sensitive to commodity price movements, will mean smaller increases in natural gas and oil sands royalties than envisaged by the six-member review panel's report, entitled "Our Fair Share."

Stelmach rejected the panel's proposed new tax on oil sands production.

Among other changes, the amount companies pay for oil sands projects before capital costs are recovered will range between 1 percent and 9 percent of revenues, with increases starting when oil trades at $55 a barrel and a cap set at $120 a barrel. Oil prices climbed to a record $90 on Thursday.

After capital costs are recovered, royalties will range from 25 percent to 40 percent of net profits.

Under today's structure, oil sands producers pay 1 percent of revenue until capital costs are recovered and 25 percent of net profits afterwards.

A Smaller Increase

The new measures will mean a $470 million increase in oil sands royalties in 2010, compared with the $660 million recommended by the panel.

Stelmach said no projects will be "grandfathered" to maintain existing fiscal terms, and he said the government was in talks with major oil sands producers Syncrude Canada Ltd and Suncor Energy Inc to reach a transition agreement.

He was coy about what he might do if executives who run the huge mining and synthetic crude operations did not agree to make changes to their terms, which are in effect until 2016.

"I'm confident they will," he said. "But I also made the commitment earlier that we will receive our fair share."

Suncor, whose oil sands business produces nearly 300,000 barrels a day, said it will work with the province, but warned changes "could have a significant impact on industry economics."

Among other shifts, conventional oil and gas royalties will be revamped to be more sensitive to rising commodity prices.

Gas royalties will range between 5 percent and 50 percent and be capped when gas prices hit $16.59 per gigajoule. Rates begin rising when gas hits $7, rather than the $6 the panel recommended.

Changes to gas royalties mean a $470 million revenue hike for 2010 versus the $740 million in the panel report.

Industry officials blasted the changes, despite some of the softer measures, predicting activity levels will drop.

"I don't think there's anybody in the (oil) patch who views this as being mildly positive. This is very much viewed as a dark day," said Pierre Alvarez, president of the Canadian Association of Petroleum Producers, the industry's main lobby. He estimated the moves mean a minimum increase of 20 percent.

"Any business that takes those kinds of hits is going to react in a negative way."

Tristone Capital, a Calgary investment firm, predicted a flight of industry capital from the province and said some share prices would drop 5 to 10 percent when trading opens on Friday.

"There will be a bit of a pullback," Don Rawson, Tristone's director of institutional research, said during a conference call. "You're going to see an ugly day tomorrow."

On the other side, the Pembina Institute, an environment and economics group, said it was clear that the industry's pressure on the government convinced Stelmach to water down the recommendations of the review panel.

Scrapping the oil sands tax proposal, for example, takes away certainty from the government's take, said Pembina analyst Jaisel Vadgama.

However, one business expert said the government found middle ground. Polls have shown the vast majority of Albertans in favor of higher royalties with oil prices surging to successive records, and schools, hospitals and roads creaking under the weight of a population influx.

"I think Stelmach has threaded the needle," said Mike Percy, dean of the University of Alberta school of business. "He's made significant moves to restructure royalties and at the same time set out a regime that will continue to attract investment."



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