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Alberta NDP spares industry, oil sands royalty rate to remain static

Tags: Alberta

Alberta’s NDP government is making no changes to oil sands royalties under an industry-friendly new system that comes as it grapples with an oil price shock that has forced producers to slash billions of dollars in spending and shelve projects.

Following an extensive review of the royalties that energy companies pay for the privilege of producing oil and gas, the government of Premier Rachel Notley also set a flat rate for new drilling for conventional resources, or those outside the oil sands, until drilling costs are paid out. Those changes take effect in 2017.

For wells drilled before then, the existing rates will remain in effect until 2026.

The head of the government-appointed panel, ATB Financial chief executive officer Dave Mowat, said the new regime will give investors and companies the predictability they have clamoured for.

The industry had been dreading changes to the system of economic rents, promised by the NDP during the provincial election campaign in 2015. The party had said the fiscal regime should be reviewed to make sure that Albertans were getting their fair share of spoils from massive resources.

However, a severe downturn in world energy markets has dragged on, forcing companies to claw back capital spending and lay off tens of thousands of workers. The slowdown has cut the government’s non-renewable resource revenues in half. Meanwhile, the U.S. – Alberta’s biggest energy customer – is now a competitor in exports to other markets.

Ms. Notley appointed the expert panel to talk to energy executives, key investors, academics and numerous others who have a stake in this crucial part of public revenue.

The changes announced Friday appear favourable for the sector, considering that many executive and investors had complained about the very notion of examining royalties less than a decade after a previous attempt to restructure the system failed.

The government said the new system is designed to reward companies that reduce drilling costs through innovation, and said it will help boost industry-wide net revenues and, in turn, royalties for the public purse.

Among key parts of the new framework:

– The existing royalty system for oil sands projects which includes a sliding scale based on oil prices, remains unchanged. The panel said the system, combined with the last decade’s massive investments, will mean increased revenue for Albertans.

– The review panel recommends increased disclosure including an annual accounting of capital costs of oil and gas projects, as well as the revenue, expense and royalty information for each oil sands project.

– Crude oil, natural gas liquids and natural gas production will have a flat royalty rate of 5 per cent until cumulative revenues from a well equal drilling and completion costs. After payout, royalties will be price sensitive and reflect expected returns over the life of the well.

– The panel recommends “recalibrating” costs each year so that the system remains up to date with industry realities.

– The panel says the government should implement strategic programs for enhanced recovery and high-risk wells to promote expanded production that could generate long-term revenues.

– The government will study ways to expand the province’s petrochemical industry, as well as accelerate development and commercialization of new bitumen upgrading technology. The framework does not prescribe any incentives or specific projects.

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