Alberta retreats on energy royalties

Alberta has rolled back the royalty rates it charges energy companies to develop the province's oil and gas resources, which will sharply slash government revenues but may boost investment.
Energy Minister Ron Liepert and Alberta Premier Ed Stelmach speak to reporters in Calgary on Thursday. ((Tara Fedun/CBC))

Alberta has rolled back the royalty rates it charges energy companies to develop the province's oil and gas resources, which will sharply slash government revenues but may boost investment.

"They will help us use innovation to unlock our energy resources, create opportunities and jobs in communities large and small across our province and strengthen Alberta's economic recovery," Premier Ed Stelmach said of the cuts.

The maximum rate for conventional oil will be cut to 40 per cent of revenues from 50 per cent, and the top rate for natural gas will be cut to 36 per cent from 50 per cent, the province announced Thursday.

Royalty rates between the upper and lower ends, which are being worked out in consultation with the industry, will be finalized on May 31, 2010.

The new rates come after a year-long government review of how competitive Alberta's industry is, compared with other jurisdictions. Its conclusions were released Thursday in a report titled Energizing Investment.

The changes, effective January 2011, will result in a revenue loss of $363 million in 2012 and 2013.

The premier also announced the government will be working to streamline regulator approvals for the oil and gas industry.

Alberta collected $12.5 billion in royalty revenues in the 2008-2009 fiscal year. ((Dave Simms/CBC))

The rates announced Thursday mean the royalty structure is similar to one in place before October 2007, when the Alberta Conservative government boosted its take by 20 per cent, predicted to translate into an extra $1.9 billion a year.

The 2007 royalty revamp brought major criticism from the oil and gas industry, which said the increases compounded the effects of falling demand and low oil and gas prices during the recession that followed the province's decision.

Premier Ed Stelmach won re-election in 2008 with the largest majority in the province's history while promising the royalty increases. His stand was popular with some voters who felt the industry should do more to share the costs of coping with soaring growth, inflation and labour shortages brought on by rising prices for oil and gas.

'We're not transforming this asset into a financial asset to … ensure that we've got revenue flows down the road.'— Andre Plourde, economist

Andre Plourde, an economist at the University of Alberta, is concerned the new structure is too much about a quick fix and not enough about the future. There's a temptation to extract too much at low rates and spend all the revenue, he said.

"Oil and gas in the ground is an asset that belongs to us, belongs to future generations of Albertans. If we produce it, get all the revenues and then spend it right away, we're not transforming this asset into a financial asset to kind of ensure that we've got revenue flows down the road," Plourde told CBC News.

Plourde was a member of the 2007 royalty review committee that recommended raising royalty rates.

Royalty changes government 'incompetence'

The Wildrose Alliance, whose popularity has surged in recent provincial polls, has proposed a strategy calling for lower royalties, especially for natural gas, and faster environmental approval for drilling projects.

Party leader Danielle Smith said the royalty changes have been a costly disaster and have dried up energy investment and jobs in Alberta.

"We've seen so much incompetence on the part of this government that this is just one more example, I think, of the mistake after mistake after mistake that they've made on a whole range of fronts," she told reporters on Thursday.

Smith slammed the government for going ahead with the 2007 increases despite warnings from the industry.

"They went ahead and did it anyway," she said. "And the fact that it was a wrong decision is proven in the fact it took five major adjustments over the course of last year to try to get it right. Now we've seen a sixth major adjustment."

Some in the industry believe the industry's anticipation of lower royalties was one reason the province raked in $167.5 million Wednesday in its regular sale of exploration rights, the fourth-highest total in the province's history.

Companies paid an average of more than $500 per hectare for exploration rights on 324,000 hectares.

Alberta has the most volatile revenues of all the provinces because of its reliance on oil and gas royalties. In the 2008-2009 fiscal, year it raised $12.5 billion through royalties.

With files from The Canadian Press