Alberta royalty review recommends few changes for oil and gas industry

After Alberta's NDP government criticized the royalty rates being paid by oil and gas companies, a five-month review of the system resulted in a recommendation that will not increase the government's revenue in the foreseeable future.

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The NDP ran on an election platform less than 12 months ago that suggested Albertans were not receiving full and fair value because the province had one of the world's lowest oil royalty rate structures. 

That's why industry had expected this review would lead to a rate hike. But instead, the panel concluded Alberta's rates are comparable to other jurisdictions. 

"Times have changed and we need to work in the best interests of the current economic challenges that we're faced with. This plan does that," Premier Rachel Notley said to reporters, after the review panel presented its findings Friday morning in Calgary.

The oilsands, which contribute the most in royalties to provincial coffers, will be unaffected as rates will remain the same.

"We didn't mess up," said Dave Mowat, chair of the royalty review panel. "Success for Albertans only comes when the industry is successful. Success doesn't exist when one really wins and one really loses."

Changes to the royalty structure for oil, liquids and natural gas will initially only apply to new wells as the existing royalty rate will continue for 10 years for wells that are already producing.

The report states, "There will be new royalty rates under the [modernized royalty framework]. However, the new rates will be calibrated to match the industry returns and Albertans' share of value that are achieved under the current royalty framework."

'Waste of time'

Opposition Wildrose Leader Brian Jean said he was relieved the government decided against drastic changes but described the entire review process as "totally a waste of time" that only injected further uncertainty into the industry and capital markets.

"During low oil prices, we did not need to do this," Jean said.

"The royalty review was, in essence, not necessary."

Royalty review's key conclusions

The key points of the report are:

• Albertans are receiving their fair share.
• Oilsands royalties won't change.
• Conventional oil and gas wells will pay a minimum royalty of five per cent of revenue until they have recovered costs.
• System will reward the most efficient drillers.
• Alberta markets will be developed for the use of natural gas.
• Alberta government accepts the report and is expected to adopt its recommendations this spring.

Oil and gas groups voice support

Several oil and gas industry groups and companies voiced their support of Friday's announcement.

"The grandfathering of existing projects, the fact that the new rules will only apply to projects starting in 2017 and maintaining the oilsands royalty regime are signals that the government is serious about encouraging investment in Alberta at this difficult time," said Tim McMillan, president of the Canadian Association of Petroleum Producers, in a statement.

The fact the NDP is not increasing the government's share of royalties may be tough for the party's base to accept, but it's likely more palatable considering the change in Alberta's economy and the drop in oil prices.

"Most of the complaint in the past was that the public interest was left off, while industry interest was forwarded by the state, and in this case I think the government has been able to achieve a more fair balance here," said Melanee Thomas, a political science professor at the University of Calgary.

The report suggests annually publishing a capital cost index for oil and gas wells in addition to information about each oilsands project including costs and royalties paid.

The royalty review panel held 65 stakeholder meetings across the province as part of its consultation process.

The premier's office said the cost of the review came in at $2.96 million, just under its approved budget of $3 million.