Alberta government reveals new framework for royalty gains in the oil and gas industry

Premier Rachel Notley announced Alberta’s new oil and gas royalty framework Friday morning, revealing a plan that emphasizes a “transparent and efficient system” with job diversification and higher returns for the province.

The review was established to revisit the amount of royalties the provincial government collects from oil and gas companies operating in the province, in light of the ongoing economic deterioration plaguing the region. The four mandates of the review were to optimize returns for Albertans, promote further investment in the industry, suggest ways to diversity the energy economy, and find an approach to develop resources in an environmentally-friendly way.

While Alberta’s royalty rates are comparable to other similar jurisdictions, the industry is burdened with higher costs. The new plan will set a drilling cost allowance for wells based on an industry-wide standard.

“Alberta’s energy resources are owned by the people of Alberta. They are the foundation of our prosperity and will remain a great opportunity for our province and our citizens.  They will play a central role in our economy – and in Canada’s economy – for many decades to come,” Premier Notley said in her Friday speech.

“The economic opportunity inherent in those resources must not be inefficiently wasted today or squandered for our future.”

Notley said Alberta’s royalty structure was “outdated and inefficient”, especially in light of Saudi Arabia’s growing actions to flood the market with cheap oil, operating with a lower cost structure and greater revenues. In response, the review recommended, and the government accepted, a number of new guidelines for higher returns and transparency:

• Set out a structure to encourage the reduction of costs in the industry, which will increase net revenues shared by Albertans and industry in all price environments
• Establish new royalty rates on oil and gas wells that preserve existing rates of return at the outset
• A current distortion that discriminates on the basis of the hydrocarbon found will be eliminated so companies will not face the same risk of loss or inefficiency when they don’t get the hydrocarbon they were drilling for.
• The current royalty rates for oilsands will stay the same, but they will adopt a new framework to assess deductible costs with “greater transparency, accountability and certainty,” allowing all Albertans to see the costs the oilsands deduct.
• The government will provide an “unprecedented level of transparency” through the publication of a new annual Capital Cost Index for oil and gas wells, and the prices, production volumes and allowable costs used to determine royalty payments in oilsands operations through detailed reports. The Legislation will also be presented with a detailed report to monitor how returns in Alberta compares to similar jurisdictions.
• Will soon announce new job-creating initiatives along with a working group on energy diversification

The new royalty framework will apply to all new wells drilled after 2016 and existing wells will be exempt for the next 10 years.

“Over time, new oil and gas wells should move more quickly from low initial royalties to higher posted royalties and that means higher returns for the public in the future,” said Notley.

Furthermore, the framework will ensure that the oil and gas industry makes the same amount of returns on new wells as they did under the previous system.

“The straightforward message I have for every person who wants to know about the government’s plan on royalties is this: our new royalty framework recognizes the reality of our economy today,” the Premier added.

Notley states that the new framework will allow oil producers to make the same earnings as they would under the current system if they can meet or beat the average industry costs of drilling and keep prices within a range where the government’s extended drilling incentives are recognized. She expects the lower costs of drilling can be found through innovation.

Over 70,000 Albertans spoke to the panel, led by ATB Financial’s head Dave Mowat, to voice their opinions between August and January. The panel also included Calgary-based energy economist Peter Tertzakian, Beaverlodge Mayor Leona Hanson, and President and Vice Chancellor of the University of Winnipeg, Annette Trimbee.