News: Alberta Ups the Ante
Column
By Brian Salgado   
Monday, 03 December 2007
Preceded by an outcry from Canada’s oil and gas companies, Alberta premier Ed Stelmach in October unveiled the preliminary plans for the Canadian province’s adjusted royalty program.

But since the announcement of the initial framework of the new program – which will increase provincial government coffers by $1.4 billion (Canadian) – there has yet to be the massive layoffs and collapse of the energy infrastructure as many companies had warned.

“The industry has been conspicuously quiet,” noted George Eynon, vice president of business development and external relations at the Canadian Energy Research Institute. “After looking at what was in place, they realized they are still going to make a healthy return, particularly with the new price lines they’ve put in.”

Under the new program, the maximum royalty rate for natural gas and conventional oil will rise from 35 percent to 50 percent. Alberta’s oil sands will still require a 1 percent royalty for start-up projects, possibly rising to 9 percent if oil approaches $120 a barrel. After start-up, the royalties range from 25 to 40 percent contingent to the market. Currently, oil sands royalties top out at 25 percent.

Eynon says the new royalty framework won’t take affect until Jan. 1, 2009. The provincial government needs time to prepare systems to track compliance.

Even though the protests were loud and numerous before the royalty program was unveiled, Eynon says there never was much doubt that the new levies would be acceptable in today’s market. “If they hadn’t protested, they would have thought it could have gone much higher,” Eynon said. “Whatever happened was going to happen anyway, comparatively speaking, so they would just place their funds somewhere else.”

Besides, Eynon noted many of the companies that were threatening additional layoffs in the wake of the new royalty program already suffered greatly because of the decline in natural gas drill rigs being assembled throughout western Canada. This industry has seen a decline in the number of rigs erected the last two seasons, and Eynon expects those numbers to either decline further or plateau this year.

Roger Soucy, president of the Petroleum Services Association of Canada (PSAC) predicted a 17 percent reduction in natural gas activity in 2008, which would follow an 18 percent drop in 2007. This would represent a drop from 24,000 wells drawn in 2005 to a mere 14,500 in 2007.

“[Layoff threats] have been related to natural gas prices,” Eynon added. “Since we heard both extremes, with the public ones wanting higher royalties and the industry wanting lower ones, that probably means it hit right in the middle.”

Soucy said contractor members of his organization are still uncertain of the ramifications to their bottom lines. “What we’re going to find from everybody is they’re still in a state of flux with a lot of elements of this program,” Soucy adds. “All of the regulatory elements are not flushed out yet, so we could have some impact to hammer out with the government. In a large respect, it is difficult for the contracting and service sector to know until their customers have deciphered this thing with regards to capital expenditures.

“But these are not the most severe taxing elements the panel had recommended, so from that perspective, it is not as bad as expected.”

Industry members were troubled that many citizens of Alberta supported the royalty hikes, and Soucy said the province saw this as “an opportunity to pick the pockets of big oil.” While it is true the funds are intended to serve Albertans, it takes away money from companies in a province that is dependent – possibly to a dangerous level – on the oil and gas industry for employment.

“Polls taken during the process showed very high numbers full in support of royalty increases, which is disheartening to the industry,” Soucy added. “A large portion of the population, including our own industry’s workers, is not familiar with how the industry works.”

Soucy said the program will divert $1.4 billion away from potential industry reinvestment. “That is less to deploy into our services and products, which isn’t going to help our cause,” he lamented.
 
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