Alberta readies royalty curves, aims to fix soured oilpatch ties

CALGARY – The ball will be in the oil and gas industry’s court after the province releases its long-awaited royalty curves as part of the competitive review process, Alberta’s energy minister said Wednesday.

Speaking at the opening of Bow Valley College, Energy Minister Ron Liepert said the announcement of the curves — which will be made in Calgary after the close of markets today — will be the next step in the province’s competitiveness review, which is designed to lure oil and gas investment back to the province.

When asked what oil companies and investors can expect, Liepert was coy, but said the numbers will represent the government’s best efforts to correct a relationship that went sour after it moved to hike royalties two years ago.

"We can expect the culmination of a lot of good work that we’ve been doing with industry over the last 60 days," he told the Herald. "Obviously, there are a lot of challenges today, we’ve tried to create as stable an environment as we can for the investment community and we’ll have to wait and see" how they react.

Today’s announcement is the second plank of a three-part competitiveness review designed to look at fiscal and regulatory policies affecting investment in all sectors of the economy.

In March, the province announced a five per cent royalty holiday on all new wells and implemented maximum caps of 40 per cent for oil wells and 36 per cent for gas, but left the curves in between those points empty. A subsequent review of regulatory policies, which was also announced in March, will not be part of today’s announcement, Liepert said.

Royalties are based on volumes, as well as price. Commodity prices were substantially higher when the original royalty changes were announced, with crude oil hitting an all-time record of $147 US a barrel in the summer of 2008. Likewise, natural gas prices are now about a third of what they were two years ago.

Liepert said the changing market dynamics, compounded by the ensuing recession, justify a second look at the fiscal regime.

"Part of the problem we have today is the uncertain global situation."

Gary Leach, executive director of the Small Explorers and Producers Association of Canada, said the royalty curves are "arguably" more important than the original competitiveness review announcement because they will determine how much producers will pay.

The original royalty changes were too steep on the front end and too high on the back, which was addressed with the five per cent holiday and the maximum rate caps. Now everybody will be looking at the points in between, he said.

Leach described the final numbers as a "balancing act" between broad-based incentives and special cases like unconventional gas, which will be addressed in today’s announcement

Although he praised the efforts on behalf of the province to date, he agreed industry will eventually have to follow through.

"The government probably feels they’ve done all they can," he said.

Industry representatives were cautious ahead of today’s announcement.

John Wright, president and CEO of Petrobank Energy and a critic of the original royalty review, said he’s taking a wait-and-see approach. Recently, Petrobank subsidiary PetroBakken has emerged as a leading unconventional oil player in Alberta’s Cardium resource to complement its southeastern Saskatchewan Bakken presence.

"Well, we’re looking for rationality, of course," he said on the sidelines of the company’s annual meeting Wednesday.

"Our hope would be that when the curves come out, that we define what the short end is, because there’s a royalty holiday at the beginning, and that the long end creates the sort of environment for people to make long-term investments and take long-term risks.

"If the royalties are too high in the long-term end, why would you take the risk?"

Former energy minister Murray Smith said the province will have to balance the realities of its fiscal situation, and a multibillion-dollar defi-cit, while promoting resource development.

"I know that the government is very aware of the financial pressures that they have. . . . I look for a very positive outcome," he said, noting there are more changes needed as the nature of development changes.

"Shale gas is a brand new resource opportunity for Alberta, and if we can capitalize on that quickly and efficiently . . . it would be a really good news story for Albertans."

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