After months of worry and anticipation, the results of Alberta's royalty review were announced last week, but it wasn't the end to uncertainty many were hoping for.
“I am concerned that they haven't finished the framework that's going to be implemented after 2017 on the new wells. With that uncertainty still in place this could still continue to be a province where investment is cautious and they won't be putting a whole lot into it,” said Bonnyville – Cold Lake MLA Scott Cyr. “At this point, I'm glad to see that the royalties won't be raising on anything older than Jan. 1, 2017, but very cautious when it comes to anything after 2017.”
In August 2015, the provincial NDP government announced that they would be moving forward with conducting a royalty review. The review saw the creation of an advisory panel to engage various stakeholders throughout the province, including residents, in discussions about Alberta's royalty system. Their mandate was to identify ways to optimize returns to Albertans as owners of the resource, industry development, diversification opportunities, and responsible development of the province's resources.
Now, months later, the panel released their findings – and it wasn't what many expected.
Heading into the review, general consensus stated that royalty rates would likely be increasing as a result of the review. However, the premier decided to adopt the panel's recommendations, which stated that the current royalty framework should remain in place for all existing wells and any drilled in 2016.
The decision is little comfort to Cyr, though.
“The fact is that we did eight-months worth of pain and agony for Alberta for nothing. That's very distressing that the NDP chose to go this route.”
Cyr added, “A royalty review is something that is done when you feel you're not competitive anymore. Alberta's been very competitive when it comes to our royalty rates, so the NDP just reconfirmed the fact that we're competitive but they still leave this question of what are they going to do in the future on new wells, and that's just upsetting.”
Unwelcome from the get-go, the royalty review received mixed feelings from not just the Wildrose Official Opposition, but also all of the province's political leaders. While pleased to see the royalties won't be going up, concern echoed from all corners about what's still to come.
“I'm supportive of anything that promotes efficiency and innovation to benefit both producers and Albertans,” said Greg Clark, leader of the Alberta Party. “But, I do have some concerns about the impact this will have on small operators and service companies, and we have yet to see the actual royalty curves. As always, the devil is in the details.”
Alberta Liberal leader David Swann stated that he was disappointed in the review, noting that there were several issues that should have been included that the NDP has either “overlooked or deemed irrelevant.”
“All in all, I don't feel this royalty review will provide protection for the environment, add revenue for Albertans or increase investment and jobs. There are positives, such as increased transparency and the harmonizing or hydrocarbon royalties, but overall, I'm disappointed.”
The royalty review panel, lead by ATB Financial CEO Dave Mowat, released a 209-page document of their process, findings and recommendations, which was adopted in its entirety. In addition to applying changes only to wells drilled after 2016, and keeping existing royalties in place for 10-years on any well prior to that, the panel recommended harmonizing the royalty structure across crude oil, liquids and natural gas.
For implementation in 2017, the report states that there needs to be a royalty structure designed for crude oil, liquids and natural gas that emulates a “revenue minus costs” approach. The belief behind the strategy is that it will provide the province and investors with a “clear line of sight” on recouping capital costs and see them re-invest in Alberta.
The new framework will maintain the current oil sands royalty regime, but will see the establishment of new royalty rates on oil and gas wells that preserve existing rates of return at the outset
“This improved royalty framework will make Alberta's energy industry more competitive and create more good jobs. We heard the system was complex, unpredictable and too rigid to keep pace with the rapidly changing technology of our energy sector,” said Energy Minister Marg McCuaig-Boyd. “Albertans and industry will benefit from a modernized framework that is simple, predictable, and adaptable.
Moving forward, Alberta's royalty framework will incorporate existing incentive programs and ensure they operate in high and low price environments, lay the groundwork for the establishment of a working group on energy diversification, measure performance annually and ensure there is a high level of transparency by annually publishing a capital cost index for oil and gas wells, along with a range of data for each oil sands project. For new wells, there will be a flat royalty rate of five per cent until the industry average on upfront costs are recovered, following that the rate will increase with price.
“Our new royalty framework recognizes the economic context of Alberta's energy industry and the need to protect and promote good jobs. Our new system will gradually deliver greater revenue to Albertans while building a more competitive energy sector enhanced by greater transparency and performance measurements to allow Albertans to hold government and industry to our commitments,” said Premier Rachel Notely.
The Government of Alberta will begin work this spring in order to put the panel's recommendations into effect beginning in 2017. While Notely boasted more jobs, increased investment and a better return to the province through the new framework, as the MLA in an oil-producing region Cyr questions the realties of those promises.
“My question is 'how?'” said Cyr. “My first thought is how do you manage old and new together within the same system, so I'm thinking there's going to be some transition problems in how to implement this. While their framework is still incomplete, we're still in limbo.”
There is one thing Cyr is sure about, that the royalty review did significant harm for the little results that came from Friday's announcement.
“We sure waited a long time to find out there were going to leave everything the same. If they knew all of this stuff three or four months ago, why wait until now to release this. That damage can't be undone that they've done to our economy and the fact that it is incomplete is even more distressing.”
Cyr added, “At this point, it's a wait and see and hope, but I'm not all that optimistic.”
