Reductions form an integral part of Alberta’s competitive future, but is it the right approach?

The royalty rate ride continues in politically-volatile Alberta, after the provincial government signalled its intent in March to retreat back to lower levels of oil and gas royalties.

An early March poll by Environics found nearly half of Albertans disapprove of the government’s handling of royalties. The numbers are split between those who wish to see the rate increased or decreased. Disapproval may also stem from the fact that Albertans – the owners of the province’s resources – were left out of the process of reviewing the royalty rates.

“The goal is to maximize value to Albertans, yet they have been excluded from negotiations,” said Chris Severson-Baker, policy director for the Pembina Institute.

“We can’t be sure that today’s changes will allow Albertans to get the best value from the development of their resource because they weren’t consulted as part of this review.”

It is welcome news to large and small scale producers, however, who can now look forward to significantly lower rates starting January 2011. The new system will be tougher on the industry’s bottom line than what existed two years ago, but not as demanding as the changes brought in last year.

A highlight for many is a now-permanent five per cent rate on natural gas and conventional oil wells in their first year of production. Maximum royalties have also been reduced from 50 to 40 per cent for conventional oil, and 50 to 36 per cent for natural gas. The changes are slated to take effect in January 2011, except for tar sands producers, who face no change in royalty levels.

For the Conservative Government, it’s hoped the move will ease the pressure they’ve been under since increasing royalty rates in January 2009 – a move that coincided with successful efforts by BC and Saskatchewan to lure the industry to their domains.

“There’s an understanding by government that after the new royalty regulations were introduced, there was a game-changing technology which opened up reserves in other jurisdictions which previously did not compete with Alberta for investment dollars,” explained Alberta Energy spokesman Bob McManus. “Because of the ability to bring up the shale gas, they were now in the game.”

Plans to bolster Alberta’s competitiveness were first unveiled during the Throne Speech in early February, and solidified in the first bill of the session – the Competitiveness Act. Most of the details came out in mid-March, with the remaining royalty curves to be announced by the end of May.

Alberta Energy’s forecast is that the royalty changes will bring an additional $2.1 billion into the provincial treasury, despite up to $400 million less in royalties from conventional oil and both conventional and unconventional gas in the near-term.

While Premier Ed Stelmach expects the royalty reduction could result in 8,000 jobs next year and 13,000 by fiscal 2013, the provincial treasury is also expected to see a $785-million shortfall in royalty revenues by that time. The government is clearly hoping the lower royalties will spur increased activity and land sales, and decreased support for the upstart Wildrose Alliance. Stelmach is seemingly staking his political hide on that hope.

That could be wishful thinking in the face of a National Energy Board report released in late March. It predicts Alberta gas production will fall to 8.5 billion cubic feet (bcf) per day over the next few years from 12.7 bcf per day, while output in the Montney and Horn River Basin plays in Northeastern British Columbia is expected to rise to 3.7 bcf per day.

Alberta Energy’s predictions also include a drop in natural gas production, though McManus couldn’t say how those predictions compare to the NEB’s. Production levels are expected to recover through strengthening gas prices and through tapping into unconventional reserves, he said.

Meanwhile, BC also continues to spur the industry forward with lucrative credit programs. In March, the province added a new $120-million installment to the Infrastructure Royalty Credit program, which means reduced royalty rates for gas extracted as a result of a new road or pipeline put in place by a company. That program also gives the province a return of about $2.50 for every $1 of credit extended, and as many as 210 Montney wells and 70 Horn River Basin wells could be drilled by the end of this year.

The competitiveness review is bigger than the royalty reductions alone – it’s a larger initiative aimed at creating a competitive environment across a number of industries in Alberta, working hand in hand with Alberta’s ‘The Way Forward’ economic recovery plan. Innovation, productivity and technology are also getting a major push under the review.

Enhanced communications are also a significant part of the rollout, which calls for more reporting to the public about how Alberta’s competitiveness contributes to the province’s prosperity, environment and quality of life.

Minister of Finance and Enterprise Ted Morton will be at the helm of the new initiatives, which add up to an ambitious end goal: bringing Alberta back into a surplus position in three years, through a combination of less government spending and continued public infrastructure investments.