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Royalty break for Alberta drillers

NORVAL SCOTT AND DAVID EBNER

Thursday, April 10, 2008

CALGARY — Alberta is giving drillers of deep oil and gas wells a break on royalties at a cost of more than $1-billion over five years.

The province Thursday introduced two new royalty programs, a move aimed at relieving pressure on companies drilling high-cost, high productivity wells that were seen as the most heavily penalized by the previous royalty regime changes last October.

“Addressing the unintended consequences with these programs will help Alberta achieve the necessary levels of investment and production to generate the royalties anticipated by the New Royalty Framework,” Energy Minister Mel Knight said.

Drillers of deep natural gas wells will get a break on royalties through credits, which will cost the province about $200-million a year for five years, while the credits to deep oil drillers will cost $37-million annually, also for five years.

The main change is for deep natural gas wells, those drilled to more than 2,500 metres in depth, multimillion-dollar efforts that occur in the Foothills of the Rocky Mountains. While only accounting for about 5 per cent of all gas wells drilled, deep wells contributed about a quarter of the province's total gas production and are crucial to the provincial treasury.

The changes come as new figures show Canada's energy firms are funnelling vast sums of money to Saskatchewan, at least in part at Alberta's expense.

In October, Alberta approved increased royalties on oil sands, natural gas and oil production, seeking to increase the amount earned by the province by 20 per cent, or $1.4 billion, after the new rates come into force Jan. 1, 2009.

The changes to the regime were complex – rates varied depending on both the depths and productivity of wells – but effectively hit conventional oil producers and firms that operate deep gas wells the most. Spending cuts of more than $1-billion were seen as companies such as EnCana Corp. and Canadian Natural Resources Ltd. redirected spending out of Alberta.

Junior firms, which have fewer assets and so less options for redirecting capital, were seen as being particularly affected. Highpine Oil and Gas, a deep gas and oil-producing junior, said the October changes would reduce its cash flow by as much as 29 per cent.

Other provinces appear to be reaping the benefits. Both British Columbia and Saskatchewan have made more in crown land sales so far this year than Alberta. While hot new plays in both provinces are seen as a cause, so too is Alberta's higher royalty scheme.

“This level of interest is unprecedented and speaks to the optimism about the economic prospects of both our province and our number one industry,” said Saskatchewan Energy and Resources Minister Bill Boyd. “It is also a clear sign of confidence in Saskatchewan's new government and our stable royalty and regulatory regime.”

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