Alberta relaxes royalty increase plans

November 20, 2008 CALGARY -- The Albertan provincial government is offering improved terms for companies drilling new unconventional oil and natural gas wells in the province.

Under a new royalty regime, due to come into effect on January 1 2009, the government is set to charge 20% more for the right to develop oil and gas resources, boosting its take from the province's oil and gas reserves to CAD1.4bn in 2010. Under the revised terms, unconventional oil and natural gas wells drilled at depths of 1,000-3,500 metres (m) will not be subject to the new royalty regime until 2013. All existing wells and projects will still be subject to the new royalty regime. With the price of crude oil falling, the comparatively high capital costs of tar sands projects combined with higher royalty rates, uncertain US oil demand and increasingly tight credit markets have resulted in a number of international oil companies (IOCs) and oil sands-focused producers cancelling or delaying oil sands projects in Alberta.

This is the second time Alberta has sought to offset the impact of the new royalty regime on exploration. In April 2008, the government announced that natural gas and oil exploration wells drilled to depths exceeding 2,500m and 2,000m respectively would have access to state subsidies.

Ed Stelmach, the Premier of Alberta, stressed that the move was not a tax break but a temporary incentive. Oil sands producers had scaled down investment plans in response to the new royalty regime prior to the deterioration in financial markets and slide in the price of crude. Companies were increasingly choosing to invest in unconventional plays with more benign fiscal regimes such as neighbouring British Columbia, Saskatchewan and unconventional gas and shale plays in the US. Producers also moved to process bitumen at upgraders in the US, reducing potential revenues and job creation in Alberta. The province estimates that its latest move to placate producers could cost it up to CAD1.8bn over five years.

Several companies are pursuing a more cautious approach to investing in Canadian oil sands. Should oil prices continue to fall BMI expects that this trend will intensify. As market conditions worsen, so does access to credit, hitting capital expenditure (capex) plans of small producers especially hard. While higher crude prices had been expected to compensate for the worst effects of the credit crunch, a sustained fall in the price of crude oil will have wider implications especially for high cost crude oil producers.

© 2008 Business Monitor International.