​Alberta introduces legislation to guarantee oil and gas royalties

The Government of Alberta has introduced legislation that would guarantee the oil and gas royalty structure that is in place when a producer drills a well is the same ten years later.

The bill to further legitimize the current royalty system follows two formal reviews conducted by the province in recent years.

The first, in 2007, resulted in the government’s New Royalty Framework in 2009.

This increased rates and was not well received by industry and its investors, especially because the new rules came into effect as the price of oil tanked from $150 to $40.

Largely, the changes to the royalty regime were ultimately repealed.

“Shortly after passing legislation for the New Royalty Framework, the government began to roll back the increases with new royalty relief programs. By the time the dust had settled in 2010, most of the changes to the new royalty framework that had been recommended by the panel, including some later legislated by the government, had been dismantled in response to pressure from industry,” DOB regulatory specialist Elsie Ross wrote in January 2016.

“The disastrous review ultimately cost [Ed Stelmach] his job as premier, as his relationship with the industry had been permanently damaged. He was unable to overcome its mistrust.”

Alberta’s NDP government under Premier Rachel Notley conducted a second oil and gas royalty review in 2015.

The resulting Modernized Royalty Framework, which took effect in January 2017, included changes designed to drive innovation by rewarding producers that reduce drilling costs below the industry average, Ross noted.

It also enacted no changes on existing oil wells or to oilsands projects, and was broadly well received.

Alberta Premier Jason Kenney’s new legislation would restrict further reviews of the province’s oil and gas revenue system.

The Royalty Guarantee Act, introduced on June 20, “would increase investor confidence” with a “guarantee that no major changes will be made to the current oil and gas royalty structure for at least 10 years.”

This time frame is intended to provide sufficient time to recover most of the producible oil and gas from new and existing wells in Alberta, the government said.

“Frequent royalty reviews have had a significant negative impact on the energy industry and our province’s ability to compete with other energy jurisdictions. Alberta has competitive royalty rates and investors need certainty when making long-term decisions that the rates will not change on a whim. This legislation would provide the guarantee that stability isn’t just something we talk about in Alberta, it is the law,” said energy minister Sonya Savage.

The Royalty Guarantee Act still has to be passed in Edmonton.

It was endorsed on Friday by Mark Scholz, CEO of the Canadian Association of Oilwell Drilling Contractors, whose members are increasingly seeking opportunities in the United States.

“With an attractive investment environment, the Permian Basin in Texas has recovered far faster than Alberta since the downturn in 2014,” he said.

“Policies that increase investor certainty, like a royalty guarantee, will go a long way in helping Alberta compete again, and ultimately speed up recovery in the Western Canadian Sedimentary Basin.”

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