Economic crisis forces Alberta to trim $1.8 billion from energy royalty hikes

In the new year, companies that drill new natural gas or conventional oil wells at a depth of between 1,000 and 3,500 metres will be able to choose between a new transitional rate or the province's previously announced royalty framework, Alberta Premier Ed Stelmach said Wednesday.

"The overriding factor is the world has changed and this is all about creating Alberta jobs," Stelmach told a news conference in Edmonton.

The new wells will be required to shift to the new royalty framework in 2014. Existing wells and most oilsands projects will pay the higher royalty rates announced a year ago.

The changes would result in savings of $1.8 billion over five years for companies that meet the drilling criteria.

Taking into account the change, the province still expects revenues generated by the new royalty framework next year to be $1.8 billion and $2.1 billion in 2010.

When asked whether the decrease in royalty revenues will, in effect, cancel out next year's expected gains, Energy Minister Mel Knight said he didn't see it that way.

"It's like investing a dollar to get a five dollar return," he told reporters in Edmonton.

"The wealth generation coupled with the increase in royalty will indeed offset that in my opinion very handsomely."

A five-year transition period makes sense, because it takes a long time for many of the new wells to ramp up production, Knight said.

"If we put a program in place for a year, it would kick start a little bit of activity for six months and die. This will allow three or four years worth of pretty solid opportunity for us to see work in the field in that depth range," he said.

University of Alberta economics professor Andre Plourde said the move will only serve to delay the effects of the royalty hike.

"I don't think we're gaining anything that wouldn't net itself out over a longer period of time," he said.

"The government now seems to put higher value on activity right now than on capturing more value from the resource for the owners ... In the longer term, the gas, the oil doesn't really go anywhere. Do we really want to get the activity out right now?"

Plans to hike Alberta's royalties created an outcry in the energy sector, which reacted by moving much of its investment out of the province, slowing drilling and delaying projects.

Gary Leach, executive director of Small Explorers and Producers Association of Canada, said he welcomed the change and said his group would be meeting with Alberta's deputy energy minister on Thursday to work out the details.

"We're pleased to see that the government has recognized that the junior sector here in Alberta needed some relief from the new royalty framework."

He said the transition rate option "will leave a little bit more in the pocket of the junior companies that they can use to invest in the province and put people back to work."

Alberta Liberal Leader Kevin Taft said the announcement reminds him of the 1980s, when the Alberta government rolled out a series of programs to help the energy sector.

"One of the things I take from this is that these guys are expecting the downturn to be sharper and deeper and longer than they're letting on," he said.

The announcement was the second in as many days to tinker with the new royalty framework, first announced in October of last year.

Late Tuesday, the Alberta government and Syncrude Canada Ltd., the world's largest oilsands operation, said they reached a new royalty agreement after more than a year of negotiations.

Since the operators of Syncrude and No. 2 oilsands producer Suncor Energy Inc. (TSX:SU) both had existing Crown agreements that lasted until 2015, the province had to negotiate new terms.

Under its deal, Syncrude will pay the base royalty rate of either 25 per cent of net bitumen-based revenues or one per cent of gross bitumen-based revenues, depending on which is greater.

It will pay an additional $975 million stretched over the 2010 to 2015 period, after which it will transition to the new royalty structure.

Under Suncor's royalty deal, announced Jan. 29, the company could pay about 20 per cent more in royalties from 2010 to 2016, after which it would convert to the new structure.

Syncrude is a joint venture between Canadian Oil Sands Trust (TSX:COS.UN), Imperial Oil Ltd. (TSX:IMO), Petro-Canada(TSX:PCA), Nexen Inc. (TSX:NXY), ConcoPhillips, Mocal Energy Ltd. and Murphy Oil Company Ltd.