Canada: Alberta Revamps Oil And Gas Royalty Framework

In 2009, in the wake of a changing economy, a slowdown in oil and gas well drilling and a new but much criticized royalty regime, the Government of Alberta launched a competitiveness review (the Review) with a focus on upstream natural gas and conventional oil development. The results of this Review and the Government of Alberta's policy response were released on March 11, 2010 in its publication Energizing Investment - A Framework to Improve Alberta's Natural Gas and Conventional Oil Competitiveness (the Competitiveness Framework).

By comparing Alberta's investment competitiveness with other key jurisdictions, namely British Columbia and Saskatchewan in Canada and Arkansas, Colorado, Kansas, Louisiana, New Mexico, Oklahoma, Pennsylvania, Texas, Utah and Wyoming in the United States, the Review revealed that, though still a dominant player in the energy business, Alberta has lost competitive ground in relation to its peers in the conventional oil and gas industry. To attempt to secure Alberta's competitive future in conventional oil and gas, the Competitive Framework identifies proposed actions by the Government of Alberta in a few key areas, the most significant of which appear to be royalty adjustments and regulatory process improvements.

Royalty adjustments

The Competitiveness Framework identifies two areas of concern with the current, and only recently implemented (January, 2009), royalty regime that are making Alberta a less attractive oil and gas investment destination:


    The Competitiveness Framework found that Alberta's front-end royalty rates on natural gas and conventional oil are significantly higher than those found in other jurisdictions competing for energy investment and creates too much front-end risk.

    The Competitiveness Framework also found that Alberta's maximum royalty rates are too high in comparison to its peers. For example, at a price of $120.00 per barrel, Alberta's maximum royalty rate on conventional oil is 49%, whereas British Columbia's is 18% and Saskatchewan's is 19%.

    As a result of these competitive royalty concerns and also with a view to encouraging innovation and technology development in the sector, the Government of Alberta has announced it will take the following actions:
  • The current royalty framework for natural gas and conventional oil will be modified effective January 1, 2011;
  • New royalty curves will be reviewed and any changes announced prior to May 31, 2010;
  • The current temporary incentive maximum 5% front-end rate on natural gas and conventional oil will become permanent effective January 1, 2011;
  • The maximum royalty rate for conventional oil will be reduced from 50% to 40% effective January 1, 2011;
  • The maximum royalty rate for natural gas will be reduced from 50% to 36% effective January 1, 2011; and
  • The transitional royalty framework introduced in November 2008 for certain deep wells will continue until December 31, 2013, provided that as of January 1, 2011, no new wells will be allowed to select the transitional rates.

Regulatory process improvements

The Review identified a lack of coordination among the various government agencies involved in the regulation of the oil and gas industry, which has resulted in a cumbersome and duplicative system, requiring unnecessary effort by industry participants and causing unnecessary delays. The Review determined that in order to regain competitive ground, Alberta's regulatory system needs to be more efficient and practical.

To address the need to reduce red tape in this area, the Government of Alberta proposes in the Competitiveness Framework to take a number of actions, including the following, over the next six months:

  • coordinated compliance programs are to be in place by October 2010;
  • Alberta Environment will streamline its process for pre-disturbance assessments; and
  • the Energy Resource Conservation Board will streamline processes for well spacing in certain categories and for in-situ oil-sands-development approval amendments.

In addition, the Government will form a task force to undertake a review, involving industry and stakeholders, of its regulatory system for resource development to ensure alignment with an "outcome-based approach." The task force is to issue a report within ninety days regarding (i) short-term enhancements that can be made to the system to facilitate the development of new technology, as well as (ii) the process it will undertake for its comprehensive review of the regulatory system.

Industry reaction

While some industry players have expressed concern as to whether the Government of Alberta has adequately addressed changes needed to make deeper wells economic or to spur shale gas activity in the Province, the industry reaction has been generally favorable. In particular, the Canadian Association of Petroleum Producers views the new policy reflected in the Competitiveness Framework as a positive change to the existing royalty structure. The Small Explorers and Producers Association of Canada also reacted positively to the effect the changes reflected in the Competiveness Framework would have on small producers. As the Government's action plans are implemented over the next few months, and in particular the new royalty curves are announced, the impact of the changes reflected in the Competitiveness Framework will be better understood.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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