Alberta Oil and Gas royalty review more about survival than more money
Alberta’s oil and gas royalty review started off as an NDP campaign plan to squeeze more money out of the oil sector, but is morphing into an industry survival strategy as the oil shock and tax hikes continue to depress activity.
The evolution was in plain sight Monday evening, when review panel chairman Dave Mowat, president and CEO of ATB Financial, promised “a strategic look to set us up for success” as he faced a testy oilpatch crowd during a community engagement session in downtown Calgary, where many have lost their jobs.
From corporate directors to recent hires, geoscientists to consultants, hundreds responded to an invitation to share their views on royalties with the four-member panel, which is due to give its recommendations to Premier Rachel Notley’s government by December.
And they provided an earful. Many questioned the $3-million exercise during an already-tough oil price downturn. Some worried recommendations would be politicized to fit the NDP agenda. There were even calls for government incentives to give the sector a boost.
Among the feedback:
“Why are we having this now? Why not wait until oil stabilizes?”
“You are exposing Alberta to risk by pushing for refining and upgrading.”
“If it’s not broke, why fix it?”
“The NDP, everything they have done has driven investment out of Alberta.”
“Are you considering the employment piece?”
“35,000 jobs have been lost to date. People in this room wonder if they will have a job this week.”
“Can’t you keep things constant for the oil and gas investor?”
The panel’s mandate is to review Alberta’s royalty system and identify opportunities to provide optimal returns to Albertans; encourage investment; encourage diversification opportunities such as value-added processing; support responsible development.
Mowat, who patiently explained the process and answered all questions, said the review would produce implementation-ready recommendations to prepare Alberta for changing conditions expected to impact Alberta’s top industry for many years.
New technologies are unearthing new energy supplies, rising oil production in the U.S. means it will switch from being the main market for Alberta oil to being a competitor, there are higher expectations to protect the environment, he said.
“There is a genuine desire to make Alberta successful” on the part of Notley’s government, Mowat said.
The recommendations “will be attractive to elected officials and to oil companies as well,” he said.
The government will be lucky to collect $3-billion in royalty payments this fiscal year, down from $9-billion, and oil prices are so low that 80 per cent of wells are paying no royalty at all, which means the government is highly motivated to see industry activity, not shut it down, he said.
Worried about the deteriorating economy, the province already promised in late August to hold off implementing any changes until 2017 and to deposit any royalty increases in Alberta’s Heritage Fund.
Mowat said the review would be done quickly, but would also be thorough.
It will involve a comparison of Alberta royalty rates to those of other oil producing jurisdictions by energy consultancy Wood Mackenzie, an assessment of how Alberta companies compare to companies that operate elsewhere, an assessment of all costs – including the 20 per cent corporate tax hike and higher carbon taxes already implemented by the new government, and feedback from out-of-province investors.
The review aims to come up with principles that ensure Alberta has a good royalty system, with technical aspects that could change with changing conditions, Mowat said.
Speaking to reporters, Mowat said there has been huge public response to the effort and some themes are emerging: a concern for the environment, a desire to come up with a system that works during high and low oil prices, and royalties that keep the province competitive.
The community engagement sessions supplement Web-based discussions. Prior to the one in Calgary, sessions were held in Fort McMurray and Grande Prairie. A final session was scheduled for Edmonton Tuesday evening.
Mowat said some of the hostile reactions are understandable.
“There are people who lost their jobs,” he said. “It’s a difficult time for the province.”
Despite the panel’s best efforts, it’s hard to see big upside other than information gathering by a novice government. Alberta already had a strategy to deal with changing conditions. Market diversification, responsible energy development and support for innovation have been pursued for years. The only new government priority is to boost refining and upgrading, both tried with little success in the past.
Meanwhile, there is lots of downside if the review messes a royalty system that served the province well.