After months of build-up, royalty review finally arrives
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The stakes are high for both Alberta’s hard-hit oilpatch and the rookie NDP government when Premier Rachel Notley reveals the findings of the province’s much-anticipated royalty review in Calgary on Friday.
A sweeping review of the payments the province charges petroleum producers to extract bitumen, oil and natural gas on Crown land was a key campaign promise for the NDP in last spring’s provincial election win over the Progressive Conservative dynasty.
After five months of study by a review panel, Notley will deliver a new royalty framework in the midst of a historic downturn in oil prices that has triggered thousands of layoffs, battered the energy sector and the entire Alberta economy — and prompted fierce attacks on her government’s policies.
“What’s at risk for Notley is the danger of being perceived that her government is making a bad situation worse,” said University of Calgary political scientist David Stewart.
“The whole process has been quite controversial. Even just launching the review, you’ve had people being upset by that,” added Mount Royal University political scientist Duane Bratt.
The NDP government has already promised that any changes brought forward in the review won’t be implemented until 2017 to give the industry time to adjust.
In an interview this week, Energy Minister Marg McCuaig-Boyd said the four-person review panel that was created in August — chaired by ATB Financial CEO Dave Mowat — is bringing forward a royalty regime that’s “durable, it’s going to be effective at all price points and effective for all parties involved.”
The report will also address issues around increasing refining and upgrading in Alberta, as well as further developing the petrochemical industry in the province.
Tim McMillan, president of the Canadian Association of Petroleum Producers, said the oilpatch is hoping for a new royalty framework that ensures Alberta is competitive with other jurisdictions.
But he said the most important thing is that the review is now complete.
“We are looking forward to having the certainty,” said McMillan, whose group represents Canada’s largest oil and gas producers.
“It will be very important to have … royalties concluded and have everybody know what the go-forward royalty framework will be.”
The review also took into account Alberta’s new climate change policy and the effect of increased carbon taxes on industry players. The NDP has raised the existing carbon levy and plans to introduce a new economy-wide carbon tax in 2017.
Mark Scholz, head of the Canadian Association of Oilwell Drilling Contractors, said royalty rates must be reduced to offset those extra costs.
His group represents companies hired by oil and gas producers to drill wells — business that’s dried up because of the collapse in crude prices from more than US$100 a barrel in the summer of 2014 to close Thursday at $33.22.
“We’re not talking about growth anymore. We’re talking about survival for a lot of service companies,” said Scholz.
Mark Salkeld, head of the Petroleum Services Association of Canada, said the industry is on “pins and needles” ahead of Friday’s announcement.
“Industry’s anxious to get this one past us and move on,” he said. “Industry didn’t really want the royalty review to happen, but kind of understood that with the new government, they had to follow up on their promises.”
Both Scholz and Salkeld said they felt they had a fair hearing from the panel and said the process was better run than the 2007 review.
The 2007 report, called Our Fair Share, recommended the province increase its take. The government of former premier Ed Stelmach accepted the report’s recommendations, in part, but it prompted a furious backlash from the oilpatch.
After the 2009 oil bust, the government launched a “competitiveness review” and many of the royalty changes were essentially undone.
Our Fair Share panel member Evan Chrapko said too many people still think of royalties as a “greedy penalty charged by the owners of the resource” rather than a reasonable cost of doing business, like groceries for a restaurant.
He said royalties shouldn’t be made so low that they effectively act as a subsidy.
McCuaig-Boyd said earlier this week there would be “no surprises” for the industry.
And many observers believe that while the NDP originally talked of getting “a full and fair return” of revenue from natural resources that are owned by Albertans, the province’s deep economic funk has tied the government’s hands.
Bob Schulz, a professor at the University of Calgary’s Haskayne School of Business, believes the province may end some existing subsidy programs that aren’t being used by business.
He noted the existing system is already sensitive to commodity prices — taking in more royalties as oil and gas prices rise, and less as prices fall.
“Probably there will not be major changes but at least the illusion of thoroughness,” Schulz said. “With where the oil price is, there can’t be major changes.”
With files from The Canadian Press
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