Ed Stelmach. Premier of Alberta, made a move. By 2010 energy related royalties in Alberta will increase by $1.4 billion on certain assumptions about energy prices. If they are higher than now, royalties will be higher if prices are lower the royalty increase will be lower. The basic arrangements are as follows:
- New, simplified royalty formulas for conventional oil and natural gas that will operate on sliding scales that are determined by commodity prices and well productivity. The formulas eliminate the need for conventional oil and natural gas tiers and several royalty exemption programs.
- A sliding scale will be implemented for oil sands royalty rates ranging from one to nine per cent pre-payout and 25 to 40 per cent post-payout depending on the price of oil.
- The province will exercise its existing right to receive “royalty-in-kind” on oil sands projects (i.e. raw bitumen delivered to the Crown-operated Alberta Petroleum Marketing Commission in lieu of cash royalties). Because this bitumen can be sold or used for upgrading or refining, royalty-in-kind can be sold by the province to support value-added, upgrading projects in Alberta.
- The province will ensure that eligible expenditures and definitions of oil sands projects (also known as “ring fence” definition) that determine when a project has reached payout are tightly and clearly defined. Environmental “costs of doing business” will continue to be recognized as eligible expenditures.
- No grandfathering will be implemented for existing oil sands projects. The government is in discussions with Syncrude and Suncor, whose Crown agreements expire in 2016, to transition to the new oil sands royalty regime.
- Substantial legislative, regulatory and systems updates will be introduced before changes become fully effective in January 2009.
Natural gas royalties will be unchanged – the industry is in enough trouble as it is, with low prices and increased costs of securing and exploiting new, deep finds.
It’s a smart move – not as bad as many expected and better than some feared. No one will be satisfied.
The oil companies will bleat and moan and their share price will drop for a very short time (good time to buy). They will then get on with business, with a slight slowing of projects (which is not a bad thing). Three years from now, all will be well.
Meantime, the Progressive Conservative Party of Alberta will now need to go into over drive to sell this decision as a good deal for Albertans. I doubt that this will trigger an election – it started to get cold today and a few flecks of snow were seen about town. Buy we are headed that way. I suspect there will be a very different kind of Alberta budget statement on February 10th 2008 and we will head into an election on February 11th 2008. If, however, the oil patch starts to take on the Premier, he will goto the people and they will vote him back in.
Royalties are not the real issue, though they are important. The real issue is that current royalties will drop by close to $2 billion and Alberta government spending is out of normal bounds – well above inflation and a factor for population growth. Further, few government departments manage within budget and there are surpluses due to poor foreword forecasts of oil prices (risk management requires modest forecasts). The budget will rightly correct some of this – Stelmach is a fiscal hawk – but come as a surprise to many Albertan’s who are blissfully unaware of the true circumstances of the Province.
Alberta has invested $11 billion in municipalities and $18 billion in infrastructure from forecast revenues. Health care costs are rising rapidly and, at current rates, will take 50% of all revenues by 2020. Personal taxation revenue, already the lowest in Canada, will decline as more and more baby boomers retire. There are also legal requirements as to the use of surplus revenue. So pretty well all room for manoeuvre is small.
Of all the issues Stelmach faces, health care is the real worry. The system is broken and there are so few strategic and system thinkers with the courage to fix it – the inmates of tacticians and vested interests (nurses with collusion from doctors) have been running the asylum for too long. The public have been seduced into thinking that more money will make a difference – there is strong evidence that the challenge has little to do with money, but is more about strategy, structure and culture. We cant allow costs to continue to escalate.
So it will not get interesting.
Stelmach seems shocked that Alberta is being branded the “new Venezuela” (it is a totally ridiculous charge – especially given that royalty rates in Texas are much higher than here) and he is no communicator. Someone has to step up to the plate. Watch this space.