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Smaller piece of a larger pie

The Alberta government said Thursday it will slash its royalty take from oil and gas producers, many of whom responded to a new regime introduced a year ago by moving their investment elsewhere.
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Triumph Well Service No. 3 crew works on a Penn West Energy Trust well site south of Condor Thursday.

CALGARY — The Alberta government said Thursday it will slash its royalty take from oil and gas producers, many of whom responded to a new regime introduced a year ago by moving their investment elsewhere.

“We can’t pretend that oil and gas investment levels haven’t eroded or that we don’t have a responsibility to current and future generations of Albertans to address that,” Energy Minister Ron Liepert said.

The province will move the maximum royalty rates for conventional oil — which doesn’t include the oilsands — from 50 per cent down to 40 per cent. The top rate for natural gas will be 36 per cent, down from 50 per cent.

An incentive program introduced last year to dampen some of the effects of the new royalty framework will also now be made permanent.

A five per cent royalty rate for new oil and gas wells was to have expired in 2011.

The government still needs to consult with industry precisely how royalty rates will be calculated, and those elements will be finalized by the end of May. The changes will take effect in January 2011.

The changes are expected to reduce revenue from royalties by $785 million in the 2012-2013 fiscal year, but the government said the benefits from increased activity will have on land sales and taxes will offset that, leading to a net reduction of $363 million in overall revenues.

Premier Ed Stelmach said the changes will benefit Albertans in the long-term.

“The piece of the pie may be smaller, but we’re growing a much larger pie,” he told reporters at a news conference.

“It’s the economic activity that makes the difference, so there are so many things that go into the calculation of the quality of life for Albertans the return on the investment.”

Word of the royalty cut appeared to be filtering slowly into the oilpatch Thursday. Bev Reuteman, who has worked for more than 25 years in Drayton Valley, was pleased to hear about the announcement.

“I think any revision to that royalty program will benefit the oilpatch,” said Reuteman, the controller at Nelson Bros. Oilfield Services. “I think it’s a good thing. Better than nothing at all.”

“Is it enough? I guess time will tell,” she said, noting that there has been an increase in oilfield activity since the fall.

In 2007, Alberta appointed a panel to look into whether citizens of the province were getting a fair shake from the royalty regime back. That resulted in a report entitled Our Fair Share that recommended the province hike its royalty rates.

The energy industry railed against the changes, and moved much of its investment to neighbouring British Columbia and Saskatchewan. Some tweaks were made to the regime in response to the economic downturn.

Energy revenues for the government from natural gas, crude oil and oilsands was $10.6 billion in 2008-2009.

That figure fell with plummeting energy prices and a falling world economy to $5.4 billion in 2009-2010.

The provincial budget estimated that figure to be $7.2 billion in the current fiscal year. These figures do not include land sale revenues and tax revenues.

When asked whether the province should have overhauled the program sooner, Liepert said the government is trying to move forward.

“I can’t do anything about yesterday. I can only do something about tomorrow, and I think we’ve got a great opportunity here working with industry to identify what some of those immediate sort of barriers are, address them and continue to streamline.”

The province also said it wanted to streamline its regulatory regime by avoiding duplication with various departments involved in the approval process.

Environment Minister Rob Renner said Alberta will also look at what other provinces have done to speed up regulatory approvals.

“I don’t think we have to re-invent the wheel,” he told reporters on his way into the legislature Thursday. “If someone’s got a great idea, then I’m not ashamed to steal it.”

“But the bottom line at the end of the day is we have to ensure that we’re protecting the environment,” said Renner. “So nothing that we would propose to bring into place would in any way jeopardize or compromise our ability to do that.”

Danielle Smith, the leader of the right-of-centre Wildrose Alliance party, told reporters the new royalty framework was the worst policy for Alberta since Pierre Trudeau’s National Energy Program three decades ago.

“The fact that it was a wrong decision is proven in the fact that it took five major adjustments over the course of last year to try and get it right,” she said.

“It looks like they’ve made some pretty good changes here. They may not have gotten the whole thing right but at least it shows they finally are listening.”