CALGARY — The Alberta government announced a new royalty incentive program Thursday aimed at encouraging energy companies to drill technically challenging wells in the province.
Under the new rules, shale gas, coalbed methane and horizontal oil and gas wells drilled as of May 1 will pay a maximum five per cent royalty rate.
“This initiative to unlock Alberta’s unconventional resources offers the potential for decades of employment and community benefits,” said Energy Minister Ron Liepert.
“The final adjustments to royalty formulas will help industry make important investment decisions for the fall and winter drilling season and maintain Alberta as a competitive jurisdiction for investment.”
The incentives for unconventional drilling will be reviewed in 2014, and companies will be given three years notice before the program ends.
For shale and coalbed methane, the five per cent rate would last for the first 36 months of production.
There would be no volume limit for wells that produce gas from shale, a type of dense, hard rock that needs to be fractured with water, sand and chemicals in order for the gas to flow out.
There are a meagre two shale gas wells in Alberta currently, in contrast to the hotbed of industry activity in neighbouring British Columbia.
“There’s no question that Alberta has lagged behind B.C. and other jurisdictions in North America with respect to shale gas,” said Dave Collyer, president of the Canadian Association of Petroleum Producers.
“And I think both the improvement overall in the royalty structure and some of the specific incentives that have been put in place for shale gas will be helpful.”
Each dollar of investment in Alberta’s energy sector has a threefold impact on economic activity in the province, Collyer said.
The incentives for coalbed methane, in which natural gas is drawn out of coal seams, would apply for the first 750 million cubic feet of gas production.
Horizontal gas wells would enjoy the new perks for 18 months of production to a limit of 500 million cubic feet per day. For horizontal oil wells, the length of time wells are eligible for the five per cent rate depends on well depth and production level.
In the 2012-2013 fiscal year, the province will have a $700 million shortfall in revenue as a result of the royalty tweaks, but Liepert said the province is still committed to having its finances in the black by that time.
The province also fleshed out Thursday how its new lower royalty rates on conventional oil and gas wells, announced in March, will be calculated.
The low end for both oil and natural gas wells will be five per cent. The top rate for gas will be 36 per cent and 40 per cent for oil, compared to the 50 per cent cap both would have been subject to prior to the changes.
Now the province’s royalty take will still rise in tandem with higher commodity prices, but at a much more subdued rate than they would have under the previous regime.
Gary Leach, with the Small Explorers and Producers Association of Canada said junior energy firms didn’t get everything they wanted, but the changes are largely positive.
“I think what’s encouraging is the process that the government developed to allow this dialogue to take place with the industry,” he said.
“I think we have a government that’s listening to industry suggestions.”
In 2007, Premier Ed Stelmach’s government announced a new royalty framework that would give Albertans their “fair share” of the resource they own.
Industry railed against that new regime, moving their investment dollars elsewhere. Since that announcement, the provincial government has been rolling back its royalty framework bit-by-bit in a bid to lure activity back to the province.
“I’ve think they’ve gone a long way to recognizing the error they made three years ago,” said Danielle Smith, leader of the right-of-centre Wildrose Alliance party.
“I just think it’s a shame to all of the companies that have gone out of business and all the workers who have been unemployed for the last three years that it took us this long to get to this end.”