Oilsand royalties in Alberta to be based on revenues not oil prices

The royalty model for oilsands’ remains largely untouched after Rachel Notley’s NDP government’s review, which was a part of their election promises last year.The energy industry, which remained anxious for months on this particular issue, now heaves a sigh of relief as it learnt that oilsands companies will continue paying the government the same royalties they have paid before, but the province’s take is changing for other unconventional oil and gas producers.

[pullquote align=”normal” cite=”Rachel Notley, Premier of Alberta”]Alberta’s biggest challenge is that our largest market is becoming our largest competitor [/pullquote]

Notley was referring to the development of oil and gas through the controversial fracking method in the United States. Alberta’s greatest challenge was not Saudi Arabia’s yearning to flood the market with cheap oil, she added.

The changes in the royalty model are designed to help develop shale oil and gas formations and will charge royalties based on a formula that subtracts a number of costs. Costs incurred by drilling horizontally when exploring for shale resources would be subtracted in this method.

The renewed model which is based on revenue minus costs incurred would give the province’s government royalties which would be based on the average returns of the industry and not the price of oil and gas.

Since there was no way to change oil or gas prices, the focus of the review was on costs, head of the review panel Dave Mowat, ATB Financial president and CEO said. Government revenues will also rise when commodity prices increase, if the energy industry can keep down costs.

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Mowat added that the panel’s recommendations were intended to reward innovation and competition in Alberta.

Energy economist Peter Tertzakian, who was a panel member in the review, added that greater certainty would mean lesser risk and could possibly lead to greater investment.

The Announcement made after the government’s review came as a relief to the energy industry with the Canadian Association of Petroleum Producers commenting that the new model was a signal that the government was serious about encouraging investment in Alberta.