Canadian Royalty Review Causes Major Backlash

Alberta, Canada, Premier Ed Stelmach ordered a public review of royalties, taxes and fees received from the oil and gas industry in February 2007. In less than a year, the backlash from this review has resulted in the first official monetary cutback from the industry, as well as criticism from within the government.

Amid the royalty review controversy, Crescent Point Energy Trust announced on October 2 that it will direct $150 million in investments to Saskatchewan – rather than Alberta.

“Because of the uncertainty created by the Report, Crescent Point has decided to direct all of its $150 million 2008 preliminary capital development budget to the Province of Saskatchewan,” said Crescent Point President and CEO Scott Saxberg in a released statement. “Increased royalty rates in Alberta would decrease the rates of return on projects in the province, making investments in other jurisdictions more attractive.”

The release does not disclose how much of the total $150 million would have been directed to Alberta had the uncertainty concerning the royalty review not been present.

Additionally, in his annual report released October 1, Alberta Auditor General Fred Dunn criticizes the government for knowing for at least three years that it should be collecting up to $1 billion more from oil and gas companies.

“There’s good evidence going back to 2004 that the royalty regime was very low,” Dunn is quoted after making his annual report public. “What was needed, really, was just leadership.”

“The principals of transparency and accountability, I believe, were not followed,” Dunn added.

Last week, EnCana Corporation, North America’s largest national gas producer, made a public statement threatening to cut about $1 billion in Alberta investments (out of about $3 billion) for 2008 if the proposed changes in the Alberta Royalty Review Panel Report were enacted as recommended.

“If the Royalty Panel’s recommendations are adopted in full, many of Alberta’s new and emerging resource plays will simply not be economically viable,” cautioned Randy Eresman, EnCana’s President and CEO.

“We will have no choice but to slow down our Alberta-based activity and move investments to other areas in Canada and the U.S. that are more economically attractive,” Eresman added.

When asked by the media for a response to EnCana’s release, Premier Stelmach is reported by Canada’s “The Globe and Mail” newspaper as saying, “My message to everyone is let’s just calm down.”

The newspaper added that Stelmach said, “We’re analyzing all the recommendations.”

Hal Kvisle, CEP of TransCanada Corp., Canada’s leading natural gas transporter, explained the oil and gas industry’s position concerning increased royalties in an article originally published in the “Globe and Mail” on September 21.

“Most of Alberta’s production sells for $30 to $50 per BOE, well below the global benchmark,” Kvisle wrote. “With a cost structure approaching $30 BOE, there is not much room left for higher royalties and taxes.”

Released in September, the report by the Royalty Review Panel is titled “Our Fair Share,” and consists of 104 pages of recommendations for the government to improve the existing royalty structure.

“Our goal is to ensure the royalty framework strikes the right balance, providing Albertans with a fair return while maintaining an internationally competitive system that allows the provincial economy to continue to prosper,” said Alberta’s Minister of Finance Dr. Lyle Oberg when the report was made public.

A formal response to the report by the government has been promised by mid-October. It is suspected that many more oil and gas companies are stalling strategic decisions about investing in Alberta until then.