Alberta To Cut Royalties Amid Competition

OTTAWA (Dow Jones)

The Alberta government announced plans Thursday to cut the royalty rates it charges natural gas and oil producers in an effort to make the province more attractive to investment.

The government said it will cut the maximum royalty rate on conventional and shale natural gas wells to 36% from 50% and on conventional oil wells to 40% from 50%. It will also make permanent a temporary incentive it introduced last year that reduces the royalty on new natural gas and conventional oil wells to 5% for one year. The permanent incentive takes effect immediately, while the new royalty curves will be finalized by May 31 and made effective on Jan. 1, 2011.

Royalty rates for the oil sands industry will not be changed, officials said, as that sector continues to attract investment capital.

Alberta Premier Ed Stelmach promised a review of the province's royalty regime last year as his popularity at the polls sagged. Alberta citizens and industry groups blame the current royalty system for job losses in the province's energy industry during the economic downturn of 2008 and 2009, and for losing new energy investment to the neighboring provinces of British Columbia and Saskatchewan as the economy began to recover.

Alberta's current royalty system was formulated in 2007, when the strong international economy and the frenetic pace of energy development in Alberta offered ample support for high rates. By the time it was made effective at the start of 2009, it was seen as an added burden on an energy industry already hit hard by the global recession.

The health of the energy industry is vital to Alberta; by some estimates, it makes up more than half of its economy.

However, changes to Alberta's royalty regime may not stop investors from looking elsewhere, since they've been lured away in part because of attractive new oil and gas resources in British Columbia and Saskatchewan that were only recently unlocked by improvements in drilling technology.

To Alberta's west, British Columbia has attracted new investment in its abundant shale gas basins, which can be made more productive than Alberta's conventional gas reservoirs by using horizontal drilling and hydraulic fracturing techniques. To the east, producers have been drawn away by Saskatchewan's piece of the Bakken formation, which is abundant with shale gas and shale oil.

"I wouldn't say that it's just the Alberta royalty changes that were introduced in 2007 that are responsible," Doug Bloom, president of Spectra Energy Corp.'s (SE) western division, said in a recent interview. Houston-based Spectra operates one of the largest gas pipeline and processing systems in British Columbia. "The prospect of such huge reserve potential and production potential really pulled the producers into B.C.," Bloom said. "The royalty changes probably didn't help production in Alberta, but fundamentally you have to have an attractive supply basis."

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