Oil industry relieved as Alberta holds royalties steady

By JULIE GORDON on 1/29/2016

CALGARY (Reuters) -- Alberta's left-leaning government unveiled a new energy royalty framework on Friday that left rates unchanged on existing oil wells and oil sands projects, alleviating fears that costs would rise to punishing levels amid the worst crude price slump in decades.

The western Canadian province, home to huge oil sands deposits, along with conventional and unconventional oil and natural gas, said the new framework would take effect in 2017, with existing royalty rates remaining in place for ten years on wells drilled before 2017.

Royalty rates for oil sands projects will not change, but the government pledged more transparency and accountability on costs producers may deduct when paying royalties.

Alberta Premier Rachel Notley noted the province's position in the global market had changed dramatically in recent years, with its biggest customer, the United States, now also its biggest competitor.

"It's not the time to reach out and make a big money grab," she told reporters, adding the government had accepted the panel's recommendations and incremental increases in royalty rates on new wells would go into the province's savings fund.

Oil sands producers, which have some of the highest costs globally, have been hit especially hard by the price crash, with Western Canada Select heavy crude sinking to as low as $13.25/bbl this month.

Suncor Energy, Canada's largest oil and gas company, said keeping the current oil sands royalty regime provides the certainty investors need to make long-term decisions.

Tim McMillan, CEO of the Canadian Association of Petroleum Producers, also said the province hit the right note with the oil sands royalty.

Energy shares on the Toronto Stock Exchange climbed on the news, ending up 1.28% on gains by players such as Suncor and Canadian Natural Resources.

New rates in coming months

The review panel recommended the government harmonize the royalty structure across crude oil, liquid and natural gas wells. New rates are to be unveiled in coming months. Currently, there are different rates depending on what is produced.

"It's a recognition that times are volatile and perhaps it's not the time to insert further uncertainty," said Benoit Gervais, a portfolio manager at Mackenzie Investments.

Still, Simon Baines, a lawyer with Osler's energy group in Calgary, said the decision "seems to be kicking the can down the road a little bit" on rates for new wells.

Alberta's current royalty rates vary between 1% and 40% depending on factors such as type of development, oil prices, crude volumes, well depths and speed of cost recovery.

The review, an election campaign promise by the New Democrat government that swept to power in Alberta last May, had concerned oil and gas executives who warned it could lead to higher costs and job losses.

The province pledged that rates of return to producers would remain the same at the outset under the new system.

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