Last week, Alberta’s provincial government announced they would repeal the royalty increases levied on oil and natural gas produced within the province. The announcement coincided with my arrival in Calgary (not that the two are in any way related).
Effective January 1, 2011, the top royalty rate on natural gas will drop to 36% from 50%, and highest rate for non-oil sands crude will drop to 40% from 50%. The bottom rate for both natural gas and crude oil will remain 5%.
According to the Globe and Mail, cutting the royalties will cost the province nearly $200 million in missed royalties between now and 2013, but the royalty rollback is expected to increase drilling activity, leading to more corporate tax revenue, and add 13,000 jobs/year.
In 2008, Alberta Premier Ed Stelmach promoted the royalty increase, saying that Albertan’s deserved a “fair share” of the oil profits being reaped in the province, and the new rates became effective on Jan. 1, 2009. But the increase was particularly ill-timed, coinciding with the global financial crisis and plummeting petroleum prices. Rig usage dropped and the rapid decline in drilling triggered layoffs across the industry.
In particular, rig crews were idled in Alberta, as scaled-back investment shifted to opportunities in other provinces. The effects in Alberta were apparently quite painful, as 30% of the province’s economy is rooted in the petroleum sector.
The Petroleum Services Association of Canada (PSAC) updated their 2010 drilling forecast on Jan. 27 , forecasting a new total of 9,000 wells to be drilled across the country, up 12% (1,000 wells) from PSAC’s original forecast released in early November 2009. All of the additional wells in this new forecast are expected in Alberta, where PSAC now estimates 6,095 wells will be drilled. This represents an expected 4% increase over 2009 drilling in the province.
Roger Soucy, president of PSAC, said “Improved prices led to a spurt in drilling activity in December 2009 and we expect stronger pricing to continue to impact drilling levels as we move through 2010.”
Let us not forget that most of the petroleum used in the US comes from Canada, and that the US relies heavily on production from Canada’s vast oil sands. The recently announced royalty rate changes do not pertain to oil sands development.