Drillers: Royalty Review Delay Drives Investment Out of Alberta

Nick Wilson,
Alberta Oil Magazine
January 13, 2016

The Alberta NDP government’s royalty review delay “has just sent investment elsewhere – as prices drop so rapidly [drillers] don’t have time to wait,” Canadian Association of Oilwell Drilling Contractors (CAODC) spokesperson John Bayko, said Wednesday. “Alberta is not as attractive because of uncertainty – Saskatchewan has had more friendly investment policies for a while now,” he said. A TD Securities report last year called such flight Alberta’s “capex leakage” – which it said would benefit Saskatchewan and B.C. as the review spooks producers.

In addition to the uncertainty of the royalty review – originally scheduled for year-end, but pushed back to the end of January – the government’s commitment to reducing carbon emissions pledged at the Paris climate change summit, also fuels uncertainty. Environment Minister Shannon Phillips said the plan is a “long process” that will roll out over several months with details not revealed until the next provincial budget in March.

Bayko said, “The cumulative effects of everything going on in Alberta have teamed up with oil prices and have investors looking for more cost effective areas.”

The fear of uncertainty is fed by the certainty of increased corporation and carbon taxes. When they were announced last year Tim McMillan, president and CEO of Canadian Association of Oil Producers (CAPP) said, “Our industry is already suffering from the dramatic drop in world prices for oil and gas. Now, the mounting pressures on Alberta’s top job-creating industry are beginning to layer on top of one another. In July alone, we saw corporate taxes increase 20 per cent and a doubling of the carbon price. These two changes added about $800 million in extra costs over the next two years to an industry already suffering.”

And that was before oil prices crashed to around US$30 per barrel.

Both CAPP and CAODC have suggestions for the government’s review and policies. They say they want carbon tax money to be invested in oil industry clean technology. Last year Mark Scholz, President of CAODC said, “….every dollar raised through new carbon taxes should be made available to industry in order to reinvest into new technology to achieve emission reductions.” CAODC also wants a reduction oil and gas royalties by the incremental increase from new carbon taxes.  CAPP wants the review to be forward looking, stable and predictable to minimize uncertainty and maximize investment and take into account “all the mounting costs from new government policies such as climate change and corporate taxes.”

CAPP says it supports the government’s climate change plan – with qualifications – saying that it will help green up Albertan oil’s image and help get it to market. “As Premier Notley said [the plan] will further enhance the reputation of our sector and improve our province’s environmental credibility as we seek to expand market access nationally and internationally,” McMillan said. Energy Minister Marg McCuaig-Boyd says the carbon tax won’t have a huge effect on the royalty review, but the review panel is considering the full package of costs facing the oil industry and it is considering ways to help stimulate the sector.

CNRL, however, sees things differently. On announcing slashing salaries up to 10 percent, it blamed the cut on low oil prices “as well as the current fiscal and regulatory challenges.” CNRL cancelled its annual investor day soon after the NDP won the election, blaming “uncertainty” caused by the NDP campaign promise to review royalties. It also says it cannot plan 2016 until the government finalizes its intentions on royalties. It also blamed a deep quarterly loss on the government’s corporation tax hike saying it will have less money to invest in drilling.

Nerves strain as prices drop, but one thing everyone agrees on is that the sooner the government rolls out its review the better.

Story: Alberta Oil Magazine