On October 25, 2007, Alberta Premier Ed Stelmach announced the New Royalty Framework (New Framework) to be implemented on January 1, 2009. The government stated that the purpose of the New Framework was to give future generations of Albertans a share in the development of resources, to provide stability and predictability to the oil industry, and to assure investors that Alberta would remain an internationally competitive and stable place to do business. Government analysts projected that royalties would increase by approximately $1.4 billion in 2010, a 20% increase from revenues under the prior regime.
In April 2008, in response to an overwhelmingly negative reaction
from the oil and gas industry, the government introduced two new
royalty programs designed to encourage the continued development of
deep, high-cost oil and gas reserves, to be implemented
concurrently with the New Framework. In November 2008, Alberta
introduced an incentive program making companies drilling new
natural gas or conventional oil wells from 1,000 to 3,500 metres in
depth, eligible for a one-time option to select new transitional
royalty rates. These rates remain applicable between November 19,
2008 and December 31, 2013, and companies to which the transitional
rates apply will be required to shift to the New Framework on
January 1, 2014. The Alberta government estimated that offering the
transitional rates would result in a potential reduction of
projected royalties of approximately $172 million in 2009, rising
to $512 million in 2013, depending on such factors as the number of
new wells paying transitional royalty rates, actual production
rates and commodity prices.
However, as predicted, despite such efforts to soften the blow to the oil and gas industry, the implementation of the New Framework appears to have been a significant factor in lower levels of investment (and resulting lower production) in the Alberta oil and gas industry during 2009. In response, the Alberta government announced another incentive program in March 2009, providing a new, one-year, $200-per-metre drilled royalty credit for new conventional oil and natural gas wells, and a maximum five percent royalty rate for the first year of production from new oil or gas wells. Additionally, the province will invest $30 million in a fund committed to abandoning and reclaiming old well sites and to encouraging the clean-up of inactive oil and gas wells. On June 25, 2009, the government extended the March 2009 energy incentive program by one year, to March 2011, to attempt to alleviate the significant downturn in the oil and gas industry by encouraging investment.
Since the New Framework was announced, the Alberta government has introduced a variety of new programs that have increased the complexity of the regime-precisely what the New Framework was supposedly designed to avoid. It remains to be seen whether these new programs will attract much-needed investment into the Alberta oil and gas industry. What seems clear is that the Alberta Government has realized its misjudgement of the Alberta royalty regime and is now taking the steps it deems necessary to try to rectify the problem.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
