Copyright of the Daily Oil Bulletin 2018
Government, Industry Mark First Anniversary Of Alberta’s New Royalty Framework With Cautious Optimism
What a difference a year has made.
Just over a year ago when Alberta Premier Rachel Notley came to Calgary to announce that her government had accepted its advisory panel’s recommendations on a modernized royalty framework, oil was at just over US$30 a bbl WTI and only 30 per cent of the western Canadian drilling fleet was active.
Monday, oil was just above $53 a bbl and 55 per cent of the fleet (354 rigs) was out in the field.
“We reviewed royalties when prices were low so that when prices returned, Albertans and Alberta would be able to hit the ground running and that’s exactly what we are starting to see,” Energy Minister Marg McCuaig-Boyd told government and industry members who gathered here Monday to mark the one year anniversary of the framework which took effect Jan. 1, 2017.
“One month into the framework, the industry is showing a lot of encouraging signs,” she said. “Across Alberta from my home in the Peace Country to here in downtown Calgary, there is a growing sense of optimism.”
Although it is still too early for formal numbers, McCuaig-Boyd also believes investment is beginning to return to the energy sector, a view she said is supported by the Bank of Canada which expects a modest increase in oil and gas investment across the energy sector, beginning early this year.
“Add to this the federal approval of the Trans Mountain expansion and Line 3 replacement and positive momentum on Keystone XL and it is clear for our single largest sector we are closer than ever to breaking Alberta’s landlock,” she said.
However, the world also has changed and the United States, once Canada’s best customer has become an even more formidable competitor, said Peter Tertzakian, a former panel member and is chief energy economist and managing director of ARC Financial Corporation. “We have to be on top of our game.”
In retrospect, one of the royalty panel’s most important achievements, along with the people of Alberta and the government, was “recognizing that we have to compete in a disruptive world that looks forward,” he suggested.
“A year ago I stood beside the premier who stepped up and acknowledged that we need a royalty framework that can compete,” said Tertzakian. “Today it’s in place and I think we can all be proud of the accomplishments that can happen when stakeholders throughout the province come together with our government to produce something that can endure.”
Encouragement for innovation
The panel recognized that the industry was not in a normal cyclical downturn but a structural change was underway, added Dave Mowat, former chair of the panel and president and CEO of ATB Financial. “We as the people who seek to gain advantage of the basin here in Alberta had to get our costs down and that is what the modernized royalty framework does in many ways as it encourages innovation and encourages people to get their costs down.”
Oil and gas producers had an opportunity to opt in to the new royalty framework prior to Jan. 1, 2017 and the government approved 158 new wells, receiving applications from more than 40 companies, according to the government. “Industry was anxious to get on with things and we are seeing more and more innovation going forward,” he said.
Tertzakian also acknowledged there is room for cautious optimism with higher oil and gas prices, the return of investors and rigs going back to work.
“These are all positive indications but let’s understand something,” he said. “This is not so much a price-driven recovery as it is an innovation and efficiency and productivity driven recovery as we too in the industry in Alberta are innovating as we think about how to compete in the future.”
The royalty panel, he said, realized the new royalty framework had to adapt to new innovation over time — to not only adapt to innovation but to encourage it. “The vision we had was to encourage best practices … with the mindset that we needed to be able to withstand future downturns much better than we have the one we are in.”
Competition for capital
The Canadian oil and gas industry also has to compete with the U.S. for capital and that will be a focus this year for the Canadian Association of Petroleum Producers (CAPP), said Tim McMillan, president and chief executive officer.
“Royalties are an important part of the competitive puzzle,” he said. However the industry needs to be more mindful of some of the policies that the President Donald Trump administration is talking about such as bringing on more federal lands, lowering corporate taxes and looking at U.S. regulatory standards with the express purpose of being more competitive and attracting more capital, according to McMillan.
“We have reached out to governments across Canada and federally to say we think this requires a “Team Canada” approach at the highest levels,” he said. “We need to look at all our environment and regulatory processes to make sure we can be as efficient as absolutely possible and still reach the outcomes we are looking for,” he said. “I don’t believe we can sit back and hope we can compete. We need to be very active in changing our policy frameworks, our structural frameworks and industry cost frameworks as well.”
McCuaig-Boyd who said her government continues to have discussions with industry about competitiveness. “It’s not like we’ve done the royalty review and we’re done and we’re not going to talk to industry anymore.”
She also agreed with McMillan that a Canadian strategy is needed, noting that it’s something Notley has been working on with her counterparts as well. “Because it’s not just about Alberta; it’s about Canada.”
Some of the work on competitiveness needs to be at a more strategic level, though, said McMillan. CAPP has written to Notley, he said, inviting her to partner with the association on perhaps a more systemic view of how the industry operates and “how we can continue to execute on the objectives of industry and government to grow our businesses in a more competitive world.”
The royalty review panel also recommended that the province explore more value-added developments in Alberta and that work is underway, said McCuaig-Boyd, who was joined by members of the energy diversification advisory committee which was appointed last fall (DOB, Oct. 13, 2016 ). “We have seen all too clearly the consequences of failing to diversify our economy and our energy sector and we are going to change that,” said the minister.
The advisory committee has been asked to find ways to add value to the province’s resources. “This includes looking at what the government can do to support what we have called the value chain,” she said. “It could include partial upgrading technology and opportunities for more petrochemical manufacturing in Alberta.”
The committee will be consulting with the industry and with non-profit groups, similar to the royalty review, with its report expected in the fall, said McCuaig-Boyd.
As part of the new royalty framework, applications are open for two new strategic royalty programs. The Enhanced Hydrocarbon Recovery Program and Emerging Resources Program will help projects obtain more oil and gas from existing pools before they are abandoned and encourage development of higher-cost and higher-risk areas with large resource potential respectively.