The Alberta government is rolling back a royalty regime loathed by the province's all-important energy industry, in a bid to revive its political fortunes and lure oil and gas investment back into the province.
After months of feeling the wrath of an industry chafing under a year-old royalty hike intended to give Albertans a greater share of windfall profits, Premier Ed Stelmach's government is now reversing course and almost completely abandoning the increases.
It is slashing the highest royalty rates - those designed to kick in only when energy prices are high and profits are surging - on oil and gas wells.
The province is also moving to cut industry red tape, promising a new report to speed regulatory processes within 90 days.
It is a dramatic reversal from a premier who just two years ago trumpeted the need to deliver Albertans a "fair share" of oil and gas profits that were pouring in as crude oil prices soared into the triple digits.
But by the time the royalty hike came into effect on Jan. 1, 2009, the world was suffering through a financial and economic crisis, and crude prices were tumbling toward $35 (U.S.) a barrel. Drilling rigs went idle and energy projects and deals went cold, while an eagerness for higher royalties had been replaced by concern for the survival of Alberta's bedrock industry.
The energy sector is vital to Alberta's financial well-being. Fully 30 per cent of the province's economy flows from oil and gas. The Premier resisted calling the royalty hike a mistake, instead painting the rollback as a response to events beyond his control.
"The world has changed. The realities of the energy sector have changed. And Alberta must change, too, or risk losing its competitive edge," said Mr. Stelmach, who won a landslide election in 2008, but is fighting for his political life after Albertans blamed some of their recent economic pain on policies from his government - including the royalty hike.
The royalty fracas caused an unusual schism in the normally comfortable relationship between government and industry, but the government retreat brought signs of détente.
"Alberta's back," declared Andrew Wiswell, the chief executive officer of NAL Oil & Gas Trust who also chairs the Canadian Association of Petroleum Producers.
"We're back in terms of working together to figure out what works best, not only for the industry but for activity and jobs and for Albertans."
The provincial take from the important oil sands component of the energy sector, where billions of dollars continue to pour into new projects, was left unchanged.
But for a government that has careened into deep deficits and lost ground to a nascent political threat, the need to spur drilling for natural gas and non-oil sands crude - in hopes of creating jobs and revenues - has become urgent. In the past two years alone, provincial production of natural gas has fallen about 15 per cent, and the industry has shifted some of its spending to British Columbia and Saskatchewan.
Though much of the blame falls on world economic factors and shifts in the energy industry, provincial dissent has proven fertile ground for the Wildrose Alliance Party. The upstart party has gained near polling parity with the ruling Conservatives and lashed out at Mr. Stelmach for ordering the original royalty hike, which was supposed to pour an additional $1.4-billion a year into provincial coffers.
"It's probably been the most devastating policy decision this province has seen since the National Energy Program," said Wildrose Leader Danielle Smith, who admitted that the rollback constituted "good strides" by the government. It was, however, missing one key element, she said.
"They didn't say the words that I think industry wanted to hear: 'We were wrong, and we're sorry'."
The new deal is not instant salvation for the still-scarred industry, one that continues to rely heavily on natural gas, whose price is still low. And details of benefits from the new regime are not fully clear. Still, after the province tweaked its royalty hike five times to assuage corporate anger, the royalty rollback provides the promise of a more stable investment environment.
"It's better than it was. It's an admission by the government that they got it wrong and they're going to try to get it right," said David Yager, CEO of HSE Integrated Ltd., a Calgary energy services company.
A more competitive regime is badly needed in Alberta, said Darren Gee, CEO of natural gas company Peyto Energy. "We're trying to compete for world capital dollars, not just Canadian dollars," he said.
While the higher royalties hurt Peyto, which drills deep multimillion-dollar wells in the Foothills of the Rocky Mountains, the Stelmach regime also provided a break on royalties when gas prices were very low, so last summer it worked in Peyto's favour.
Cutting the royalties will cost the province just under $200-million between now and 2013. It believes increased drilling activity will generate more corporate taxes to make up for the lower royalty take.
"If you develop it, you get paid royalty on it. And if we don't develop it, it's pretty difficult to get paid royalty," Mr. Stelmach said.
Under the royalty rollback, which will come into effect Jan. 1, 2011, the province will drop its top royalty rate on natural gas from 50 to 36 per cent, while the highest rate for non-oil sands crude production will drop from 50 to 40 per cent. The bottom rate for both will remain at five per cent, and the government has indicated a willingness to make further concessions that would favour deep new wells designed to use new technology to access oil and gas pools.
Those figures constitute an almost complete return to pre- 2009 rates, which ranged from five to 35 per cent on gas, and zero to 40 per cent on non-oil sands crude. The government predicts the rollback will create 13,000 more jobs per year.