In response to the continued global economic downturn and depressed commodity prices, on March 3, 2009 Alberta Minister of Energy, Mel Knight, announced the latest attempt by the Government of Alberta to encourage investment in Alberta's oil and gas industry.
Since announcing the New Royalty Framework on October 25, 2007, the Government of Alberta, along with the oil and gas industry world-wide, has witnessed a drop in the price of oil from $145/barrel to just under $50/barrel and a drop in the price of natural gas from approximately $13/MMBTU to around $4/MMBTU. In response to these economic conditions, the Government of Alberta announced a transitional royalty rate program in November 2008.2 This program has since been followed up with an announcement on March 3, 2009 of a three-point incentive program to encourage activity in Alberta's drilling and service sector over the next 12 months. The program consists of a Drilling Royalty Credit, a New Well Royalty Reduction and the investment of $30 million in abandonment and reclamation projects throughout the province.
The New Well Royally Reduction incentive program is designed to cap royalties payable on conventional oil and gas wells and, as hoped by the Government of Alberta, to have a $1.04 billion impact on investment in Alberta's oil and gas industry. The incentive program provides for a maximum royalty of five percent payable for 12 calendar months, 50,000 barrels of oil, or 500 MMcf of natural gas, whichever occurs first. In order to qualify for the incentive, wells must meet all of the following criteria:.
- Be a conventional well (non-oil sands and/or non-gas over bitumen);
- Pay Crown royalties; and
- Come on production between April 1, 2009 and March 31, 2010.
In addition, the incentive applies to both rates under the Alberta Royalty Framework and to transitional royalty rates3, as well as applies concurrently with the Deep Oil Exploratory Well4 and the Natural Gas Deep Drilling program5.
Reaction to the incentives has been mixed. The Government of Alberta believes that the New Well Royalty Reduction will ease the pressures on cash flow and spur new investment, and analysts agree that smaller companies stand to benefit from the incentives. However, some industry players are skeptical that the money saved as a result of the incentives will be reinvested. For example, Canadian Natural Resources, Canada's second largest natural gas producer, recently announced that it would cut $800 million from its 2009 capital spending budget and redeploy cash to reduce debt, invest in high-return projects, or acquisitions, stating it would be cheaper to buy reserves than develop them. Despite the mixed reviews, the Government of Alberta will review the impact of the incentives at the end of 2009 to determine whether it is necessary for such incentives to be continued.