Alberta slashes Alberta Oil Sands Royalty

Alberta Government reveals Royalty Slashing

The worsening financial crisis has hurt many industries including the Alberta Oil Sands and their related companies. The recent postponing of many of the billion dollar projects by companies including Suncor, Husky Energy, BA Energy, and Petro Canada to name a few are forcing Alberta politicians to review their Royalty policy. A recent shift in their Alberta Oil Sands Royalty from 15% - 20% down to 5% shows how much the Alberta Government is willing to give in order to save jobs in Alberta. Read more about this online at Financial Post http://www.financialpost.com/story.html?id=1349060. The Alberta Government is facing a dire deficit of more than 1 billion dollars, its first deficit for more than 10 years. Despite the recent increase in the percentage of Royalty payments in 2008 when oil price per barrel was well over $100, the Alberta Government is in a worst position if no new jobs are created. With fewer oil wells as a result of a postponement in projects, royalty slashing is the only alternative in creating the right environment for Alberta Oilsands companies to continue to invest in Alberta rather than in other areas. The new royalty slashing plan in Alberta applies to 5% of the first 500,000 barrels of oil in the next year or 500 million cubic feet of natural gas.

Alberta Oilsands Royalty rates and the Alberta Oilsands Companies

The royalty rates charged by the Alberta Government allow it to share in the profits of Alberta oil sands companies. When the economy is doing well, Alberta oil sands companies will continue to invest despite a high royalty payment to the Alberta Government. As long as profits remain high, and they were at record levels of a few billion dollars per quarter, everyone will remain in business. However, the global financial crisis has created a bad environment for the Alberta oil sands companies. In a global financial crisis, it is impossible to borrow money from any bank. The major banks around the world provide the credit facilities required to fund Alberta oil sands companies operations and lines of credit facilities to operate efficiently. Without the support of the global financial system, the Alberta Oilsands companies run a high risk of running out of needed capital and going bankrupt from a lack of financial resources. While the big companies such as Suncor have large financial reserves, it is still unlikely to invest in times that are this uncertain. The royalty rates are a financial incentive to provide Alberta Oil Sands companies to continue to take risk despite the possibility of lower financial support.

Will the Royalty reduction work?

The beginning of 2009 has already seen a decrease of 27% in drilling activity from the major Alberta oil sands companies. This drastic reduction in activity means a drastic reduction in employment and an increase in unemployment for the province of Alberta. A royalty reduction will provide the financial incentive for Alberta oil sands companies to take the risk now to invest rather than wait a year and have to pay a larger percentage of their profits to Alberta oilsands royalty payments. But arguments of whether this will work include the financial stability of the Alberta oil sands companies have not improved. Without providing the financial stability taken away as a result of a weakening in the global major banks, the small Alberta oil and gas companies are still not able to make any new investments despite having a lower royalty. The main benefits of this royalty reduction would actually to go larger producers who have the financial reserves to produce even more and will be able to take advantage of a saving in royalty payments.