Alberta royalty cuts: will it help the oil companies?

Why is Alberta cutting it’s royalties?

The Alberta Government just announced their policy change in March 2009 for the Alberta Oil sands royalty revenues. The Alberta government has decided to give Alberta oil sands companies a break in 2009 due to the financial crisis and drop their oilsands royalties significantly for any new activity that will be done in 2009. What this means is that any Alberta oilsands companies willing to invest in their existing oilsands projects and thus create new jobs in Alberta will be able to benefit from paying less royalty to the Alberta government for the oil that they produce. There is of course a cap on the amount of the cut and it only applies to a certain amount of oil produced as well as the time period. Time is of the essence in the Alberta royalties cuts and Oilsands companies need to move fast in order to benefit from this revenue boosting cut. The main reasons for the royalty reduction in Alberta is the lower revenue that is expected due to the postponement of many major oilsands projects and due to the climbing unemployment rate in the province. The Alberta government is losing revenue anyways and the reduction in royalty split may actually increase its share in a shrinking royalty pie in 2009 and 2010. The other reason is that oil prices that have hit historic highs of $140 US per barrel have fallen to barely profitable levels of $35 US per barrel. At these low US dollar per barrel oil prices the Alberta oilsands companies have postponed any further production to protect their future revenues.

Who will benefit from the Alberta royalties cuts?

So who will really benefit from the Alberta royalties cuts anyways? The Alberta oilsands companies consists of a few major players and lots of smaller companies. The fragmented nature of the oilsands companies is the reason why it is so hard to control the revenue that the Alberta government hopes to achieve. The global financial crisis has caused a reduction in the available capital to all Alberta oilsands companies both big and small. This is the real reason behind the many postponements of major oilsands projects and why we may continue to see very little oilsands activities despite the Alberta royalties cut. The stimulus for the cuts is giving the Alberta oilsands companies more future revenue but as you can see this misses the point of why they have reduced their development in the first place. This is especially true of the smaller oilsands companies in Alberta as they do not have the financial reserves that the bigger players such as Suncor has. In the current global financial crisis we can expect the big players such as Suncor, Husky Energy, or BA Energy benefit from the Royalties cuts the most. The smaller players will have to sit on the sidelines waiting for the banks to start lending again before taking part in any revenue gains as a result of Alberta royalties cuts.

Alberta oil company activity in 2009 and beyond

What will happen in 2009 for Alberta oilsands companies and the industry? This is a question mark for everyone including this writer of course but we can definitely put out our opinions. One of the main factors for any growth in the Alberta oilsands development in 2009 is the ability of the global financial crisis to stabilize. This is by far the most important factor in determining whether we will see an increase in Alberta oilsands companies investments. With an increase in lending activity we should start to see the large Alberta oilsands companies start to perhaps consolidate by buying smaller oilsands firms. This consolidation will happen at good prices not seen for some time as the smaller oilsands companies values have decreased dramatically with the fall in US oil prices to $35 per barrel. The second important factor is the US price per barrel of oil and what price this will stabilize at. It is important for US oil prices to maintain a level of $50 or more. This level of US price of $50 will allow for the profitable development of new projects without over production causing abnormally high costs. The US price per barrel of oil should not be more than $100 or else this will have an adverse affect on the industry.