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.

Alberta Oil Sands companies – BA Energy files for credit protection

Alberta oil sands and BA Energy

A major player in the Alberta Oil Sands projects, BA Energy Inc., filed for credit protection in early 2009. BA Energy Inc. was developing a $4 Billion Dollars Alberta Oil Sands Upgrader project near Edmonton in what is known as the Heartland Upgrader. These projects require significant capital in order to run its daily operations and would require funding from its credit facilities. Credit facilities for BA Energy Inc. are secured via a $507 Million US$ loan from Credit Suisse and due to the worsening financial crisis, this credit line is not guaranteed to be around for 2009. What this means for BA Energy Inc and its Alberta Oil Sands Upgrader projects is that there could be a callback of their loans in 2009 which would lead to credit protection. This has lead BA Energy Inc. to be the first Alberta Oil Sands developer to file for credit protection in 2009.

Financial crisis and BA Energy

How has the financial crisis affected BA Energy Inc. and other Alberta Oil Sands companies and what further developments will come in 2009? The financial crisis is a worldwide event that resulted from defaults in asset backed securities and the housing crisis in the US. Because there has been a dramatic default and loss as a result of the Financial Crisis and defaults of loans, the worldwide credit markets have literally been frozen. BA Energy Inc. and other Alberta Oil Sands Companies depend on vast amounts of credit to fund their daily operations. The funds that BA Energy Inc. require are provided by global credit facilities offered through banks such as Credit Suisse. Because of the mounting defaults in the US and the exposure that these global credit facilities companies including Credit Suisse has, the need to recall existing loans has been created. The global credit companies will recall loans with the highest risk first. Alberta Oil Sands projects including BA Energy Inc.’s Heartland Upgrader project are now considered high risk because of the drop in oil prices to sub $50. Not only have BA Energy Inc. filed for credit protection but it has also been one of many Alberta Oil Sands companies to postpone projects indefinitely. This will be a continuing theme while we are in the middle of the financial crisis and oil prices remain low.

Are more Alberta Oil Sands companies needing credit protection

Which Alberta Oil Sands companies will survive the financial crisis? Or more to the point which Alberta oil sands companies will have a strong enough balance sheet to weather out the financial crisis storm for 2009. Afterall, it is a result of the lower oil prices in Alberta that have created the lower profit expectations of all the companies. With Alberta oil sands companies projects being viable at a stable oil price of over $50, the current level is going to create significant problems for some of the smaller firms to survive. Large Alberta Oil Sands companies such as Suncor have significant cash reserves set aside to ride out rough patches including a short term lower oil price. However smaller companies such as BA Energy Inc. will need to file for credit protection. The forecast in 2009 will probably see a consolidation of the smaller Alberta Oil Sands companies with the larger ones and thus avoiding credit protection. However for existing shareholders of these smaller companies the outlook is poor that they will receive much value from their existing shares.