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Alberta NDP spares industry, offering oil sands a royalty break

An oil pump jack pumps oil in a field near Calgary, Alberta, July 21, 2014.

Todd Korol/Reuters

Alberta's NDP government is holding the line on oil sands royalties under an industry-friendly policy, shielding the sector from higher costs as it copes with severely depressed crude prices.

Premier Rachel Notley also set a flat rate for new wells drilled outside the oil sands, easing industry fears that a sweeping review of energy royalties would result in substantially higher fees.

The results of the months-long assessment represent a sharp contrast to the NDP's comments about royalties before the party formed the government. At the time, Ms. Notley had charged that Albertans were not getting their fair share. However, economic conditions, and her understanding of the industry, have changed since then, she said on Friday.

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"It is not the time to reach out and make a big money grab. That just is not going to help Albertans over all right now, and so I feel quite confident that this is the right direction to take," she told reporters in Calgary.

"The fact of the matter is the environment has changed profoundly, even in the last 12 months, and so that is what is driving our decision-making at this point."

The head of the government-appointed panel, ATB Financial chief executive officer Dave Mowat, said the new regime will give investors and companies the predictability they have clamoured for.

The industry had been dreading changes to the system of economic rents, promised by the NDP during the provincial election campaign in 2015. However, a severe downturn in world energy markets has dragged on, forcing companies to claw back capital spending and lay off tens of thousands of workers. The slowdown has cut the government's non-renewable resource revenue in half.

Ms. Notley appointed the expert panel to talk to energy executives, key investors, academics and numerous others who have a stake in this crucial part of public revenue.

The changes announced Friday appear favourable for the sector, considering that many executives and investors had complained about the very notion of examining royalties less than a decade after a previous attempt to restructure the system failed.

Among key parts of the new framework:

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- The existing royalty system for oil sands projects that includes a sliding scale based on oil prices remains unchanged. The panel said the system, combined with the past decade's massive investments, will mean increased revenue for Albertans.

- The review panel recommends increased disclosure, including an annual accounting of capital costs of oil and gas projects, as well as the revenue, expense and royalty information for each oil sands project.

- Starting in 2017, crude oil, natural gas liquids and natural gas production will have a flat royalty rate of 5 per cent, until cumulative revenue from a well equal drilling and completion costs. After that payout, royalties will be energy-price-sensitive and will reflect expected returns over the life of the well.

- For wells drilled before 2017, the existing rates will remain in effect until 2026.

- The panel recommends "recalibrating" costs each year so that the system remains up to date with industry realities.

The industry's initial response was positive, although some details of the new policy have yet to be hashed out. It remains unclear, for example, what rates will apply to producers once they have recouped their initial capital costs, said Tim McMillan, president of the Canadian Association of Petroleum Producers. The province has said it will announce those rates before March 31.

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"The numbers weren't laid out today, and those are going to matter," he said.

The decision to spare oil sands producers from new costs reflects, in part, the sector's financial stress as it struggles with crude prices that have buckled to the low $30s (U.S.).

Dozens of new projects have been scrapped, with little prospect of being resurrected any time soon. Meanwhile, the U.S. – Alberta's biggest energy customer – is now a competitor in exports to other markets as its domestic output has surged. And major Canadian pipeline proposals that would give producers access to global markets remain years away from completion.

"There was a lot of cold water that was splashed on all of our faces, in terms of recognizing the competitive issues that we face," said Peter Tertzakian, chief energy economist at ARC Financial Corp., and one of four members on the provincially appointed panel.

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Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More

Jeff Lewis is a reporter specializing in energy coverage for The Globe and Mail’s Report on Business, based in Calgary. Previously, he was a reporter with the Financial Post, writing news and features about Canada’s oil industry. His work has taken him to Norway and the Canadian Arctic. More

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