Alberta to raise oil sector royalties

By Sheila McNulty in Houston and Daina Lawrence in Ottawa, Financial Times
Published: Oct 26, 2007

The Canadian province of Alberta yesterday said it would follow other oil-rich nations in raising royalties on the oil and gas sector by as much as 20 per cent, despite warnings from the industry and some analysts that it would drive away investment.

The decision surprised some in the industry, given the importance of energy to Alberta's economy. Yet it underlined the weakened position in which the international oil companies find themselves as oil-rich nations either block access or make them pay dearly for access to reserves.

The new royalty regime includes a sliding scale implemented for oil sands royalty rates, ranging from 1 per cent to 9 per cent imposed before companies make a profit, and between 25 per cent and 40 per cent after they make a profit, depending on the price of oil.

"Future generations of Albertans will receive a fair share from the development of their resources,'' said Ed Stelmach, state premier.

He used 2010 as a benchmark to show how much the changes would bring Alberta, saying the royalties would increase by $1.4bn in 2010, a 20 per cent increase over currently projected revenues for that year.

Despite pleas by the oil companies to exempt existing contracts, Mr Stelmach said there will be no grandfathering for oil sands projects. The oil sands developments are expensive and increasingly popular with investors in Alberta province, where the wealth of oil trapped deep in sand represents the world's biggest proven oil reserve outside Saudi Arabia.

He said substantial legislative, regulatory and systems updates will be introduced before changes become fully effective in January 2009 to ensure companies are clear on the way forward.

Several companies had threatened to curtail or even withdraw investment if the government went through with the royalty increases and will have to decide now how to proceed.