Alberta's New Royalty Framework Gives Options to Oil Producers

Alberta’s tweaks to its new royalty framework last week will give investors who are paying attention to the little things hints about where companies think the price of oil is headed.

The province offered oil and gas outfits a break: For wells with a depth between 1,000 meters and 3,500 meters drilled between November 19, 2008 and December 31, 2013, companies can choose their own royalty adventure. They can opt for the new royalty framework, effective January 1, 2009, or the transitional plan, designed to offer small and medium-sized companies some breathing room in these tough economic times. Or perhaps not.

“Under all oil price scenarios greater than C$50 per barrel, new oil wells will benefit from the [transitional royalty program] for most production levels,” said Peters & Co. Ltd. in a research note. Operators will have greater exposure to higher oil prices under this program.

The note said:

However, under oil price scenarios under C$50 per barrel, the new royalty framework provides a materially lower royalty rate than the [transitional royalty program]. As a result, crude oil producers’ elections to participate in the [new royalty framework] or the [transitional royalty program] will depend greatly on their crude oil price outlooks at the time of the spudding of their wells.

So opting for the transitional plan means companies are optimistic about the price of oil. Those shying away aren’t quite so sure.

Comments

[January Thaw:]

Boy, there goes the Canadian Govt. again. How on earth are companies
supposed to plan for the future with mouse traps like that one. I have
to hand it to the guys in the industry. They must really be patriotic to
put up with such nonsense.

2008 Nov 26 06:15 PM