Alberta waiving $3B over 2 years

A new report finds the Alberta government relinquished about $1.5 billion in potential energy income last year from a series of royalty reduction programs and drilling stimulus initiatives designed to spur oil-patch activity.

With the additional $1.4 billion in uncollected royalties projected for the current budget year, the province is expecting it will forfeit nearly $3 billion from the incentive programs over two years.

The Alberta Energy 2009-10 annual report released Thursday also notes that "measurement uncertainty" in petroleum production volumes initially reported to government will mean royalty revenue paid to the province last year could be off by $175 million on natural gas alone.

While the industry and government are confident the correct amount will eventually be collected, the auditor general has repeatedly warned that Alberta could be losing hundreds of millions of dollars in royalties annually because of poor accounting of production volumes.

The provincial government's total resource royalty haul was about $6.8 billion last fiscal year (including oilsands, natural gas, conventional oil and land sales).

But the Energy Department estimates that resource income was reduced about $1.5 billion from royalty reductions and drilling incentives offered to petroleum producers -- more than double the $671 million in projected lost royalties from the previous year.

The initiatives are intended to create additional oilpatch jobs during the downturn and have industry produce from wells that would otherwise be uneconomical.

"Times changed. We had to bring in incentives," Energy Minister Ron Liepert said Thursday. "It's not like it was money collected and then handed back as a subsidy."

Some of the royalty reduction programs were made permanent earlier this year when the government announced a new oil and gas strategy as part of its competitiveness review, while drilling incentive programs end next March.

Measures that accounted for about half of the $1.5 billion in uncollected royalty income will expire at the end of the current fiscal year, Liepert said. The other half of the cash is tied to programs that are now permanent.

The moves have sparked additional oil and gas investment during an otherwise sluggish time, the minister maintained. The number of active drilling rigs in Alberta over the past few months is more than double the same period in 2009, according to data from the Canadian Association of Oilwell Drilling Contractors.

Oil and gas land sales have hit a record this year, raking in $1.86 billion, the Alberta government announced earlier this week.

But beyond the $1.5 billion in lost royalties from last year (and additional $1.4 billion in uncollected energy income expected for this year), the province predicts its sweeping oil and gas review will cost the treasury $785 million in forecast royalty revenues in the 2012-13 budget year.

Yet, the province believes the latest royalty moves will help create 8,000 jobs in 2011-12 and 13,000 more jobs annually across the economy.

Liberal Leader David Swann said the Stelmach government's repeated royalty changes have hurt the industry by eroding investor confidence and scaring off capital investment. But the general public also has taken a hit with the lost energy royalties, he argued.

"It's a reflection of a government that's unwilling or unable to do its job," Swann said. "We're still going to be paying for those changes . . . the drilling incentives, and we don't know how much."

The province has come under fire from energy economists -- including Andre Plourde, a member of the government's former royalty review panel -- for being more interested in short-term economic gain than maximizing the value of the energy assets.

However, Gary Leach, with the Small Explorers and Producers Association of Canada, said the government stimulus programs have been desperately needed to respond to a collapsing oilpatch job market over the past few years.

"The government felt that if it could put some rigs back to work, it would have a significant impact on the Alberta economy. We think it did," Leach said.

"It was significant in bringing investment back to Alberta and putting people back to work."