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The Alberta government has altered its royalty rates for companies drilling new oil or gas wells after Jan. 1, a move that will cost the province as much as $1.8-billion over the next five years.

In a response to the slowdown in oil and gas drilling, companies drilling new wells will have a one-time option of choosing new transitional royalty rates instead of the framework set to come into effect at the beginning of the year.

The move will help companies get access to the cash flow they need to invest in new projects, the province said.

“This is all about a different world position we're in, in terms of credit,” Premier Ed Stelmach told a news conference in Edmonton. “The world has changed, and this is all about creating Alberta jobs.”

The province says the deal is not a royalty holiday. However, the province will see its royalty revenue fall by about $172-million in 2009 – compared to what it expected to get under its new royalty regime – as a result of the change. This number will grow to $512-million by 2013, adding up to a total of $1.8-billion.

All companies will have to shift to the new royalty framework by Jan. 1, 2014.

Mr. Stelmach noted that the break only goes to companies that are drilling new wells. “Nothing is expended in this program until a drill bit hits the ground.”

Conventional oil and gas wells drilled after Jan. 1, at depths between 1,000 and 3,500 metres, will qualify to choose the optional rate. Between 2,400 and 2,650 wells are drilled at those depths in Alberta every year.

Oil sands projects and existing gas and oil wells will not qualify for the program.

The oil industry has warned since the new royalty structure was proposed in October, 2007, that the scheme will make conventional oil and gas exploration, and oil sands development, less economically feasible, and it will reduce activity levels in the oil patch.

Some players have suggested that investment will leave the province as a result of the new royalty structure. They say local firms will reallocate capital spending from oil and gas exploration in Alberta to opportunities outside of the province.

The industry has already been battered by the precipitous fall in oil prices in the last few months, and the financial crisis which has dried up credit markets.