Oil and gas producers said they were impressed by the move to a more transparent pre-payout system.Ben Nelms/Bloomberg
A frequent criticism of Alberta's energy royalty review over the past six months was the uncertainty it created for investors. A few unknowns linger after Friday's rollout of the new regime.
Industry and investor reaction to the New Democratic Party's new royalty framework was largely positive after the provincial government left oil sands royalties unchanged and established a flat rate on conventional oil and gas production before capital costs of drilling are paid out.
Oil and gas producers said they were impressed by the move to a more transparent pre-payout system that appears to address the problem of competing against other regions, such as those in the United States with surging light tight oil production.
But questions remain: What will the post-payout royalties on new wells be, and when will they kick in?
It will be another two months before those calculations are completed. The government will "calibrate" a series of drilling and well-completion costs to arrive at a capital cost index. The figures will be adjusted annually.
Under the revenue-minus-capital-cost system, producers that can operate more efficiently and cut costs will be rewarded.
However, it is impossible to gauge the impact on individual companies based on the information that is currently available, TD Securities said. Much depends on the details of the capital cost allowance, TD said.
"Given the vast discrepancy in vertical and horizontal drilling costs across all Alberta play-types, we question how the calibration team can derive a figure that is applicable across scenarios," the dealer said in a research note.
It also raised the question of which base year to use for calculating the costs. For instance, if 2015-16 is used, and the industry begins to recover from its crash, there would be a lengthy lag before rates catch up with inflation during a recovery.
RBC Dominion Securities estimated that the pre-payout periods will be shorter, which means that post-payout rates will need to be "quite attractive" so as not to negatively affect internal rates of return, as recommended by the royalty review panel. That puts the updated formulas that are due in March front and centre, it said.
For its part, Raymond James Ltd. said the new framework should achieve one of its goals – maintaining Alberta's competitiveness as a place to invest.
"It is difficult to fully ascertain which producers look relatively better/worse off under the new framework versus the old one, but as a general statement, the new framework appears to be more supportive of lower-cost producers and producers drilling deeper wells, along with those that can lower their costs at a faster pace than industry due to cost innovation," its analysts said.
Jeffrey Jones