Jay Park Interviewed In Financial Post Regarding Royalty Tax Regime
April 16, 2009
It has been a tumultuous year for Alberta's energy industry, which has seen oil prices plummet from record highs and watched as natural gas prices stagnate. At the same time, the provincial government has been tinkering with the royalty regime to fix problems stemming from October, 2007's major overhaul to royalties, the first since the mid-1990s.
Jay Park, an energy and resource lawyer at Macleod Dixon in Calgary, said the problem is that between 2002 and 2008, the price of oil rose 700% -- to US$140 from US$20 -- only to drop to US$35. A barrel now sits around US$52. Natural gas also hit highs of US$13 before settling in around the US$5 mark, which, in a mature base such as Western Canada, makes it "plain tough" to drill economically.
That meant the October, 2007, overhaul essentially introduced a new royalty regime at or near peak prices, he said. However, the recent slump means "we've gone back to prices in the range where the old regime worked."
So will the incentives announced in March be enough to reverse the exploration decline seen since the government revamped the royalties and put rigs back to work in Alberta? Mr. Park is unsure. One of the problems, he said, is that "the capital markets are basically closed. People just aren't investing in stocks and it is very difficult to raise financing for this kind of activity. Exploratory drilling is notoriously difficult. It's quite risky." There will only be activity if a company can afford to finance the drilling on its own, he predicted.
Moreover, under the March changes, there's no incentive to attract new players to drill in Alberta, since it's a credit and offsets existing royalties that companies pay. However, there may be some positive consequence such as a bit of M&A activity, or a reversal of the trend to move exploration budgets into north-eastern B.C.
But the damage may be done. Mr. Park said the original overhaul was supposed to simplify royalties. But the government has been layering on "patches" and has "now made a more complex regime" and has lost the "beauty of simplicity."