25-04-07

In the midst of this energy-driven boom, it's hard to imagine that the gravy train is already slowing down. But the truth is the provincial government faces a 33 % drop in oil and gas royalties over the next three years, and Albertans should take a close look at the reasons behind it.
First, the supplies of easy-to-get conventional oil and gas have declined to the point that almost 90 % of wells are permanently paying lower royalty rates, many as low as 5 %. The highest royalty rate is about 30 %, but with so many wells now at the "low productivity rate," the average royalty from conventional oil and gas is down to 20 %.

Natural gas, the biggest money spinner for years, which pumped $ 8.3 bn into the treasury in 2005-06, will bring in only about half that amount, $ 4.6 bn, by 2009-10. Conventional oil royalties will also come down. They'll bring in $ 1 bn this year, one-third less than two years ago, and drop to just $ 815 mm in 2009-10.
Without the oil sands, Alberta would already be inthe midst of those unthinkably dark days when the oil runs out, a time most Albertans imagine is still a long way off. It's tempting to ask, why worry? Oil-sands production is expected to last 40 to 50 years. But the oil sands will never yield the rich flow of petrodollars pumped into the treasury by conventional oil and gas.

Despite the fact that production is rising dramatically, oil-sands royalties will go down, from a high of $ 2.3 bn last year to $ 1.1 bn in 2009-10. Even when production triples to 3 mm bpd in 2020, royalties will be stuck at $ 1.1 bn, the same level as 2004-05, according to one report.
That's partly because royalties in the oil sands are mostly calculated on raw bitumen, which sells at about half the price of upgraded synthetic crude. While the budget predicts the price of oil to average $ 58, bitumen is set at $ 28.

The two oldest oil-sands giants, Suncor and Syncrude, are currently paying royalties on their upgraded oil, but are allowed to choose in the next couple of years whether to switch to bitumen. Also, there's very little unallocated land left for mining leases, so the revenue from land sales -- which hit a record $ 3.5 bn in 2005-06 -- will drop about $ 1 bn in the next few years.
In the past, energy revenues provided 35 % of government spending. That will fall to 29 % in Premier Ed Stelmach's first budget. The royalty review will have an impact on this forecast. But it won't change the fact that the boom years of revenue from conventional oil and gas are behind us.



Source: www.thestar.com