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Alberta royalty rates: New fears in Canadian oil patch

Swift political change is bringing uncertainty to Canada's largest oil producing province.

Alberta NDP leader Rachel Notley speaks at her first news conference as Premier elect in Edmonton May 6, 2015.
Dan Riedlhuber | Reuters
Alberta NDP leader Rachel Notley speaks at her first news conference as Premier elect in Edmonton May 6, 2015.

Rachel Notley, the Alberta leader of the New Democratic Party, was elected last week as premier of the province, putting a halt to 44 years of rule by the more business-friendly Progressive Conservative Association of Alberta.

Throughout her campaign, Notley vowed to increase corporate taxes to 12 percent from 10 percent and to review Alberta's "royalty fees" for the energy industry—the cut of revenue that Alberta and the central Canadian government take in exchange for giving oil companies the right to extract oil. (Tweet This). Most of Alberta's mineral rights—81 percent—are claimed by the province, rather than the government in Ottawa.

Large oil companies in Alberta are more worried about a royalty review than a corporate tax increase at this point, said Andrew Leach, an associate professor at the University of Alberta School of Business. "I think right now probably the royalty review (is the bigger concern), because the risk is higher," he said. "The uncertainty is much greater."

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U.S.-traded shares of large oil companies that operate in the province have taken a hit since Notley's victory last week. Suncor Energy, for example, traded near $30.35 on Monday, down from its opening price of $32.65 on May 5, while EnCana was changing hands at around $13.80, down from its opening price of $14.53 on May 5.

There's no set protocol for changing royalties, and any shifts would likely involve the industry as well as the government, given the complexity of royalty fees. "It's major economic policy," Leach said. "You are going to have a lot of different interests at play."

For the fiscal budget year 2013-2014, royalty revenue from oil sands stood at CA$5.222 billion (US $4.961 billion), compared with an estimate of CA$1.361 billion ($1.116 billion) for 2015-2016, according to data from the provincial Ministry of Energy.

The province also estimates that Alberta will run a budget deficit of about CA$5 billion ($4.15 billion) for the period 2015-2016 and has a deficit target of about CA$3 billion for 2016-2017 ($2.49 billion).

Notley said a review doesn't necessarily mean a change will take place. She positioned the review as a way to provide answers for residents.

"For years, Albertans have been left out of this process," Notley said in a radio interview in April. "They haven't been able to get access to why our royalties look the way they do."

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Alberta's gross domestic product is still heavily linked to energy, though the role of that industry is smaller as a percentage of overall GDP than it once was. In 1985, energy made up 36.1 percent of Alberta's GDP, compared with 24.6 percent in 2013, according to the website Alberta Canada.com.

Despite apparent worries among shareholders, Notley appeared to extend an olive branch to leaders of the oil and energy sectors of Alberta right after her victory.

"To Alberta's job creators, great and small—in the energy sector and in every sector—our government will be a good partner with you to grow our economy and to secure a more prosperous future for every Albertan in every community," Notley said in a statement.