How it works
Setting royalty rates
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- Category: How it Works
- Written by Stephen Marsters
The battle between the provincial government and the petroleum sector over royalty rates finally seems to be over. After close to three years of opposition, the two sides appear to have called a truce after the release this spring of the government’s competitiveness review, which proposes more favourable royalty rates for oil and gas producers.
SO WHAT ARE ROYALTIES? Simply put, a royalty is the price charged by an energy resource owner for the right to develop those resources.
In Alberta, 81 per cent of the mineral rights are owned by the provincial government, which manages those resources on behalf of Albertans. (The remaining 19 per cent are owned by the federal government in national parks or held on behalf of First Nations, and by individuals or corporations.)
Royalties ensure Albertans receive a portion of the benefits arising from the development of the province’s energy resources. They are an important part of the provincial government’s revenues and help to fund health, education and infrastructure programs.
A jurisdiction’s royalty system can have a direct consequence on the pace of development, including the rate at which resources are developed and jobs created, as well as the level of investment.
Royalties are set with the expectation that industry will earn a reasonable rate of return given the risk and investment they make in developing the resource. When setting royalty rates, the government considers factors such as oil and gas prices, production, costs and the province’s competitive ability to attract industry investment.
Three years ago, Premier Ed Stelmach appointed a review panel whose members were asked to provide advice on whether Albertans were receiving a fair share from energy development through royalties. The resulting report, Our Fair Share, was released in September 2007 and said Albertans were entitled to another $2 billion per year in taxes and royalties as their share of oil and gas development.
Industry roundly criticized the report, saying data used to create the document was flawed. Subsequently, many companies moved their investment capital to other jurisdictions, including neighbouring British Columbia and Saskatchewan.
“You can’t get royalties from wells that are not drilled,” retired Talisman Energy chief executive Jim Buckee said in a letter to the premier, referring to the risk of companies moving their investment dollars out of the province.
That risk turned into reality and the compounding worldwide recession that began in late 2008 delivered a blow to Alberta-based producers, especially natural gas producers. Drilling activity tumbled across the province and natural gas production declined by almost 10 per cent. Royalties paid to government fell.
As a remedy, the provincial government released in May of this year the details of a new royalty framework for energizing investment in the province, including initiatives to accelerate new technologies to encourage development of Alberta’s vast unconventional and deep resource pools, and finalized royalty rates for conventional oil and gas.
The government said the new rates will encourage new exploration, development and production from deeper, higher-cost natural gas wells, gas resources within coal seams, shale gas, and horizontal oil and gas wells.
The oil and gas sector generally appear happy with the changes.
“Overall, I think it is very positive,” said David Collyer, president of the Canadian Association of Petroleum Producers. “Clearly to the extent that it [the new fiscal regime] has addressed the competitiveness issue, and we think it largely has, that’s going to drive incremental investment in the province and that’s going to create jobs for Albertans.”
