Alberta Unveils New Royalty Plan for Energy Sector; 20% Increase Projected Over Current Levels
28 October 2007
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| Alberta’s share from oil sands projects under the new royalty regime (hatched blue) compared to other countries. Click to enlarge. Source: Alberta Royalty Review Panel |
Saying that “Future generations of Albertans will receive a fair share from the development of their resources,” Alberta Premier Ed Stelmach last week unveiled the Canadian province’s new royalty regime for the energy sector. Under the New Royalty Framework, oil and gas royalties are expected to increase by C$1.4 billion in 2010, a 20% increase over currently projected revenues for that year.
Actual revenues will depend on future prices and production levels in the province. Therefore, the Alberta government’s annual budget development process will not change. The new royalty regime includes the following components:
Conventional oil. The government will simplify royalties for conventional oil, eliminating specialty royalty programs and tiers. Royalties will be set by a sliding rate formula containing separate elements that account for oil price and well production. Royalty rates will range up to 50%, with rate caps at $120 per barrel.
Oil sands. The government will increase its royalty share from oil sands development by introducing price-sensitive formulas both pre- and post-payout, rather than implementing an industry-wide tax on oil sands production.
The base royalty will start at 1%, and increase for every dollar the world oil price, as reflected by West Texas Intermediate (WTI), is priced above $55 per barrel, to a maximum of 9% when oil is priced at $120 or higher. The net royalty will start at 25% and increase for every dollar oil is priced above $55 per barrel to 40% when oil is priced at $120 or higher.
There is no grandfathering for existing oil sands projects. The government will work with Syncrude and Suncor over the next 90 days to reach an agreement on a transition plan to the new royalty framework. In the event an agreement cannot be reached, the government will take other measures to ensure a level playing field for all industry stakeholders.
The government will adopt a permanent generic “bitumen valuation methodology” by June 30, 2008, after consulting with stakeholders and independent advisors.
The province will exercise its existing right to receive “royalty-in-kind” on oil sands projects (i.e. raw bitumen delivered to the Crown-operated Alberta Petroleum Marketing Commission in lieu of cash royalties). Because this bitumen can be sold or used for upgrading or refining, royalty-in-kind can be sold by the province to support value-added, upgrading projects in Alberta.
Natural gas. Gas royalties will be set by a sliding rate formula sensitive to price and production volume. New royalty rates will range from 5-50% with rate caps at C$17.50/MMBtu.
The government will eliminate all tiers, but will retain natural gas programs for the Otherwise Flared Solution Gas Royalty Waiver Program, which improves air quality through solution gas conservation. New incentives consistent with the current Deep Gas Drilling Program will be implemented to support development of costly deep reserves. Royalties for natural gas liquids will be set at 40% for pentanes and 30% for butanes and propane.
Substantial legislative, regulatory and systems updates will be introduced before changes become fully effective in January 2009.
The province will ensure that eligible expenditures and definitions of oil sands projects (also known as “ring fence” definition) that determine when a project has reached payout are tightly and clearly defined. Environmental “costs of doing business” will continue to be recognized as eligible expenditures.
Canadian press characterized the energy industry as “reeling” after the announcement.
Alberta Premier Ed Stelmach found himself brushing off comparisons to a South American socialist revolutionary Friday as he defended his aggressive plan to increase Alberta’s energy royalties by 20 per cent. Stelmach told listeners to radio talk show that he shouldn’t be compared to Venezuelan President Hugo Chavez, who recently raised royalty and tax rates on all foreign oil companies as part of a nationalization plan.
“I can tell you that this isn’t Venezuela. This is Alberta,” the premier said. “Alberta is without a doubt the best place to invest in North America. We have the lowest personal income taxes, low corporate taxes.”
The Canadian Association of Petroleum Producers (CAPP) had earlier reviewed the report of the Alberta Royalty Review Panel which formed the basis for the new royalty regime, and concluded that the Panel did not achieve the government’s objectives in finding the balance between a reasonable royalty and tax system and a healthy, sustainable oil and gas industry.
CAPP said that it found faults with the report in a number of areas, including flawed data; incorrect costs; activity assumptions; and international comparison and government take.
Resources
(A hat-tip to Allen!)
Recently, I read that it cost $24 to extract and transport a barrel of oil to refinery.
If Alberta applies this royalty, the costs may become prohibitively high.
Its Black Gold and the End of Cheap Oil.
Posted by: Max Reid | 28 October 2007 at 09:13 AM
Max:
Have you considered oil price increases vs royalties increases?
After you do, you may no longer think that royalties are very high. Most are comparatively lower than 10 years ago.
Oil compagnies have been making a killing in Canada for the last few years and it looks like they may do even better when oil price goes over $100/barrel. That may be sooner than we think.
To bad the Federal Government is not adding a 10% royalty or export tax on that d.... stuff.
There is nothing like $120+/barrel oil to favour PHEVs and BEVs development. Otherwise, $180/barrel may be here in about 5 to 7 years and those royalties will look rather slim.
Posted by: Harvey D | 28 October 2007 at 09:27 AM
Gee it so unselfish and responsible to take as taxes, (steal) the earning of Albertans that they could bestow on their progeny to "invest" in the uneconomic and transitory pleasures of government spending for the moment.
I'm gratified that this politician is so willing to steal from tomorrow for his immediate gratification. I guess i just have to remember that living in Alberta as a successful politician, he must be experienced in selling snowballs to Eskimos.
Give the man a prize; I suggest the Nobel Chutzpah Prize.
Posted by: Stan Peterson | 28 October 2007 at 10:14 AM
Stan:
Do you know what royalties you pay on imported oil from Saudi Arabia, when oil price is close to $92/barrel and what it will be when oil price goes up to $120+/barrel?
Have you compared that with the proposed (mini) royalties in Alberta?
What is best? $10 billion in royalties for the Alberta government or another $10 billion (tax free) profit for the Oil Cos?
Don't forget that Alberta used royalties to pay all accumulated deficits, to reduce sales taxes to zero + free medicare, + free education + free highways + the lowest fuel and NG price in Canada etc. That's also why Albertans can afford to drive their kids to school in beautiful 5000 lbs pick-ups, huge 4 x 4 and enjoy the fastest GHG increase in Canada.
Posted by: Harvey D | 28 October 2007 at 11:17 AM
Always keep in mind that Stan is mean, alone, and insane.
Posted by: | 28 October 2007 at 02:00 PM
Stan thinks governments collect taxes and burn the money so no one can benefit from it. I bet he went to one of those underfunded public schools, or funamentalist private. In any event he seems to think it is fine to pay royalties to foreign countries an in another form (otherwise known as profits) to every rich oil company manager (don't kid yourself, the shareholders aren't getting it).
Don't forget Stan, when this forces oil up to $120, the Saudi's profits will rise with it. You should be happy.
Posted by: JMartin | 28 October 2007 at 02:20 PM
Stan is not alone. The new royalty rates are unusually high and are a breaking of a deal that was made with the industry before. The current royalty structure was supposed to last at least five years more and companies made plans based on those rates.
One year ago the Canadian government promised not to tax oil and gas trusts and then proceeded to do so anyhow. The resulting trust stock crash took BILLIONS of dollars from Canadian seniors and has only reduced the amount of tax dollars collected. Increasing taxes reduced the amount of total tax collected? YES. Oh yes alot of jobs were lost too and the tax loss does not even include those taxes.
http://www.investorvillage.com/smbd.asp?mb=4992&mn=12823&pt=msg&mid=3325748
Posted by: hampden wireless | 28 October 2007 at 05:06 PM
Politicians lied about not raising taxes? The shock! The horror! And of course we are told Canadian seniors lost billions. And hundreds, maybe thousands of jobs have been lost. And what about the children? I'm sure they are very very sad today too.
Myself, I think I shall retire to my room and quietly weep whilst pondering the depth and breadth of this tragedy.
Posted by: domenick | 28 October 2007 at 06:42 PM
I know several near seniors whose retirement plans were destroyed by the trust taxes; very angry people, and they have every right to be.
Who knows what affect this Alberta tax grab will have. Gas prices are so low anyway, and alberta costs so high, that drilling has been drying up. Seems they are extra taxing the only gas wells that were profitable to drill, which doesn't suggest good things for the future. The tax on gas liquids also looks very high to me, and on the component of a gas well that could generate money, if you were lucky enough to have liquid rich gas.
A new, and weak premier, desperately striving to earn re-election for his party, goaded by the opposition braying about what they would do.
The result will be somewhat less drilling and further downward pressure on rig rates, wages and service costs for drilling of all types, but particularly for gas.
Oops, does that mean lower wages and less employment for albertans; why yes, of course.
Posted by: tan | 28 October 2007 at 11:20 PM
Maybe if they put the money in to the environmental clean up, but then if would never be enough money to do that.
Posted by: | 29 October 2007 at 01:14 PM
hamden & tan;
Did you assume that oil producers-refiners-distributors have not raised their profit rate when oil price went from $27 to $93+/barrel?
Are you assuming that their profit rate will be the same when oil price goes to $120+/barrel?
We all know that their profit has and will multiply with higher oil price.
Why shouldn't the royalties go up at the same rate and multiply too?
If higher royalties double the retail price from $3/gallon to $6/gallon and consumption decreases by 20%, we would all be better off.
Unfortunately, even $6/gallon may not be enough to break our love affair with 4000+ lbs gas guzzlers but may help to promote hybrids, PHEVs and BEVs.
Posted by: Harvey D | 29 October 2007 at 02:08 PM
Harvey, I am not against taxes on fuel, in fact I am for them. I just don't like deal breaking and unfair government grabs. These companies started this work based on the royalty structure and timeline that was negotiated. If the price of oil tanked the government would not have given them a break.
The changes made are causing a huge buyout of Canadian assets by foreigners and huge losses by Canadian citizens. Government is clearly not serving its citizens.
Posted by: hampden wireless | 29 October 2007 at 05:27 PM
With the amount of mess that the oilsands project has created in northern Alberta, this is the least that the oil companies can give back to Alberta. Future generations of residents of Fort McMurray(if there is one in the future) and area will be privy to such things as increased health problems, increased cancer and rare diseases and a landscape of bleak desecrated land.
The least we can take back from this is money while oil companies (None Canadian) pillage our resources.
Posted by: Oorgo | 30 October 2007 at 09:05 AM
An Albertan politician can't extract the same royalty from a Tar Sands operation that is cost based on producing lifted barrel equivalent of $24 per bbl, versus a Saudi oil firm whose lifting price is 25 cents per barrel.
The result will be the shut-in of some or all of the Canadian operation. That is as sure as night follows day.
I am amazed how many of you actually think that most government expenditures actually work. Remind me of their success with Synfuels "investments". Remind me of the successful "investment" designs for gold-plated $800,000 per PNGVs. Or "investments" in post Dallas class nuclear subs, the size of small battleships. Or the War on Poverty that "invested" a couple of Trillion, and destroyed the black family, that even Slavery couldn't. Remind me of the great progress of "investments" in inner city public schools, that have the highest spending per capita in the country making Exeter, Andover and Chaote seems cheap by comparison.
Of course, the wonderful government politicians never are capable of reading or seeing the unintended consequences of their actions.
Except for their re-election possibilities with vote buying with someone else's money.
Posted by: Stan Peterson | 30 October 2007 at 01:26 PM
"The result will be the shut-in of some or all of the Canadian operation. That is as sure as night follows day."
Excellent!
Posted by: domenick | 30 October 2007 at 02:47 PM
hamden:
The proposed Alberta royalties will still be among the lowest of all oil suppliers. (look at the graph)
As oil gets scarce, price will normally increase to $100 (by 2008), $150 (by 2012) and even $200+/barrel and so will (should) royalties. Otherwise, producers would be making monstrous unwarranted profits.
Alberta and Saskatchewan have huge NG and Oil potential (as much as the Arabian peninsula) and there are no reasons why they should give it away.
Big users will have to pay or switch to other sources that may cost as much if not more.
Posted by: Harvey D | 30 October 2007 at 03:24 PM
When did your mind first snap, Stan? I assume you weren't born crazy.
Posted by: | 30 October 2007 at 11:06 PM
Dominik;
I hope you did not really mean ALL Tar Sands operations.
Alberta being the #1 USA outside oil supplier, can you imaging a few milllion SUVs grinding to a halt on USA and western Canada roads or forced to be replaced with smaller more efficient unwanted vehicles.
Even with all the GHG it creates, tar sand operations are here to stay a few more decades. The current $24/barrel production cost will quickly become almost meaningless. If you add another $25 to $50/barrel royalties, the profit margin is still excellent with oil above $100/barrel.
Posted by: Harvey D | 31 October 2007 at 10:36 AM
Unfortunately, Harvey D, you are right. I just got caught up in the thrill of Stan's imaginary world for a moment. The sky had a certain hallucinogenic tint of ochre to it.
I'd put money on oil going over $100 within two weeks.
Posted by: domenick | 01 November 2007 at 02:15 AM