|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.
(A hat-tip to Allen!)