Reviewing Alberta’s Royalty System
Inviting your ideas
Fellow Albertans,
We are the members of the Royalty Review Panel who were recently
appointed by the Minister of Finance, the Honourable Dr. Lyle
Oberg, to review Alberta’s royalty regime and tax system
for oil and gas.
We have a number of tasks and we are asking for your help, as
the owners of Alberta’s resources. First and foremost, our
purpose is to determine whether Albertans are receiving a fair
share from the resources this province has been blessed with.
We will be reviewing royalty and tax regimes for oil and natural
gas production and making recommendations for government’s
consideration.
Industry explores for and develops oil and natural gas across
the province and in return compensates Albertans through royalties,
taxes and fees. Our review will focus on all aspects of the royalty
system, including oil sands, conventional oil, and natural gas,
including coalbed methane. As well, we will examine the tax regime
faced by resource companies, including income tax and the freehold
mineral rights tax levied on freehold mineral rights holders.
On the following pages, we have presented some issues and questions
related to our specific terms of reference. Several
documents that provide background information are available
on our website.
Thank you for your interest, time and comments. We look forward
to reviewing the information you provide and to meeting with and
listening to those of you who will be able to make it to one of
the public meetings.
Regards,
Bill Hunter |
Judith Dwarkin |
Andre Plourdé |
Ken McKenzie |
Sam Spanglet |
Evan Chrapko |
Questions to consider
The panel has been asked to address the following issues:
Different jurisdictions weight these factors in different ways.
We will be reviewing a number of technical documents comparing
Alberta with other jurisdictions in our review.
Whether Alberta’s royalty system is sufficiently
sensitive to market conditions
A royalty system typically is designed to respond to changes
in the markets for oil and natural gas. For example, if the price
of oil or gas increases, royalty rates often increase in tandem
so the owner of the resource receives a higher share of revenues
and the companies exploring for and producing the oil and gas
take a lower share. Similarly, if prices decrease, royalty rates
are often reduced to help ensure that exploration and development
remain profitable for companies.
Royalty systems also can be designed to be sensitive to other
conditions in the market, such as increases or decreases in costs
or the advent of new technologies.
We will look at whether Alberta’s royalty system has the
right balance for current and expected market conditions.
Whether the current revenue minus cost system
for oil sands royalties is optimal
The royalty system for Alberta's oil sands is different than
the system for conventional oil and natural gas. The system was
designed to specifically recognize that the oil sands are a different
resource with different investment profiles. The revenue minus
cost regime was selected to reflect the large initial investment,
long lead time before any revenue is realized and, once production
begins, a long steady stream of revenue. This is a regime chosen
around the world for this type of profile.
The government applies a 1 percent royalty rate on gross revenues
until the costs of a project are recovered - the point known as
payout. Once payout has occurred, the royalty rate becomes the
greater of 25 percent of the project's net revenue (gross revenue
minus allowable costs) or 1 percent of the project's gross revenue.
These rates were chosen to encourage investment and development
at a time in which there was limited interest in the oil sands
resource.
One of the issues we have been asked to consider is whether this
regime is still appropriate.
Which programs built into the existing
royalty system should be retained or strengthened, and which should
be adapted or eliminated
A number of additional programs, adjustments and exceptions are
built into Alberta’s current royalty system. For example,
the provincial government charges lower royalties as an incentive
for companies to invest in pilot projects testing new and more
efficient technologies, or for operating low productivity wells
that are less profitable, but still capable of producing oil or
natural gas.
The Alberta royalty programs and a comparison to other provinces
are outlined in a report entitled: Oil and Gas Fiscal Regimes
of the Western Canadian Provinces and Territories.
The report is available at www.energy.gov.ab.ca/Oil/771.asp.
We will look at whether these programs are still appropriate.
How the tax treatment of the oil and natural
gas sector compares to other sectors and jurisdictions
In Alberta, companies pay for leases that allow them to use Crown
land to explore for or drill wells. They pay royalties when they
produce oil and natural gas. As well, companies pay an annual
rent to government of $3.50 per hectare as part of the licence
and lease agreements. And, like all other Alberta businesses,
they pay corporate taxes and municipal taxes.
We will be reviewing taxes to see how they affect the competitiveness
of Alberta’s energy industry.
The economic and fiscal impacts of any
possible changes to the royalty and corporate tax systems
Oil and natural gas are important to Alberta’s economy.
If we determine that some changes are appropriate, we also will
need to assess the impacts these changes may have on Alberta’s
economy and the financial situation of the province.
How existing resource development should
be treated if changes are made to the fiscal regime
Today’s oil and natural gas, especially oil sands, have
developed under the current royalty system. The decision to invest
in these projects was based, at least in part, on what companies
expected to pay in royalties and taxes. Any time governments change
programs they have to determine how the change will be implemented.
Sometimes, existing projects are left unaffected. Other times,
they are allowed a phase-in period for the changes. Alternatively,
the changes may be made effective immediately, for everyone.
As we review Alberta’s royalty system, we will be considering
whether any recommended changes to the system should be applied
to both existing and future projects.
How to participate
June 23, 2007:
The timeframe for making submissions to the Royalty Review Panel
has now closed. Thank you to everyone who made a submission
and/or a presentation to the panel.
