Understanding Alberta’s royalty system
The issue of royalties Albertans receive for their natural resources is a topic that often sparks strong opinions. In the past, opinion polls have shown that many Albertans feel they haven’t been adequately compensated for money made from the province’s oil and gas reserves by the oil industry.
In 2007, the Alberta Royalty Review – an independent panel established by the provincial government – released a report titled “Our Fair Share” which concluded that Albertans, as owners of the province’s natural resources, weren’t receiving what they should have been from energy development, and that royalty rates hadn’t kept pace “with changes in the resource base and world energy markets.”
Eight years later, Albertans still aren’t sure they’re receiving their “fair share.”
Fortunately, the province’s NDP government has undertaken its promised royalty review, which is scheduled to wrap at the end of 2016.
But the royalty system is a complicated one that goes beyond a simple “royalty rate.” Researchers at the School of Public Policy at the University of Calgary believe it’s important that Albertans, particularly policymakers, understand how the system works if useful changes are going to take place.
So the School of Public Policy has released a primer on royalties, authored by Sarah Dobson, designed to help Albertans evaluate the impact of new policy and gain a solid understanding of the current policy environment. The primer can be downloaded at http://www.policyschool.ucalgary.ca/?q=research.
“We all know that oil prices have dropped and oilsands producers are losing profitability. As such, changes to the royalty system could have a deep and profound impact on the sector,” Dobson said in a news release.
The primer examines a number of factors that play a role in the royalty system, including:
– Pre-payout projects vs. post-payout projects (the classification of projects for royalty purposes based on whether the cumulative costs of a project exceed its cumulative revenues);
– Monthly payment of royalties vs. annual payment;
– Understanding the unit price of bitumen and how that price is applied;
– Gross vs. net revenues and the application of royalties;
– How the price of oil and the exchange rate between Canadian and U.S. dollars impact royalties; and
– The historical and forecast contribution of oilsands royalties to Alberta’s finances.
“Needless to say, a primer like this should be required reading for policymakers,” said the news release. “It should also be required reading, however, for any Albertan who cares about the long-term benefit of the oilsands to Alberta’s revenue, and our financial future as a province.”
The School of Public Policy points out that Alberta’s oilsands have been the largest contributor to Alberta’s royalty revenues since the 2009-10 fiscal year, chipping in an average of 10 per cent of revenues to the province’s coffers. That makes oilsands royalties the fourth largest contributor behind personal income taxes (23 per cent), federal transfers (13 per cent) and corporate income taxes (11 per cent). The primer notes that in the 2014-15 fiscal year, the province collected just over $5 billion from oilsands royalties. That’s not chump change.
Albertans can follow the royalty review process via the government’s interactive website, “Let’s Talk Royalties,” (https://letstalkroyalties.ca/) which provides a forum for public participation.
The outcome of the province’s royalty review stands to affect all Albertans, so learning more about what the royalty system involves sounds like a good way to start. Let’s hope the people who will be crafting the royalty policy have been studying up on the issue.