Alberta’s New Royalty Framework speech

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Thank you for coming today.

Let me begin by thanking my friend and colleague Minister McCuaig-Boyd for her hard work on this initiative.

And thanking Dave Mowat and his talented colleagues on the Royalty Review Panel for their work.  I suspect none of you were expecting quite how much work this was going to be!  But it was well worth it.

I also want to thank the many Albertans who took the time to participate in the Panel's public consultations on this issue.

And the many experts who provided Albertans with their best advice in the Panel's technical working groups.

The issues you have all been dealing with are critical to our province.  More than ever, they are on the minds of every worker, every family, every producer and investor – here, in the rest of Canada, and beyond.

You have given us answers that can bring reassurance to our citizens and industry partners.  Your work can give hope for a more competitive industry, greater future benefits and a better sharing of those benefits over time.

Alberta's energy resources are owned by the people of Alberta. They are the foundation of our prosperity and will remain a great opportunity for our province and our citizens.  They will play a central role in our economy – and in Canada’s economy – for many decades to come. 

Our job is to steward these resources to provide the right rewards to our partners and the right return for Albertans to hold in trust for future generations.  The economic opportunity inherent in those resources must not be inefficiently wasted today or squandered for our future.

The Panel was given four mandates: first, look for ways to optimize returns to Albertans; second, look for ways to promote further investment in this important industry; third, suggest steps we can take to diversify our energy economy and move up the value chain; and fourth, propose an approach that helps develops our resources in an environmentally responsible manner.

Through all of the Panel’s work, a number of things became clear.

Our big challenges include more than just Saudi Arabia’s desire to flood the market with cheap oil. 

Our biggest challenge – as Peter Tertzakian says, our "existential" challenge – is that our largest market is becoming our largest competitor.  And that competitor has a lower cost structure that delivers greater net revenues for their public and their industry to share.

Our other challenges include that Alberta’s royalty structure is outdated and inefficient: it has not adapted to changes in technology; it creates unnecessary uncertainty and risks for investors; and it does not do enough to reward innovation and cost savings – or to encourage investment.

In light of these findings, and based on the advice of the Panel, our government has adopted their recommendations and will take the following steps.

First, we will help ensure as good or better returns for the industry, investors and Alberta owners.

We agree with the Panel that, at this moment in our history, with prices and markets being what they are, what Albertans need us to do is to help improve their and industry’s returns by removing distortions and disincentives in the system and "grow the pie".

Since existing wells were developed under today’s royalty system, that system will continue to apply to all existing wells for 10 years and the modernized framework will apply to wells drilled after 2016.

On new wells, we’ll help incent better management of the costs that get deducted from everyone's returns.  By focusing on these costs, Alberta owners can help their industry partners become stronger, more efficient and more competitive. Net revenues will increase. 

Over time, new oil and gas wells should move more quickly from low initial royalties to higher posted royalties and that means higher returns for the public in the future.

The new framework will be calibrated to ensure that industry makes the same rate of return on new wells as it would if those wells had been drilled under the current system. A current distortion that discriminates on the basis of the hydrocarbon found will be eliminated so companies will not face the same risk of loss or inefficiency when they don’t get the hydrocarbon they were drilling for.

We will extend drilling incentives that were scheduled to expire and build them into the new framework. Their effects will diminish in a high price environment and mean a higher benefit to Albertans.

The Panel's advice is that the current royalty rates for oilsands are appropriate and we will maintain those rates and adopt a new framework for assessing deductible costs with greater transparency, accountability and certainty. Albertans will be able to see all the costs oilsands operators are allowed to deduct when paying royalties. 

We expect that oilsands will make a significantly greater financial contribution to Alberta's wealth over time, as more operations reach post-payout status which, under existing rules, subjects production to a higher royalty rate. 

Second, we will significantly increase transparency and accountability of the system.

Albertans deserve more than the promise of an optimal return – they deserve to have that promise verified in a way they can see and rely on.  We will therefore throw open the doors and let the sun shine on the development of their resources and the government’s regulation of it.

We will provide an unprecedented level of transparency – not only about the costs of drilling, through the publication of a new annual Capital Cost Index for oil and gas wells, but also, as I said earlier, about the prices, production volumes and allowable costs used to determine royalty payments in oilsands operations.

Detailed reports on all these costs will be disclosed and tracked on an accessible, easy-to-navigate website so that Legislators and citizens can monitor this new system as it is implemented and managed.

The Government of Alberta will also benchmark results to ensure the system is meeting Albertans’ priorities. We will provide the Legislature and the public with an annual, detailed report: comparing overall return to Albertans with those achieved in comparable jurisdictions; and measuring levels of job creation, investment, production costs, value-added development and environmental performance – so that Albertans can assess our progress on the principles they told us to pursue.

There will always be room for debate in Alberta over whether we get an appropriate owners’ return or if development is meeting our expectations.  But, going forward – and for the first time – we will be able to debate these issues from the same verified facts.

Third, we will act on opportunities to diversify our energy industry and to move up the value chain.

The Panel’s report details a long history of successive administrations –the Farmers' government, Social Credit and Progressive Conservatives – who used royalties and other public policy tools to add value to Alberta's resources and diversify Alberta's economy.

Unfortunately, it is a history lesson – most of the refining, upgrading and diversified energy activity we see in Alberta today dates from those times.

The Panel points to a number of new opportunities for Alberta to promote diversification and create jobs.

We will make those new opportunities and jobs part of our future – with focus and with a real, Alberta-style determination.

Our government will shortly announce new initiatives to this end.

We will also announce a working group on energy diversification that will pick up where the Panel left off and give the Government of Alberta on-going advice on how to best partner with industry and communities to deliver more jobs from our resources.

What’s the bottom line?

We are talking here about important issues – about our opportunities, our obligations and our future. And Albertans deserve straightforward talk from their government.  And they expect their government to deliver the same message – no matter who we are talking to.

That's why, when I talk about the critical issues that we know are on people’s minds – like resources, climate, and the future of the economy – I say the same thing to Alberta oil workers as I say to environmentalists in Toronto. I deliver Alberta’s messages to my colleagues – the premiers of Quebec, New Brunswick and, most recently, Ontario – and, here in Calgary next week, to Prime Minister Trudeau. 

And, if I get a chance, I'll do the same with any mayor near the Energy East corridor who wants to hear about the exciting and necessary changes we are bringing about here in Alberta.

We will reduce carbon emissions in our economy.  With industry, we will invest in “taking the carbon out of barrel”. We will invest in energy efficiency and renewable and lower-carbon electricity.

We will keep working on pipelines and market access – for the sake of Albertans and of all Canadians who benefit from a strong Alberta industry.

We won’t shout at or threaten Canadians in our principal markets. But we will act as a climate leader among the world’s major energy producers by: cleaning up our own act; engaging constructively with other provinces and stakeholders; and being a good partner to Canada’s new federal government as it works to keep its commitments on this issue. 

So, the bottom line, the straightforward message I have for every person who wants to know about the government's plan on royalties is this: our new royalty framework recognizes the reality of our economy today.

It responds to the pain and the uncertainty that workers and families are feeling across our province. It is designed to encourage more investment and more jobs than we'd otherwise have.

What you need to know is this.

Alberta oil and gas explorers and producers – whether they are your employers, your customers or the people whose shares are in your RRSP – they will know today that the oil and gas wells they drilled this year and in previous years will pay royalties to Albertans in the same way they have since they were drilled. 

The exact same system: now, next January, and for the next 10 years.  There'll be no changes on existing wells for 10 years.

And when those Alberta explorers and producers are making their plans today – for drilling in 2017 and beyond – they will know this: those new wells – even under the Panel's modernized framework – will give them the same internal rate of return they would have earned on the same well drilled in 2016, subject to a) them meeting or beating average industry costs of drilling and b) prices remaining within the range that our extended drilling incentives stay in play.

And, when oil sands operators, and proponents of new projects, are making their investment plans – they will have the certainty that they can operate, expand or build under the same royalty regime they have today. 

What’s next?

We Albertans have been through a lot. Unfortunately, there is likely to be more rough weather ahead.

But I believe in Albertans.

I believe in our determination to come through this together, in our ability to build on our strong foundation and to create an even better future for us all.

We will agree often and disagree occasionally, but we will: innovate and control our costs; maintain investment and maintain and create good paying jobs – including new jobs adding value to our resources and developing new innovations; gain greater revenues for the Heritage Trust Fund over time; be world climate leaders among energy producers; and persuade Canadians, with evidence and with reason, of the importance of our resources and of us gaining new access to markets. 

One of the important things we’ve demonstrated with our Review Panel is that is it possible to discuss these issues without undue drama or division.

We can look at the public policy, business and environmental issues together, and make practical progress that makes practical sense.

Which is what we’ve done today.

I congratulate and thank the Panel.  I look forward to the work ahead with all Albertans.

Thank you.