Modernized royalty system will promote jobs and investment activity, while increasing revenue to Albertans over time
The adoption of the Royalty Review Advisory Panel’s recommendations will create a simpler, more transparent and efficient system that encourages job creation and investment, rewards innovation and increases returns to the province over time.
“Our new royalty framework recognizes the economic context of Alberta’s energy industry and the need to protect and promote good jobs. Our new system will gradually deliver greater revenue to Albertans while building a more competitive energy sector enhanced by greater transparency and performance measurements to allow Albertans to hold government and industry to our commitments.”
The Government of Alberta will begin work this spring in order to put the Panel’s recommendations into effect beginning in 2017.
The Panel determined that Alberta’s royalties are comparable to similar jurisdictions, but the industry’s costs are substantially higher. As a result, the panel recommends a modernized framework that sets a drilling cost allowance for wells according to an industry-wide average.
The new royalty system will reward producers who reduce drilling costs below the industry average through innovation. Over time, the effect of the change will be to grow net revenues industry-wide, which in turn will increase total royalties to the province.
“This improved royalty framework will make Alberta’s energy industry more competitive and create more good jobs. We heard the system was complex, unpredictable and too rigid to keep pace with the rapidly changing technology of our energy sector. Albertans and industry will benefit from a modernized framework that is simple, predictable, and adaptable.”
The Panel, led by ATB Financial CEO Dave Mowat, listened to industry, labour, environmental groups, academics, business leaders, community leaders and thousands of other Albertans who participated in-person or online.
“Our history of innovation has made Alberta into one of the world’s top energy producers. With the changing world we face today, it’s even more important to encourage innovation and ensure Alberta can compete. That way, everyone benefits. Our panel is proud to deliver these recommendations to improve our energy industry’s future.”
The new royalty framework will:
- provide certainty to the energy industry – royalty changes take effect in 2017 and only apply to new wells;
- maintain the existing royalty structures for 10 years on wells prior to 2017;
- set out a structure to encourage the reduction of costs in the industry, which will increase net revenues shared by Albertans and industry in all price environments;
- establish new royalty rates on oil and gas wells that preserve existing rates of return at the outset;
- harmonize allowable drilling costs on oil and gas wells to remove barriers to investment;
- maintain the current oil sands royalty regime, which was examined by the panel and determined to be competitive;
- provide unprecedented transparency by annually publishing a capital cost index for oil and gas wells, and a wide range of data for each oil sands project, including costs, royalties paid, percentage of product upgraded, and more;
- lay the groundwork for strategic development of value-added industry in the natural gas and oil sands sectors with the establishment of a working group on energy diversification;
- incorporate existing incentive programs and ensure they operate appropriately in both low and high price environments;
- measure annual performance against comparable jurisdictions using principles Albertans’ identified as important during the review, including returns to the province, industry costs, investment levels, job creation and environmental performance.
The Royalty Review Advisory Panel was named on August 28, 2015, including Calgary-based energy economist Peter Tertzakian, Beaverlodge Mayor Leona Hanson, and President and Vice Chancellor of the University of Winnipeg, Annette Trimbee, in addition to Panel Chair Dave Mowat.
The Panel’s consultations with Albertans included more than 7,000 online responses to questions posted through its website LetsTalkRoyalties.ca, received and analyzed 132 documents submitted by stakeholders, held 65 stakeholder meetings across the province, and reached 22,710 Albertans through a telephone town hall meeting.
Statements from Royalty Review Advisory Panel Members
Annette Trimbee, President and Vice Chancellor, University of Winnipeg
“It has been a privilege to serve on this distinguished panel, to hear from thousands of Albertans, and to interact closely with dozens of dedicated experts from think-tanks, universities, industry and Alberta Energy. Our task was more complex than determining whether royalty rates should go up or down. The royalty framework for oil and gas has not kept up with the times. As a Canadian, I am grateful for the chance to contribute to the design of a modern royalty framework that will encourage innovation as we transition to a lower carbon economy and a sustainable future.”
Peter Tertzakian, Energy Economist
“I am honoured to have participated as a member of the royalty review panel and am pleased to have been able to lend my industry knowledge and insight to support this intensive, but critically important process. As an energy economist, I sought to provide insightful, balanced commentary, backed by well-researched facts. Each panelist brought unique knowledge and expertise to the table and I enjoyed working with Alberta Energy, government, industry and each key stakeholder throughout the review process. Together, we created a meaningful dialogue around the energy issues both in Alberta and across Canada. I believe that together, we have developed an enduring framework and set of recommendations that will contribute to Alberta’s future prosperity.”
Leona Hanson, Mayor, Beaverlodge, Alberta
“I’m honoured to have been asked to be a member of the Alberta Royalty Review Panel and to have served alongside such distinguished panelists. Our task was to consider whether and how Alberta’s royalty system could be strengthened and modernized. We consulted widely, read deeply, and learned about the challenges this province faces and the opportunities our abundant resources offer us as Albertans. As we hand over the Royalty Report to Premier Notley and her government, I’m confident that the recommendations we made, together with ongoing dialogue on these matters with Albertans, can and will increase Alberta’s prosperity.”
Support for Alberta's New Royalty Framework
Kevin Neveu, President and CEO, Precision Drilling Corp.
“Precision Drilling is a very large employer of energy service workers in Alberta with similar operations in 16 U.S. states, and nine countries. We believed our perspectives and input would be helpful for the Panel. I was impressed with the efforts of the Panel to understand and balance the interests of the public, the Province and the industry, but I was particularly impressed with how all of the input was considered and integrated to the Modernized Royalty Framework report. I believe the Panel’s recommendations significantly update and improve the Alberta royalty framework which should ultimately encourage investment in Alberta’s resources. The Modernized Royalty Framework modestly simplifies the Royalty structure, but more importantly ensures that Alberta remains a competitive jurisdiction; it eliminates the inflection points and the unintended dis-incentives in the prior structure, while preserving the optimum value of the resources for the people of Alberta.”
Pat Carlson, CEO, Seven Generations Energy Ltd.
“Based on our preliminary review of the recommendations on unconventional natural gas development, this looks like a thoughtful and comprehensive royalty report. We cannot make a thorough assessment because the royalty formulas have not been fully defined. However, the recommendations reflect a strong foundation for encouraging innovation, responsible environmental stewardship and investor confidence. This royalty advice appears to recognize Alberta’s unconventional resource characteristics, measure real costs and simplify the system, which should help producers deploy capital with confidence while stabilizing Alberta’s resource revenues. We see this as a good start on increasing competitiveness and enhancing the province’s financial strength. We look forward to seeing the final details, but at this stage, we commend the Panel on delivering what looks to be a thorough and credible framework that can help Alberta companies compete in difficult market circumstances while providing a more transparent and suitable royalty system.”
Bill McCaffrey, President and CEO, MEG Energy Corp.
“We are pleased the government has concluded that the oil sands royalty framework provides the appropriate share of value to Albertans. Completion of the royalty review provides certainty, predictability and helps increase investor confidence in the Province. Industry and government can now focus on initiatives to lower costs, improve efficiencies and enhance environmental performance—all with the goal of getting Albertans working again.”