About the oil sands royalty framework
Oil sand is a naturally occurring mixture of bitumen, sand, clay or other minerals and water. Oil sands operators pay royalties on crude bitumen after the sand and other impurities have been removed. Since removing these impurities is required to sell the bitumen, these costs are included in the royalty calculation.
Crude bitumen is worth less than crude oil because bitumen is more difficult to refine than lighter crude and does not naturally flow through a pipeline. Dilutent is added to allow bitumen to flow through pipelines to market. The cost of adding dilutent is considering in the royalty calculation.
The oil sands royalty framework follows global practices of risk and profit sharing between the owners and the companies that develop the resource. It is a revenue-minus-cost structure, recognizing the unique revenues and costs for each project.
Royalty is charged on crude bitumen when it is:
- transported to markets via pipeline to refineries
- transferred to an upgrader to be processed into synthetic crude oil. The upgrader's costs are generally not part of the royalty calculation.
Upgrading and refining
Upgrading and refining refer to different processes that accomplish different things.
Upgraders process bitumen from the oil sands into synthetic crude oil, making it possible to transport and sell. In 2015, about 41% of the bitumen produced by Alberta was upgraded into synthetic crude oil among 5 upgraders.
Refineries take crude oil and refine it into higher-value petroleum products that are sold to end-users. This includes products such as gasoline, diesel, aviation fuel, and asphalt. Today, there are several refineries in Canada and the United States that accept Alberta's bitumen.
Costs of upgrading in the royalty calculation
In the early days of the oil sands, upgraders were required to sell bitumen to the marketplace after it was converted to synthetic crude oil. The upgraders at Suncor and Syncrude were once included in the royalty calculations for those projects. When these companies transitioned their projects to the generic oil sands royalty regime, the companies elected to remove the upgraders from the royalty calculations. Under the royalty regulations, each project can have a one-time election to include or exclude an upgrader. To date, none have elected to have one included.
Calculating and collecting oil sands royalties
Each project is different, so each oil sands development project will pay a different amount of royalties. The amount each project pays is based on:
- whether it is an approved Royalty Project or is paying royalty based on the oil & gas royalty framework
- whether the project is in the pre-payout or post-payout period of production
- the price of oil, since royalty rates are set on a sliding scale
- the quality of the project's crude bitumen, which can impact the market price of the bitumen being sold
- a project's unique revenues and costs
- audits and adjustments
The ability for royalty rates to change based on the price of oil is sometimes referred to as a 'sliding scale'. The government designs royalty rates to fluctuate based on the price of oil, so there is an appropriate sharing of price risk and reward between industry and government. and to ensure Albertans receive their share of the value of the resource at all prices. This means that when prices are high, the royalty rate is higher, and when prices are low, royalty rates are lower.
What Royalty Project status means
To pay royalties under the oil sands royalty framework, a company must apply for and receive approval from the government. Oil sands projects that receive this approval are known as "Royalty Projects." Companies are not obligated to apply for a Royalty Project status. Any oil sands development without Royalty Project status will pay royalties according to the royalty framework for crude oil (hyperlink to oil & gas royalty section).
Pre-payout and post-payout phase
There are different royalty rates for the "pre-payout" and "post-payout" phases of the project. The oil sands royalty framework is designed to recognize both phases.
The pre-payout phase refers to the period before an oil sands project has recovered its initial cost, and accounts for high initial investment costs and long construction times.
The post-payout phase refers to the period after an oil sands project has recovered its initial capital investment. Royalties increase in the post-payout phase.
During the pre-payout period, a Royalty Project pays royalty based on a percentage of its gross revenues, ranging from 1% to 9%, depending on the price of oil. After a Royalty Project reaches payout (post-payout period), it pays royalty based on whichever is higher:
- the same calculation that was used in the "pre-payout" period; or
- a percentage of the Royalty Project's net revenues (ie, gross revenues minus its allowed costs), which ranges from 25% to 40%, depending on the price of oil
Royalty rates for pre-payout and post-payout Royalty Projects fluctuate based on the price of oil, which is determined by the West Texas Intermediate (WTI) price benchmark for oil, converted into Canadian Dollars.
During the pre-payout period (and when a Royalty Project is not making much money during the post-payout period), the royalty rate is 1% of gross revenues at prices up to $55/bbl. When the price of oil increases to $120/bbl or more, the royalty rate is 9% of gross revenues. Between $55/bbl and $120/bbl, the royalty rate increases from 1% to a maximum of 9%.
During the post-payout period, a Royalty Project pays royalty based on the greater of either the pre-payout royalty calculation or the net revenue calculation. When oil is $55/bbl or less, the royalty rate is 25% of net revenues. When the price of oil increases to $120/bbl or more, the royalty rate is at its maximum, which is 40% of net revenues. Between $55/bbl and $120/bbl, the royalty rate increases from 25% to 40% in the same linear fashion as the pre-payout royalty calculation.
Revenue and costs
Oil sands royalties are calculated and collected on a Royalty Project basis. Each oil sands Royalty Project reports its revenues and costs. This data is used to determine a Royalty Project's payout point, which is when a Royalty Project has earned enough revenue to pay off its initial capital costs, including a return on those costs under the government's formula, and to calculate annual net revenues after that point (for post-payout royalty calculation).
Reporting audits and audit adjustments
After a Royalty Project operator has submitted and finalized its project data, the government can audit its submissions. The audits may review all aspects of the data submitted by operators, and may result in adjustments to the data that was submitted. This may include adjustments to all revenues and costs and the combined impact the adjustments have on payable royalties.
Alberta publishes summaries of audits and the audit adjustments. Audits are typically concluded several years after the data is reported, so the annual summary data that government publishes is for historical years, not the current year.
See Alberta historical royalty data.
Beginning in 2017, Alberta will be enhancing the disclosure of audit information, publishing the results for individual Royalty Projects. Data will not be available until the audit is concluded, typically several years after the data is originally reported.
Example of how the oil sands royalty framework works
Alberta will publish the following level of royalty information for each oil sands Royalty Project beginning in the summer of 2017, so Albertans can see how the oil sands royalty framework is performing. Information will be published annually.
The example below shows sample data for a hypothetical in situ Royalty Project still in the pre-payout period, which pays royalties based on gross revenue:
Project Name: OSR001 ABC SAGD Project
Project Operator: ABC Energy Corp.
Reporting Year: 2016
|Gross revenue ($)||$1,200,000,000|
|Volume of cleaned crude bitumen delivered at the RCP (bbl)||30,000,000|
|Gross Revenue per barrel of cleaned crude bitumen delivered at the RCP ($/bbl)||$40|
|Operating costs ($)||$400,000,000|
|Capital costs ($)||$650,000,000|
|Return allowance ($)||$70,000,000|
|Other costs ($)||$100,000,000|
|Other net proceeds ($)||$5,000,000|
|Net revenue ($)||$ -|
|Average Royalty Rate (%)||2.50%|
|Royalty compensation payable ($)||$30,000,000|
|Project Payout Status||Pre-payout|
|Unrecovered Balance at end of a pre-payout Period ($)||$3,500,000,000|
The example below shows sample data for a hypothetical in situ Royalty Project that is in the post-payout period, which pays royalties based on net revenue:
Project Name: OSR002 ABC SAGD Project
Project Operator: ABC Energy Corp.
Reporting Year: 2016
|Gross revenue ($)||$1,800,000,000|
|Volume of cleaned crude bitumen delivered at the RCP (bbl)||45,000,000|
|Gross Revenue per barrel of cleaned crude bitumen delivered at the RCP ($/bbl)||$40|
|Operating costs ($)||$700,000,000|
|Capital costs ($)||$250,000,000|
|Return allowance ($)||$ -|
|Other costs ($)||$50,000,000|
|Other net proceeds ($)||$20,000,000|
|Net revenue ($)||$820,000,000|
|Average Royalty Rate (%)||28.05%|
|Royalty compensation payable ($)||$230,000,000|
|Project Payout Status||Post payout|
|Net Loss at end of a post-payout Period ($)||$-|
See more on royalty reporting.
Below are the terms used when calculating oil sands royalties. The definition of some of these terms may not entirely agree with generally accepted definitions of the term, but are uniquely defined in the context of calculating oil sands royalties.
1. Project revenue
- Total amount of revenue reported for the Royalty Project from all oil sands products (e.g. clean crude bitumen, diluted bitumen, other by-products).
2. Diluent cost
- Oil sands products frequently must be blended with diluent to be transported. Diluent cost is the total value of the diluent contained in the blended volumes of oil sands products sold.
3. Gross revenue
- The total revenue for the Royalty Project minus the total diluent cost contained in any products sold.
- Calculated as Revenue – Diluent Cost
- Royalty of 1% to 9% is calculated on this amount when a Royalty Project is in the pre-payout period (or if a Royalty Project is not very profitable during the post-payout period).
4. Bitumen production
- The total amount of bitumen removed from the Royalty Project (passing the royalty calculation point).
5. Gross revenue per barrel
- The gross revenue divided by the bitumen production.
- Calculated as Gross Revenue / Bitumen Production.
6. Operating costs
- The expenses incurred for the daily activities and operations of a Royalty Project, such as well operations, steam generation, and mining and extraction operations.
7. Capital costs
- Capital expenditures needed to construct, commission or expand a Royalty Project's bitumen production capacity, or to maintain production of the project at a certain level through the replacement of facilities or production wells.
8. Return allowance
- An allowed cost to a Royalty Project that represents a minimum return on funds invested.
- The return allowance is applied to the excess of the cumulative costs minus cumulative revenues, or any loss incurred in a given year.
- Calculated based on the Bank of Canada's Long Term Bond Rate.
9. Net revenue
- The amount by which the Royalty Project's revenue exceeds allowed costs less other net proceeds.
- Net revenue can never be below zero.
- Calculated as Gross Revenue – Operating Costs – Capital Costs – Return Allowance – Other Costs + Other Net Proceeds.
- Royalty of 25% to 40% is calculated on this amount when a Royalty Project is in the post-payout period (and if a Royalty Project is profitable). Royalty Projects in pre-payout do not have net revenue.
10. Effective royalty rate
- Royalty rate is shown as either a gross royalty rate between 1-9% of gross revenues, or a net royalty rate between 25-40% of net revenues, depending on the status of the project.
- The specific royalty rate used depends on the status of the project (pre- or post-payout) and the current WTI oil price in Canadian dollars. For pre-payout projects, a gross royalty rate is used.
- For post-payout projects, either a gross royalty rate or net royalty rate is used, whichever calculation results in the higher amount of royalties payable.
- Royalties are calculated based on the monthly WTI oil price. This figure is the average royalty rate for the year.
11. Royalty compensation payable
- The amount of royalties calculated as payable to the Crown in the given period.
- Calculated as Gross Revenue X (Gross Royalty Rate or Net Revenue) X Net Royalty Rate.
12. Other Net Proceeds
- Other net proceeds are generally any considerations received by the Royalty Project from anything other than the sale of oil sands products.
13. Other costs
- Any allowable costs not already identified in the previously mentioned cost categories are included here.
- Examples include Prior Net Cumulative Balance costs from Royalty Project expansions, and any net loss carryforwards.
14. Royalty Type
- Whether the royalty rate is calculated from gross revenues or net revenues.
15. Payout Status
- The payout status will either be pre-payout (when cumulative costs exceed cumulative revenues) or post-payout (once cumulative revenues equal or exceed cumulative costs).
16. Unrecovered Balance (or loss carry forward)
- The unrecovered balance is the amount by which cumulative costs exceed cumulative revenues. This is also sometimes referred to as the net cumulative balance or loss carry forward.
- If a Royalty Project has already achieved payout, there is no longer an unrecovered balance. However there may be a net loss in a given period shown here as a loss carry forward.
17. Allowed Costs
- Allowed costs are costs attributed to the production and cleaning or processing of crude bitumen. These costs are deducted from a project's revenue when its royalty is calculated.