There are lots of places on earth that have energy resources. But it doesn’t make sense to compare Alberta to every single one of those places because, in reality, we’re not competing with everyone else on earth.
Not every place has the same resources as Alberta. It makes sense to compare our province to places that have similar resource opportunities of similar scale. Some of the areas are well developed, but there are also some where resource opportunities are emerging.
When energy companies are considering where to go, they think about where they (or others) are already operating. So it makes sense to compare our province to places where the companies we have in our energy sector are also operating, or might be likely to operate.
Comparisons must also be done based on the type of resource – crude oil, gas or unconventional (e.g. oil sands) resources.
When comparing royalty systems across jurisdictions, when thinking about the question “how do Alberta’s royalty rates compare?” it is important to ask, “how does Albertans’ share of value compare?” It may sound like the same thing, but there is an important difference:
Value is determined by the price received for our resources, minus the costs to produce and sell them.
For Alberta oil and gas wells, royalty rates apply to gross revenue – the sale price. How this translates to the share of value depends crucially on the amount of net value available. As an example, if prices are $60 and costs are $40, the remaining value to be shared is $20. A gross royalty rate of 20% (applied to the gross revenue of $60) provides $12, a 60% share of value to the owner. However, if costs rise to $45, the value to be shared shrinks to $15, but the same 20% gross royalty rate provides an 80% share of value.
Costs include capital like drilling costs, operating costs, and costs of exploring. Net value also accounts for some level of return on exploration and development to attract people to invest. It’s like selling a bond or a stock, or even selecting which bank account to use. If you don’t get any return or interest, you likely won’t put your money there.
The Royalty Review Advisory Panel compared Albertans’ share of value with jurisdictions that have similar resource opportunities.
The conclusion is that Alberta’s royalties overall are comparable with other jurisdictions.
British Columbia is one of Alberta’s main competitors when it comes to natural gas. It shares similar geographic constraints, and has similar tax, royalty and resource ownership structures.
The Montney and Horn River areas are 2 major shale gas resource basins that exist in BC. In 2008, 90% of the mineral rights sold by the BC government were for these two shale gas plays. The province also has offshore oil and gas basins, but there is a moratorium on their exploration and development.
Coastal access allows BC to more readily export its energy products around the world. However, natural gas must first be converted into liquefied natural gas (LNG) to be exported. As it stands now, BC does not have an LNG facility. This means that, like Alberta, BC’s natural gas is largely confined to North American markets.
Similar to Alberta, the energy industry in BC is comprised of private companies undertaking the actual exploration, production and sale of the resources. The government is not directly involved. Many of the same companies that operate in Alberta also operate in BC.
Also similar to Alberta, the BC government collects royalties on oil and gas resources that are owned by the Crown and levies a tax on freehold production. BC assesses a provincial corporate income tax of 11% (compared to 12% in Alberta). Energy companies in BC also must pay the same 15% federal corporate income tax as in Alberta. BC also offers adjustments that reduce the royalty rates payable for wells that have low productivity.
Saskatchewan is one of Alberta’s main competitors when it comes to crude oil. It shares similar geographic and market access constraint, and has similar resource ownership, tax and royalty structures.
Saskatchewan is Canada’s second-largest oil producer, accounting for 15% of the country’s total crude oil production, and it is the third-largest natural gas producing province in Canada. The Western Canadian Sedimentary Basin (the source of oil Alberta’s oil and gas reserves) also cuts across a swath of Saskatchewan.
Saskatchewan produces both light and heavy crudes, similar to Alberta. The province is also estimated to have 2.7 million hectares of oil sands potential, adjacent to the massive Athabasca deposit in Alberta. However, these oil sands are too deep to mine, and their geology is not suitable for existing in-situ recovery methods. As a result, Saskatchewan has not produced any oil from their oil sands resources.
Geographically, Saskatchewan faces similar circumstances to Alberta. As a landlocked province, it does not have easy coastal access. This makes it challenging for Saskatchewan to get its oil to international markets. Saskatchewan is also located a great distance from U.S. refineries and markets, which adds transportation costs to its products.
The energy industry structure is nearly identical to Alberta. The Saskatchewan government collects royalties on oil and gas resources that are owned by the Crown and levies a tax on freehold production. Similar to Alberta, Saskatchewan assesses a provincial corporate income tax of 12%. Energy companies in Saskatchewan also must pay 15% federal corporate income tax.
In many U.S. states, the majority of oil and gas minerals are owned by private individuals and companies, and a comparatively small amount is owned by the state.
Without large ownership stakes in their resources, these state governments don’t place their focus on royalty frameworks. They collect taxes (as Alberta does), but they don’t collect royalties. Energy companies operating in these states might still pay royalties, but they do so through private arrangements negotiated with each and every private freeholder of the applicable mineral rights.
Texas is one of Alberta’s main competitors when it comes to both crude oil and natural gas. One-third of the United States’ total crude oil and natural gas reserves are in Texas.
Similar to Alberta, Texas has diverse geology, with oil and gas found at different depths and in different areas across the state. The energy industry in Texas is also made up of lots of private companies, and government is not involved with developing resources.
Unlike Alberta, these sources of oil and gas are very close to refineries and major gas-consuming markets. Texas also has its own coastal access and a well-developed pipeline network within the U.S., this enables Texas to easily ship its hydrocarbon products.
One of the biggest differences between Alberta and Texas is the ownership of resources. More than 90% of Texas’ oil and gas resources are privately owned. Most of Alberta’s oil and gas resources are owned by the “Crown”, i.e. Albertans. Energy companies operating in Texas will typically pay royalties, but they do so through private agreements that they make with each private resource owner.
Since most of Texas’ oil and gas resources are privately owned, the Texas government doesn’t collect royalties on oil and gas development. Instead, Texas earns revenue from a severance tax (a tax on the production of crude oil and natural gas), which is 4.6% of the market value of crude oil and liquids, and 7.5% of the market value of gas.
Texas doesn’t assess a state-level corporate income tax. However, energy companies in Texas must pay 35% federal corporate income tax. This is somewhat higher than energy companies in Alberta, which pay 27% in corporate income taxes (12% provincial and 15% federal).
Due to their remote location and capital intensive nature, Alaska projects have been compared with Alberta’s oil sands projects. However, oil produced from our two jurisdictions is delivered to different markets.
Alaska has a large savings account, called the Alaska Permanent Fund. Created by constitutional amendment, at least 25% of monies raised from bonus bids, mineral lease rentals and royalties are to be placed in the Fund. The rules of the Fund require that the Fund’s principal cannot be spent and may only be used for income-producing investments. Earnings from the Fund can be spent by the Alaska Legislature for any public purpose, including making payments to the public through the Permanent Fund Dividend.
Alberta has made different choices with the taxes and royalties it raises from energy development. All tax revenues from energy activities are used in the operating budget — just like taxes from non-energy activities — to fund day-to-day services such as health and education.
Comparing Norway’s taxes and state ownership returns with Alberta’s royalties and taxes isn’t really an apples-to-apples comparison. In reality, they are two very different systems designed for their own unique circumstances.
Wells in Alberta tend to be much less productive than those in Norway, due to geography. Norway's wells are about 40 times more productive than wells in Alberta. Alberta's wells are all inland, while Norway’s wells are all offshore. Transport costs are much lower for offshore drills.
This is significant because a jurisdiction’s royalty rates are generally structured based on the revenues and costs involved in producing oil and gas in that jurisdiction.
Norway’s revenues are based on the economics of their high-producing wells. Alberta’s royalties are based on our lower-producing wells. They are two different systems designed for different circumstances. Norway’s system would likely not work here because it was designed for their unique situation, just as our royalty structure wouldn’t be suitable there.
The type of oil drilled is also different. The majority of oil that Alberta produces is bitumen and heavy crudes, while Norway’s oil is typically a lighter crude. Alberta receives lower prices because our products are lower quality oils that are lower valued.
Norway is also different because it is a country – Alberta, on the other hand, is only one province within a larger country. Consequently, the Norwegian government has considerably more power over things that impact its energy sector, including taxing power and the approval and development of energy infrastructure such as pipelines.
Oil and gas development in Norway is dominated by its state-controlled entities, such as Statoil, and a few other large multi-national corporations. The ability of private companies to invest in Norway’s energy sector is more restricted than it is in Alberta. Norway receives its non-renewable resource revenue from other mechanisms, which are principally:
- Revenue and dividends from its ownership in in Statoil, its state-owned energy company
- Revenue from the State’s Direct Financial Interest in other resource development projects within its jurisdiction
- Corporate income tax (27%), analogous to Alberta’s 12% corporate tax and Canada’s 15% corporate tax
- The Special Tax, which is a profit-based tax of 51% on oil and gas revenue (this is analogous to Alberta’s oil sands royalty)
- Other miscellaneous fees and rentals
This is a very different system from Alberta, where our government does not directly develop or hold any share in developing our province’s oil and gas resources.
Under legislation, the Norwegian government is required to deposit all of its net cash flow from petroleum activities into The Petroleum Fund of Norway. Only the expected real return on the fund, estimated at 4%, can be spent by the government each year. All the rest is saved. This means that Norway has had to collect all the taxes it needs for expenditures (other than the real return on the fund) through other measures, such as a 25% consumption tax, corporate taxes and higher personal taxes.
In Alberta, all tax revenues and non-renewable resource revenues from energy activities are used in Alberta’s budget — just like taxes from non-energy activities — to fund day-to-day services such as health and education, and to build infrastructure.