Generally, the amount of royalties collected each year depends on:
- how much oil, natural gas, and oil sands (bitumen) is being produced
- the prices that energy companies are receiving for these products, which fluctuate daily
Resource prices and production levels change over time. As a result, the total amount of royalties collected by the government changes each year. Through the use of monthly royalties, Alberta collects a regular income stream over the entire life of the well or project.
Royalties that oil and gas companies expect to pay on production are a key factor that companies and investors consider when deciding where to invest.
Royalties versus taxes
Royalties are different than taxes, and they serve a different purpose. A tax is a fee that a government will levy on a product, such as:
- land (property taxes)
- purchase of goods and services (GST)
- liquor and cigarettes (sometimes called “sin taxes”)
The government doesn’t own these products, but it taxes them.
A royalty, on the other hand, is about getting value from something we own. For example, an artist receives royalties for a piece of work they produced or own the rights to.
The government owns the rights to the land and its resources. The government sells these rights through a land sale to energy companies to drill, refine and transport oil and gas. The resources they are producing and selling are owned by Albertans, and these resources have value. Albertans receive a share of that value when the resources are produced and sold.
Value and price
Royalties are about Albertans getting the value of our resources when they are produced and sold. The value of a resource depends on:
- the price we receive for our resources
- the cost to produce the resource
- the cost to transport the resource
The price received for a resource changes monthly based on the market.
The lower the price we receive for our natural gas, the less value there is.
How royalties are calculated
Royalties are calculated differently depending on the project.
Crude oil and natural gas
A sliding-scale formula is used to calculate the monthly royalty payment for each well. This formula depends on factors such as:
- how much of the resource was produced by the well
- the price received for that resource
- the depth of the well
- the type of oil, since lighter oils generally receive higher prices than heavier oils, because they are easier (and cheaper) to process in refineries
“Par prices” are used by Alberta Energy as references for price components, which also change monthly.
Using the formulas and “par prices”, the calculated royalty rates payable on conventional oil wells can range from 0% to 40%.
Oil sands projects
Oil sands projects are generally much larger investments and are far fewer in number, so a different formula is used to calculate them.
All costs and all revenues for each oil sands facility are reported. These are used to calculate a “payout point”.
The payout point is the time in which a facility has recovered its major operating and capital costs, and has achieved an allowable return on investment.
There are separate royalty rates for an oil sands project before and after its payout point.
In the pre-payout period, the project pays a royalty based on a percentage of its gross revenues. (This ranges from 1% to 9%, depending on the price of oil.)
In the post-payout period, the project pays a royalty based on whichever is higher:
- the same calculation that was used in the “pre-payout” period; or
- a percentage of the project’s net revenues (i.e., its gross revenues minus its allowable costs) which ranges from 25% to 40%, depending on the price of oil.