What are royalties?
A royalty is the price the resource owner charges developers.
Albertans own 81% of the province’s mineral rights and the Alberta government manages those resources on their behalf. The remaining 19% is owned by the federal government, individuals and corporations.
As the resource manager, the Alberta government sets conditions and royalties for development.
Each producing oil or gas well, or oil sands project, has its own royalty rate. That's because the royalty formulas that determine the royalty rates consider factors such as:
- the price the resource is sold for
- the volume produced
- an industry average of capital costs for each individual oil and gas well
- capital costs to begin production for oil sands projects
These factors change over time, and so do royalty rates. Developers pay royalties monthly during production.
How Alberta collects value from its resources
Resource value is about more than royalties.
Value can also come from:
- land sale bonuses (payments to government for the right to develop the resource)
- jobs and economic activity generated by the sector
- taxes paid by companies and people working in the sector
The value of Alberta’s oil and gas resources is shared between Albertans, as owners, and the companies developing these resources.
How production costs affect value
Extracting Alberta’s oil and gas resources and transporting them to market is expensive. These costs affect the value we share with resource companies.
The value available to share also depends on the revenue from developing and selling Alberta’s resources.
Factors influencing revenue
Revenue from selling our energy depends on how much is produced and the price it's sold for. When we produce more or the price rises, the more value there is to share. The price changes based on:
- changes in global and local supply and demand
- access to markets
Factors influencing costs
The cost to produce and transport our resources also affects our share of the value. The higher the cost, the less value is available. Costs are influenced by:
- upfront and capital investments, such as:
- drilling and completion of a well
- mining and processing equipment
- pipelines and gathering facilities
- operating costs, such as:
- reporting and maintenance
- regulatory compliance costs, such as:
- bonuses paid to acquire development rights from the province
- property and corporate taxes
- carbon levies
- administration and reporting
- surface access and other fees
- abandonment fines
- reclamation and remediation
The cost to develop resources can differ greatly between and within jurisdictions, depending on local conditions at the time. If investors cannot recover their costs and make a return on their investment, they will not invest, and the resource won't generate jobs or economic value.
Alberta’s royalty framework at a glance
Oil sands royalty framework
- Applies to oil sands Royalty Projects (mines or wells) that have government approval under this royalty framework.
- Encourages industry to innovate and reduce capital and operating costs, which will increase value no matter what oil prices are.
- A “revenue minus cost” approach. This means a flat royalty rate will apply until a mine or well’s allowable costs have been covered (pre-payout). Then, the rate goes up as the price of the resource increases.
- Royalties depend on if the project is in a pre-payout phase or post-payout phase (after initial costs are recovered). Royalties increase in the post-payout phase.
Table 1. How project phase affects royalty rates
|Project Phase||Royalty Rate|
|Pre-payout||1% to 9% of gross revenue|
|Post-payout||Greater of: 25% to 40% net revenue, and pre-payout rate|
Crude oil and gas royalty framework
- Referred to as the Modernized Royalty Framework (MRF).
- Created in 2016 and applies to oil and gas wells drilled after December 31, 2016.
- Harmonizes royalty treatment across hydrocarbons (including methane, propane, etc.).
- Uses a “revenue minus cost” approach.
- Encourages industry to innovate and reduce drilling and completion costs, which will increase revenues shared by Albertans no matter what oil and gas prices are.
Table 2. Royalty rates under the Modernized Royalty Framework
|Crude oil||5% to 40%||Gross revenue|
|Methane||5% to 36%|
Alberta Royalty Framework
- Created in 2007 and applies to oil and gas wells drilled before December 31, 2016.
- Wells drilled before this date are grandfathered to the end of 2026.
- Treats hydrocarbons differently from each other.
Table 3. Royalty rates under the Alberta Royalty Framework
|Crude oil||0% to 40%||Gross revenue|
|Methane||5% to 36%|