How the royalty system attracts investment and promotes job creation

The royalty framework helps attract investment, create jobs, and support a predictable business climate in Alberta.

Overview

Developing our resources requires investment and expertise.

On January 1, 2017, the Modernized Royalty Framework took effect for new activity in Alberta. It made several changes to make Alberta more competitive and strengthen investment.

The new framework removes distortions inherent in the old system and harmonizes royalty treatment across hydrocarbons.

This provides predictability to companies seeking to invest in drilling activity.

The framework also provides an incentive for companies that lower their costs below the industry average. This encourages innovation and the use of new technologies. As average costs come down, Albertans will benefit from an increase in royalty revenue over time.

How the framework is performing

Several indicators such as drilling activity, employment and investment provide an insight into the performance of Alberta's energy industry and its royalty framework. However, other variables such as commodity prices and production cost could impact these results.

Early trends in 2017 show an increase in drilling activity across the province. However, data showing the impact of the first year under the new framework are not yet available. Information here shows the activity under the previous royalty framework, and applies to wells drilled before January 1, 2017; in 10 years these wells will transition to the new framework.

We can tell if the framework is attracting investment and promoting job growth by tracking:

  • employment in Alberta as a result of the mining, quarrying, and oil and gas extraction sector
  • how employment in Alberta’s sector compares with other oil and gas jurisdictions
  • Alberta mining, quarrying and oil and gas investment as a percentage of Canada’s energy investment

At a glance

  • Despite the drop, Alberta employed the highest number of people in the oil and gas industry within Canada.
  • Investment in upstream mining, quarrying and oil and gas development accounted for 57% of all sector investments in Alberta.

Direct and indirect employment in Alberta

According to Statistics Canada, in 2016, about 264,000 people, or 12% of workers in Alberta, were estimated to be directly or indirectly employed in the mining, quarrying, and oil and gas extraction sector; that is about 38,000 fewer than in 2015.

The graph shows both direct employment in the mining, quarrying, and oil and gas extraction sector, and indirect employment attributable to the activity in this sector. The decline in oil and gas employment in 2015 and 2016 in Alberta was much more significant when indirect impacts are included.

Figure 1. Direct and indirect employment in the oil and gas extraction sector

Table 1. Direct and indirect employment in the mining, quarrying, and oil and gas extraction sector

  2013 (thousands) 2014 (thousands) 2015 (thousands) 2016 (thousands)
Direct AB employment in mining, quarrying, oil & gas extraction (NAICS1 21) 171 175 155 136
Indirect AB employment in mining, quarrying, oil & gas extraction (NAICS 21) 160 165 146 128
Total direct and indirect AB employment in mining, quarrying, oil & gas extraction (NAICS 21) 331 340 301 264

How oil prices affected employment

Oil prices significantly declined in late 2014, and remained relatively low throughout 2015 and 2016, which had a major impact on employment in the sector. Direct employment, after climbing to about 175,000 in 2014, declined by 11% from 2014 to 2015, and then declined further by 13% from 2015 to 2016. In 2016, after two consecutive annual declines, direct employment in this sector was 136,000.

The reduction in total direct and indirect mining, quarrying, and oil and gas extraction sector was about 77,000 employees, or 23% from 2014 to 2016.

An example of direct employment is an oil rig worker. Indirect employment would include workers at the power station that supplies the oil rig with electricity.

How Alberta compares

Alberta directly employed the highest number of people in the oil and gas extraction sector within Canada at about 136,000 people employed in 2016.

Table 2. Change in direct employment in the mining, quarrying, oil and gas extraction sector across comparator jurisdictions, 2015 - 16.

  2015 (thousands) 2016 (thousands) Change (percent)
Alberta 155 136 -13%
British Columbia 27 30 9%
Saskatchewan 25 24 -6%
Newfoundland 12 11 -9%
Texas 275 221 -20%
California 27 23 -15%

Employment trends across jurisdictions have been fairly similar. While the rates of change varied, trends generally move in the same direction. For example, from 2013 to 2014, employment in the mining, quarrying, and oil and gas sector increased in all comparable jurisdictions; the trend was subsequently revered, as the sector's employment in all comparator jurisdictions declined from 2014 to 2015.

However, the magnitude and impact of employment changes on the economy was significantly different for examined jurisdictions. The 136,000 people in Alberta’s mining, quarrying, oil and gas extraction sector accounted for about 6% of Alberta employment in that year. By comparison, California’s 2016 employment in the sector was about 23,000 people – or 0.1% of total employment.

Therefore, while both jurisdictions saw a similar decline in the mining, quarrying, and oil and gas extractions sector's direct employment levels from 2015 to 2016 (13% for Alberta, and 15% for California), the impact was significantly more pronounced in Alberta, where the sector is much more prominent.

Effect of oil and natural gas prices

Oil prices significantly declined in late 2014, and remained relatively low throughout 2015 and 2016.  Natural gas prices also declined in 2015 because of increasing production in the United States, large storage additions, and weak-to-moderate demand throughout the year. Natural gas prices didn't recover in 2016. This created significant challenges for the sector.

From 2014 to 2015 and from 2015 to 2016, all jurisdictions we looked at saw a decline in the mining, quarrying and oil and gas extraction employment. The only exception was British Columbia, where employment in the sector increased in 2016 from the previous year due to mining and support activities for mining and oil and gas extraction.

Upstream investment

Alberta continued to be the primary destination for investment in Canada directed to the mining, quarrying and oil and gas extraction sector. For example, from 2010 to 2015, Alberta’s share of Canada’s sector investment accounted for at least 63% in every calendar year. Preliminary actual data for 2016 indicated that while Alberta's share of Canada's sector investment declined to 57%, Alberta still accounted for a majority of all of Canada's investment in the sector. Therefore, any significant investment swings in Alberta have major impacts on Canada’s results.

The significant oil price decline in late 2014 has not prevented the total mining, quarrying, and oil and gas extraction sector investment in Alberta in 2014 from setting an all-time Alberta record at $61 billion. However, the price decline has impacted the industry since then. In 2015, Alberta experienced a significant decline in investment in this sector, down to $40.3 billion, or a 34% year-over-year decline. Preliminary actual results point to a further decline in 2016, at $25.8 billion, an estimated 36% decline from the 2015 level.

Although Saskatchewan, Newfoundland and British Columbia also saw a decline in investment in this sector from 2014 to 2015, all had a smaller decline than Alberta – the decline was 29%, 16% and 27%, respectively.

From 2015-2016, as indicated above, preliminary actual results for Alberta indicate a decline of 36% in the sector’s investment from 2015 to 2016. The decline for Saskatchewan was estimated to be even more significant at 41%. Newfoundland's investment in the sector declined by 7% from 2015 to 2016, while British Columbia's went up 6%.

The results had significant implications for investment in Alberta. The amounts are much greater in Alberta than in other Canadian jurisdictions that have substantial energy industries.  Among the provinces we looked at, Saskatchewan had the largest decline from 2015 and 2016. The 41% decline for Saskatchewan translated into a $3.2 billion year-over-year reduction in investment. However, Alberta’s estimated 36% decline over the same time period amounted to a significantly larger reduction in absolute dollar values - a $14.5 billion year-over-year decline.

Industry investment is to a large extent driven by commodity prices, which the government cannot control.

Figure 2. Upstream oil and gas extraction capital investment (Including mining and quarrying)

Upstream oil and gas extraction

Table 3. Upstream oil & gas extraction capital investment (including mining and quarrying)

 

  Alberta (billions $) Saskatchewan (billions $) Newfoundland (billions $) British Columbia (billions $) Rest of Canada (billions $) Alberta as a percentage of Canada
2012 49.6 8.5 2.9 7.2 10 63
2013 55 10.0 3.9 6.6 8.5 66
2014 61 10.9 5.4 7.1 6.0 67
2015 40.3 7.7 4.6 5.1 6.0 63
2016 Preliminary Actual 25.8 4.6 4.3 5.5 5.5 57

Land sales

Alberta can also be compared with British Columbia, Saskatchewan, Newfoundland, and Manitoba for mineral rights, or land sales. Unlike oil and gas industries of other comparator provinces, Newfoundland's industry is offshore and Manitoba is also included to present the complete picture of activity in Western Canada.

Figure 3. Crown land sales and leases in oil and gas development

Table 4. Crown land sales and leases in oil and gas development

Figures are in hectares.

  Alberta Newfoundland Saskatchewan British Columbia Manitoba
2012 3,161,755 1,518,801 397,119 136,521 19,370
2013 2,291,131 554,939 111,392 119,095 4,079
2014 1,089,453 108,939 200,242 148,705 6,765
2015 1,615,397 1,629,926 132,843 62,197 2,912
2016 980,929 1,526,482 111,740 96,617 2,981

Generally since the mid-1950s, Alberta sold the most land in hectares for oil and gas development among provinces, although there were exceptions. Alberta’s numbers also include oil sands mineral rights sales in addition to petroleum and natural gas sales.

In 2015 and 2016, the last 2 years of the period looked at, Newfoundland sold more hectares than Alberta.  In 2016, 1.5 Million hectares were sold in Newfoundland, while Alberta sold fewer than 1 million hectares.

Oil prices significantly declined in late 2014 and remained relatively low throughout 2015 and 2016. The lower oil price environment affected both Alberta and its competitors.

However, while the decline in oil prices generally led to lower industry investment and employment, the effect has not been as clear for sales of mineral rights. Among the Canadian jurisdictions we looked at, Newfoundland had the largest mineral rights sales in 2015 and 2016, but Newfoundland’s mining, quarrying and oil and gas extraction sector had significantly less investment than its Alberta’s counterpart.  Mining, quarrying and oil and gas extraction investment in both Alberta and Newfoundland also saw a downward trend from 2014 to 2015.  This trend was estimated to continue for both provinces in 2016.  Therefore, mineral rights sales appear to be much more influenced by factors specific to each jurisdiction at a particular time, than by general industry trends.