Oil and gas royalties
The modernized royalty framework came into effect for all new oil and gas wells in 2017.
Oil and gas industry at a glance
- In 2016, Alberta was the world’s 8th largest producer of crude oil and 8th largest producer of natural gas.
- Alberta also has an abundance of natural gas liquids such as propane and butane, and heavier hydrocarbons like condensate. These liquids are used extensively in Alberta’s oil sands to dilute thick bitumen to help transport it through pipelines.
- Natural gas liquids are driving Alberta’s oil and gas exploration, since they receive much higher prices compared to natural gas.
- Two emerging resource plays (particular areas where resources are located) in Alberta are the Montney and the Duvernay plays, both in west central Alberta. These plays are new, and have some of the lowest production costs in North America.
Crude oil and natural gas prices
Alberta’s oil and gas industry has been negatively affected by falling energy prices brought on by rising North American crude oil and natural gas production, and limited access to new international markets.
West Texas Intermediate (WTI), the benchmark for the North American price of oil, has decreased by 70% from its high of US $105.15 per barrel in June 2014.
North American natural gas prices have not recovered since the 2008 global financial crisis. Also since 2008, the growing shale gas supply has more than met the strong demand in industrial, chemical, and power generation.
Table 1. Crude oil prices (1997–2016)
|Year||WTI (US$/bbl)||Conventional oil royalty (C$ millions)|
Crude oil activity and production
Currently, there are around 174,000 operating wells in Alberta.
With advances in multistage hydraulic fracturing completion technology, horizontal drilling is the predominant method in Alberta. A horizontal well can extend much further into a formation and has much higher initial productivity rates than a vertical well, so fewer wells are needed to achieve similar production levels.
That's why the total number of new crude oil wells placed on production (ready to start pumping or flowing) fell for a fourth straight year in 2016. With lower crude oil prices and fewer wells on production, crude oil production fell by 16% (at 444,000 barrels per day) in 2016.
Crude oil often is used to produce pentanes and condensate to dilute oil for transportation by rail or pipelines. Production for these purposes increased from about 184,000 per day in 2015 to about 222,000 per day in 2016 to meet the growing demand by oil sands operations.
Natural gas activity and production
Drilling activity for natural gas has decreased because of lower natural gas prices and reduced demand from Alberta’s traditional markets, because of higher production in the United States.
In 2016, natural gas production increased slightly from about 10.1 billion cubic feet per day (Bcf/d) in 2015 to about 10.2 Bcf/d in 2016, a 0.4% increase despite relatively low gas prices in 2016.
Natural gas liquids are driving much of Alberta’s oil and gas exploration, because these get higher prices than natural gas.
Royalties collected for crude oil, natural gas and liquids
Resource prices and production levels change over time, so the total amount of royalties collected by the government changes each year.
The amount of crude oil and natural gas royalties collected by the Government of Alberta has fallen over the past few years due to declines in world energy prices.
Generally, the amount of royalties collected each year depends on:
- how much oil and natural gas is produced
- the prices that energy companies are receiving for these products, which fluctuate daily
Figure 1. Conventional oil & oil sands royalties collected compared to WTI price (1997–2016). The royalties collected increase when the price increases.
Figure 2. Natural gas & by-products royalties compared to Alberta gas reference price (2004–2016)
Table 2. Natural gas & by-products royalties compared to Alberta gas reference price (1997–2016)
Figures are in millions of dollars.
|Year||Alberta gas reference price (CAD$/GJ)||Natural gas & by-products royalty|