Oil sands royalty framework
Oil sands are a naturally occurring mixture of bitumen (oil that is too heavy or thick to flow or be pumped without being diluted or heated), sand, clay or other minerals and water.
Oil sands operators pay royalties on crude bitumen after the sand and other impurities have been removed.
Crude bitumen is worth less than crude oil because bitumen is more difficult to refine than lighter crude, and it does not naturally flow through a pipeline. Diluent is added to allow bitumen to flow through pipelines to market. The cost of removing impurities and adding diluent is considered in the royalty calculation.
The framework follows global practices of risk and profit sharing between the owners (Albertans) and the companies that develop the resource. It is a revenue-minus-cost structure that recognizes the unique revenues and costs for each project.
Royalty is charged on crude bitumen when it is:
- transported to markets via pipeline to refineries
- transferred to an upgrader to be processed into synthetic crude oil
Upgrading and refining
Upgraders process bitumen from the oil sands into synthetic crude oil, making it possible to transport and sell. Refineries refine the bitumen or synthetic crude into higher-value petroleum products that are sold to end-users. This includes products such as gasoline, diesel, aviation fuel and asphalt. Today, there are several refineries in Canada and the United States that accept Alberta's bitumen.
Most oil sands developments in Alberta are 'Royalty Projects'. A Royalty Project is an approval issued by the Government of Alberta that meets specific criteria. It allows the operator of an oil sands project to pay royalties under the oil sands royalty regime. Any oil sands development without Royalty Project status will pay royalties according to the royalty rates for conventional oil.
Calculating and collecting oil sands royalties
Each oil sands project is unique with revenues and costs that are specific to the project. The amount of royalty paid is based on:
- whether it is an approved Royalty Project or is paying royalties based on the royalty rates for conventional oil
- whether the Royalty Project is in the pre-payout or post-payout period of production
- the price of oil, since royalty rates are set on a sliding scale
- the quality of the project's crude bitumen, which can impact the market price
- a project's unique revenues and costs
- audits and adjustments by the provincial government
The ability for royalty rates to change based on the price of oil is sometimes referred to as a 'sliding scale.' The government has designed royalty rates to change based on the price of oil, so the risk and reward is shared between industry and government. When prices are high the royalty rates are higher, and when prices are low the royalty rates are lower.
Pre-payout and post-payout phase
Royalty rates can be different, depending on whether the Royalty Project is in the 'pre-payout' or 'post-payout' phase. The pre-payout phase is the period before an oil sands project has reached payout. Royalty rates are lower to account for high initial investment costs and long construction times.
Project payout occurs when a project’s cumulative revenues first equal or exceed its cumulative costs. Royalties are typically higher in the post-payout phase. Once a project achieves payout it remains in the post-payout phase.
During the pre-payout period, a Royalty Project pays royalty based on a percentage of its gross revenues, ranging from 1% to 9%, depending on the price of oil.
Royalty rates fluctuate based on the price of oil, which is determined by the West Texas Intermediate (WTI) price benchmark for oil, converted into Canadian dollars.
During the pre-payout period the royalty rate is 1% of gross revenues at prices up to $55/barrel. When the price of oil increases to $120/barrel or more, the royalty rate is 9% of gross revenues. The royalty rate increases from the minimum to the maximum between $55/barrel and $120/barrel (see Figure 1).
Figure 1: Gross revenue royalty rates
After a Royalty Project reaches payout (the post-payout period), it pays royalty based on whichever is higher:
- the same calculation that was used in the "pre-payout" period (Figure 1), or
- a percentage of the Royalty Project's net revenues (gross revenues minus its allowed costs), which range from 25% to 40%, depending on the price of oil (Figure 2)
Figure 2: Net revenue royalty rates
When oil is $55/barrel or less, the royalty rate is 25% of net revenues. When the price of oil increases to $120/barrel or more, the royalty rate is at its maximum, which is 40% of net revenues. Between $55/barrel and $120/barrel, the royalty rate increases from its minimum to its maximum rate in the same way as the pre-payout calculation.
Revenues and costs
Oil sands royalties are calculated and collected on a Royalty Project basis. Each project reports its revenues and allowed costs. This data is used to determine the payout point, which occurs when a Royalty Project’s total revenues equal or exceed total costs. For oil sands production that is not within a Royalty Project, royalties are calculated using the conventional oil royalty rates.
The data provided gives an overview of the costs, revenue and royalty paid for each oil sands project in Alberta.
The information published here is royalty project data, and this information is only relevant to and arises from royalty calculations, and is solely intended for the purposes of calculating royalties under the Oil Sands Regulation, 2009. Please note that the information published here may differ substantially from other financial information, including but not limited to financial or accounting data reported for income tax purposes, financial statements or other reporting to stakeholders, whether at an oil sands project level or corporate level. The oil sands royalty project data published here is derived in accordance with the Oil Sands Royalty Regulation, 2009 and the Oil Sands Allowed Costs (Ministerial) Regulation. It is not comparable with other financial data and is not intended to be used for comparison purposes with any other financial data.
Project audits and adjustments
After Royalty Project operators have submitted and finalized their royalty data, the government can audit their submissions. The audits may result in adjustments to:
- data that was submitted
- revenues and costs
- royalties payable
Alberta publishes summaries of audits and the audit adjustments. Audits are typically concluded several years after the data is reported. Annual summary data is published for historical years, not the current year.
Below are the terms used when calculating oil sands royalties. The definition of some of these terms are uniquely defined in the context of calculating oil sands royalties, and may not entirely agree with generally accepted definitions of the term.
Total amount of revenue reported for the Royalty Project from all oil sands products, for example: clean crude bitumen, diluted bitumen, other by-products.
Oil sands products frequently must be blended with diluent to be transported. Diluent costs are the total value of the diluent in the blended volumes of oil sands products sold.
This is the total revenue for the Royalty Project, minus the total diluent cost. It is calculated at the point where products leave the project (royalty calculation point). Note that this value cannot be less than zero. This definition of Gross Revenue is for royalty purposes only and is not comparable to gross revenue as defined and used in financial instruments.
Cleaned crude bitumen at Royalty Calculation Point
This is the total amount of bitumen produced by the Royalty Project passing through the Royalty Calculation Point (generally where products leaving the Royalty Project are measured).
Gross revenue per barrel
This is the Gross Revenue divided by the Cleaned Crude Bitumen produced by the Royalty Project and passing through the Royalty Calculation Point.
Operating costs are allowed expenses for daily activities and operations of a Royalty Project, such as well operations, steam generation, and mining and extraction.
Capital costs are the allowed expenditures to construct, commission or expand a Royalty Project’s bitumen production capacity, or to maintain production of the project at a certain level through the replacement of facilities or production wells.
An allowed cost to a Royalty Project that represents a minimum return on funds invested. The return allowance is applied to the surplus of total costs minus total revenues for pre-payout projects. It can also be applied to any loss in a given year for post-payout projects. A return allowance that has been calculated for a given period becomes an allowed cost in the following period. It's calculated based on the Bank of Canada’s Long Term Bond Rate.
The amount by which the Royalty Project's revenue exceeds allowed costs, minus other net proceeds. Net revenue can never be below zero.
Calculated as Gross Revenue – Operating Costs – Capital Costs – Return Allowance – Other Costs + Other Net Proceeds.
Royalty rate is shown as either a gross royalty rate between 1-9% of gross revenues, or a net royalty rate between 25% to 40% of net revenues, depending on if the project is pre- or post-payout and the current WTI price in Canadian dollars. For pre-payout projects, a gross royalty rate is used.
For post-payout projects, either a gross royalty rate or net royalty rate is used, whichever calculation results in the higher amount of royalties payable.
The amount of royalties calculated as payable to the Crown in the given period.
It is calculated as Gross Revenue x Gross Royalty Rate or Net Revenue x Net Royalty Rate.
Other net proceeds
Other net proceeds are generally any considerations received by the Royalty Project from anything other than the sale of oil sands products.
Any allowed costs not already identified in the previously mentioned cost categories.
The Royalty Type displays whether the royalties are calculated from gross revenues or net revenues.
The payout status will either be pre-payout (when cumulative costs exceed cumulative revenues) or post-payout (once cumulative revenues first equal or exceed cumulative costs).
Unrecovered balance or net loss at end of period
The unrecovered balance is the amount by which cumulative costs exceed cumulative revenues. This applies only to a pre-payout project. Note, the unrecovered balance, in combination with other royalty reporting data, should not be used as a means of forecasting when a project will reach payout. There are many factors that can influence how an unrecovered balance may change over time, including oil prices, production volumes, and changes in operations or project expansions that may add costs to an unrecovered balance.
If a Royalty Project has already achieved payout, there is no longer an unrecovered balance. However, there may be a net loss in a given period shown here. This net loss can be carried forward as an allowed cost in a subsequent period.
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