Canada: Alberta's Royalty Review

Alberta's NDP Government is proceeding with its review of the Province's oil and gas royalty system, fulfilling a promise made during last spring's election campaign.

The Government's stated objective in this review is to design a royalty system that Albertans can trust. It hopes to do this through "an open, frank discussion about how our royalty system can better serve Albertans, industry and the good jobs industry creates for generations to come."

In June the Government appointed Dave Mowat as the chair of a panel to be formed to conduct the royalty review. Mr. Mowatt is the President and Chief Executive Officer of Alberta Treasury Branches. ATB is a bank-like financial institution owned by the Province that provides financing for Alberta-based enterprises.

On August 28th Energy Minister Marg McCuaig-Boyd announced the other members of the Royalty Review Panel and commented on the Panel's mandate, process and the timetable for implementing any changes that may result from the royalty review.

The Royalty Review Panel

Joining Mr. Mowatt on the Royalty Review Panel are:

  • Peter Tertzakian, the chief energy economist and managing director at ARC Financial Corp. in Calgary, Canada's leading energy focused private equity company;
  • Annette Trimbee, President and Vice Chancellor at the University of Winnipeg. Ms. Trimbee is a former Deputy Minister of Finance for the Alberta Government; and
  • Leona Hanson, a small business consultant and Mayor of Beaverlodge.  Beaverlodge is a rural Alberta community whose economy is heavily dependent on energy industry activity in the area.

Reaction to these appointments has been generally favorable, particularly with respect to Mr. Tertzakian. He is highly respected by the energy industry and others for his extensive knowledge of the Canadian oil and gas business, and his creative and practical approaches to industry problems.

The Mandate

Ms. McCuaig-Boyd said that the Panel's mandate is to get a better understanding of the current royalty system, its impact on private investment and revenues generated for the Province, as well as how Alberta's royalty system compares to other jurisdictions. In particular the Panel is to look at ways to:

  • optimize the return to Albertans, as the owners of the Province's oil and gas reserves;
  • boost industry investment and diversification opportunities such as through processing and refining; and
  • encourage responsible development of the Province's resources.

Process

The Panel will conduct two parallel processes:

  • a public consultation that will allow Albertans to participate via submissions to a Government website (letstalkroyalties.ca). Collecting feedback from Albertans in this manner is in place of holding public hearings as part of this review. This public participation process will occur over a 60 to 90 day period; and
  • consultations with experts, which may involve a second panel, based on three energy streams:  crude oil and liquids, natural gas and oil sands.  The expert consultation part of the process will proceed over the next several weeks.

The Timetable

The consultation process is to be finished by the end of 2015 following which the Panel will present its report to the Government.  It was not clear however when the Panel's report, which will be made public, will be filed and released.

The Panel's report is intended to aid the Government in developing a royalty system that "everybody feels they can have trust and faith in".

The Government has however said that they have no preconceived notions about what results will come from the study.

The Government's conclusions on the Panel's review and any changes to the current royalty system that may result from that review will likely be announced during 2016.

Maintaining the Status Quo

The Energy Minister pledged that until 2017 the current royalty regime will remain unchanged to allow companies and investors to operate with certainty during that period. This is intended to be a clear signal that the Government is committed to be a reliable partner in supporting the success of the energy industry in Alberta. Maintaining the status quo for this period will help Alberta's oil and gas companies prepare their budgets for the upcoming winter drilling season.  The hope is that increased drilling activity will result from eliminating uncertainty about applicable royalty rates during that period.  That result would also benefit the drilling companies and other service providers to the oil and gas industry whose levels of activity will be determined by these exploration and development budgets.

The Government may however need to provide industry further clarification as to whether current royalty rates on wells drilled during the coming winter drilling season will be grandfathered from or get favoured nations treatment in respect of any changes to royalty rates that may occur as a result of the royalty review.

Incremental Revenues

The Government has pledged that any incremental revenues earned from royalty changes will go to the Heritage Fund, Alberta's long-term savings fund, rather than into the province's general revenues.  This was another NDP campaign promise.

The Heritage Fund was conceived in the early 1970s.  At that time the goal was to deposit up to 30% of Alberta's annual resource revenues into an investment fund that would provide a lasting legacy for future Albertans. 

But contributions to the Fund ceased when oil prices fell in the mid-1980s. Since that time the Government has not only used most of its resource revenues for general expenses, but it has also skimmed off earnings from the Heritage Fund into general revenues.  As a result the Heritage Fund has not grown much over the past 30 years.

This is the second major review of Alberta's royalty system in eight years. In 2007 Progressive Conservative Premier Ed Stelmach conducted a review to ensure that Albertans were receiving their fair share from energy development through royalties, taxes and fees. The Stelmach review resulted in a New Royalty Framework that made significant changes to royalties in respect of conventional oil and gas and in respect of oil sands developments. The industry's response to these changes was overwhelmingly negative. When oil and gas prices fell as part of the Great Recession in the fall of 2008 the Alberta Government conducted a Competitiveness Review and gradually eliminated the New Royalty Framework's changes to conventional oil and gas royalties in response to that review.

There is concern that this is not the right time for another review of Alberta's royalty system as the industry struggles with low oil prices, higher provincial taxes and increased environmental costs.

But the NDP Government seems to have learned from the mistakes of the past. And members of the Royalty Review Panel have said that their approach will be all encompassing with the objective of coming up with a royalty system that will position Alberta to be competitive in a rapidly changing world.

Hopefully any changes that result from the royalty review will be for the better for all concerned.

The Canadian Association of Petroleum Producers has said that it wants the government to move quickly and complete the review to resolve any uncertainty created by the prospect of changes to royalty rates.

That uncertainty may be affecting decisions on whether M&A transactions, financings and projects requiring long term capital investment will proceed in the near term.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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