What is Royalty?

A royalty is the price charged by the energy resource owner for the right to develop the resources.

In Alberta, 81% of the mineral rights are owned by the Government of Alberta, which manages those resources on behalf of Albertans. The remaining 19% are owned by the Government of Canada in national parks or held on behalf of First Nations and by individuals or corporations.

Industry acquires leases from the province to develop Crown resources through a competitive bid auction which occurs about every two weeks. In return, the province sets terms and conditions and rates of royalties that the Crown is owed as owner of the resource.

Royalties are part of the overall revenue share received. In addition, the province receives revenue from its tenure system,  which results in bonus bids from the successful auction of mineral leases, from rentals and fees associated with the leases, and through corporate income taxes. While these are not royalties, they are all part of the return owners receive for the development their resources.

When royalty rates are set, government considers the full combination of royalties, taxes, and other fiscal charges (levies) that affect and contribute to the competitiveness of the oil and gas sector and to the economy as a whole. This does not imply that the sector is “better off” -  if royalties are lower. It means that they must be at the right level – too high will result in underinvestment, while royalties that are too low can result in inflation and less than equitable return to the owner of the resource.

Royalty rates are set with the expectation that industry will earn a reasonable rate of return given the risk and investment they make in developing the resource. When setting royalty rates, the government considers factors such as commodity prices, production, costs and the province’s competitive ability to attract industry investment.

Fact Sheet - Talk about Royalties

The following information explains some of the technical terms and industry language to help you better understand Alberta’s energy industry and royalty regime.

Allowable costs
This refers to expenditures for business items that have no future life (such as rent, utilities or wages) and are incurred in conducting normal business activities which a business owner may deduct from gross revenues.

Crude oil
Crude oil is a naturally occurring, hydrocarbon liquid found in rock formations in the Earth. Crude oil is used to produce fuel for cars, trucks, airplanes, boats and trains. It is also used for a wide variety of other products including asphalt for roads, lubricants for all kinds of machines, plastics for toys, bottles, food wrap and computers.

Government take
Government take is the total amount of revenue that the government receives from the development of its non-renewable energy resources. This amount includes taxes, royalties, land sales and bonuses.

Oil sands
Oil sands are a complex mixture of sand, water and clay which has very heavy oil known as bitumen that will not flow unless heated or diluted with lighter liquids. Bitumen requires significant upgrading in order to be used as consumer products.

Pre-payout and post pay-out on oil sands projects
Project “payout” refers to the point at which the oil sands developer has earned sufficient revenues to recover all of the allowed costs for the project plus a return allowance.  Unlike conventional oil and gas development where the costs of drilling can be in the order of a few hundred thousand or even a few million dollars, and where production can be achieved within a few months, oil sands developments require massive investments, often billions of dollars, and may require many years before production can be realized.

Synthetic crude oil (SCO)
SCO is high-quality oil produced by upgrading bitumen to a mixture of hydrocarbons similar to light crude.

Tenure
Tenure is the process of leasing and administering petroleum and natural gas rights owned by the Province of Alberta. Rules of tenure define how property rights in land are to be allocated and determine who can use what resources for how long, and under what conditions.