Alberta's New Royalty Framework

On October 25th, Premier Ed Stelmach announced Alberta's New Royalty Framework.

 - Technical Information for webcast

Premier Stelmach delivers historic New Royalty Regime for Alberta (News Release)
Questions and answers about the New Royalty Framework   If you have questions or comments regarding the framework visit us online or call 310-4455.

Recent news

 Bitumen Valuation Methodology (BVM) This document developed by the department of Energy describes the method.  It is a draft for discussion of implementation issues with stakeholders, and is subject to approval and implementation through regulation by the Government of Alberta as part of the New Royalty Framework package planned for this Fall.  

Shallow Rights Reversion (June 19, 2008)

New deep resource programs promote high-cost oil and gas development
Announcement follows analysis of New Royalty Framework unintended consequences
News Release (April 10, 2008) 

Building Confidence:  Improving Accountability and Transparency in Alberta's Royalty System, report by Peter Valentine, FCA 
News release (April 7, 2008)

Formulas and Charts of Royalty Rates and Curves

• Table of Oil Sands Royalty Rates 
• Alberta's New Royalty Framework (Natural Gas and Oil) - Charts
• Formulas for calculating conventional oil royalties
• Formulas for calculating natural gas royalties
• Table of conventional oil rates
• Chart of Natural Gas Combined Royalty Rates 
• Frequently Asked Questions - Natural Gas (chart included)
• Frequently Asked Questions - Crude Oil
  

A team led by Alberta Energy will consult with industry participants on implementation details for Alberta’s new royalty framework.  The team will be in place on November 15th and consultation will begin shortly thereafter through CAPP and SEPAC.

If you have technical questions regarding implementation details, please e-mail us at Response.Energy@gov.ab.ca, and we will ensure that your questions are addressed as part of the implementation discussions.  

Royalty Information Series

The Government of Alberta tasked an independent, expert Royalty Review Panel to examine the province's energy royalties and tax regime. The panel was asked to focus on all aspects of the royalty system, including oil sands, conventional oil and gas, and coalbed methane.  Their report was released on September 18th.

The Department of Energy has developed the following information sheets to provide background to Albertans interested in the review process.

	What are royalties?	Freehold Mineral Tax	Conventional Oil and Natural Gas Royalty Programs
	What is fair share?	Bonuses and Land Rental Fees
	Royalties- History and Description	Corporate Income Tax

Department of Energy Technical Reports

Alberta Energy has also prepared or commissioned a number of technical  reports describing various aspects of Alberta's royalty systems.

• Alberta’s Oil Sands Fiscal System - Historical Context and System Performance
• Appendix "A": Markets and Pricing for Alberta Bitumen Production
• Preliminary Fiscal Evaluation of Alberta Oil Sands Terms, by Pedro van Meurs 
• Comparative Analysis of Fiscal Terms for Alberta Oils Sands and International Heavy and Conventional Oils, Consulting by Pedro van Meurs, May 17, 2007
• Fiscal Options for Alberta Oil Sands, Consulting by Pedro van Meurs, May 30, 2007
• Proposed Fiscal Options, Consulting by Pedro van Meurs
  
• Alberta’s Conventional Oil and Gas Fiscal System, Overview of the Industry
• Alberta’s Conventional Oil and Gas Fiscal System, Investor Economics and Fiscal System Comparison
• Alberta’s Conventional Oil and Gas Fiscal System, Impact of Potential Royalty Change on Industry Activity
• Review of Conventional Oil and Gas Terms of Alberta, Consulting by Pedro van Meurs, July 29, 2007
  
• Final Report of the Royalty Review Panel, Our Fair Share- Alberta Royalty Review Panel, September 18, 2007  
  • Sensitivity Analysis Appendix - Alberta Royalty Review Panel
  • Data Appendix - Alberta Royalty Review Panel
  • Methodology Appendix - Alberta Royalty Review Panel, September 21, 2007
  • Addendum -Alberta Royalty Review Panel, September 25, 2007
  • Supplementary charts - Alberta Royalty Review Panel, September 25, 2007 
  • Data Appendix to Our Fair Share -Report of the Alberta Royalty Review Panel - Department of Energy
  • Proposed Panel Illustrative Charts and Tables - Department of Energy

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General Information

The Alberta Department of Energy is responsible for the administration of the Mines & Minerals Act, which sets out the requirements for the responsible development of Alberta’s non-renewable mineral resources. In Alberta, 81% of the subsurface mineral rights are owned by the Crown.  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 as a result of land grants made by Canada in the 1800s.

Companies are granted the right to explore for and develop petroleum and natural gas resources, in exchange for the value to Albertans that flows from development in the form of royalties, bonus bid payments (the amount of money offered or bid for the mineral rights)  and rents.  

In 2005-2006, Alberta non-renewable energy royalty revenue amounted to $14.347 billion. According to Third Quarter Update for 2006-2007 projections, it is anticipated that non-renewable resource revenue will total  $11.745 billion in 2006-2007.

The Alberta government is committed to ensuring that Albertans continue to receive a fair share of resource revenue through royalties, taxes, bonuses and rentals. This fiscal regime is monitored to ensure it remains competitive and appropriate for our province.

Year by year total revenue collected

• 2003/04 $8.046 billion
• 2004/05 $10.152 billion
• 2005/06 $14.347 billion
• 2006/07 $11.745 billion (Q3 Update for 2006-07)

 The current royalty features have 3 main objectives:

1. To extend the economic life of mature pools to maximize recovery of oil reserves;
2. To promote the development of new and more efficient technologies; and
3. To promote the exploration and development of new reserves while providing the province with a fair share of the value of the resource.

The Oil & Gas Fiscal Regimes of the Western Canadian Provinces and Territories report (updated 2008-01-31) summarizes the petroleum fiscal regimes for the western Canadian provinces and territories. Descriptions are provided for each resource commodity: oil sands, crude oil, and natural gas and natural gas by-products.

Historically, Alberta has been known for its tough royalty regime. There are numerous independent studies conducted—Van Meurs, Wood-Mackenzie, CAPP—that give us strong indication of how competitive those regimes are.

Classification

Oil and natural gas pools are classified by "vintage" for royalty calculation purposes.  Vintage refers to the date of discovery of the oil or gas pool from which production occurs. Royalty rates for production from newly discovered pools are set lower to reflect the higher average finding and development costs associated with the smaller pools found today compared to those found in the 1970s and 1980s. Natural gas production in Alberta has only two vintages: old, discovered before 1974 and new, discovered after 1973.

Conventional oil

Oil		Natural Gas
"Old" oil	up to March 31, 1974	"Old" gas	up to Dec. 31, 1973
"New" oil	after March 31, 1974	"New" gas	after Dec. 31, 1973
"Third Tier"	after September 1, 1992

Most of the current oil production was discovered between 1974 and 1992.   The Crown takes its share of crude oil royalties from production in-kind instead of by cash payment. The main objective of taking in-kind is to maximize the value of the Crown’s royalties.    The Crown Marketing agents are contracted to sell the Crown royalty share along with their own production, thus ensuring a competitive market price is received for the sales of these volumes.   The Crown royalty share is calculated on each individual well according to the following factors:

1. Well production volume
2. Oil density
3. Vintage (Well classification)
4. R-multiplier (Par Price)

Alberta Energy is responsible for verifying that the correct royalty volumes are calculated and delivered to the Crown’s agents on a monthly basis.   Oil royalty revenue amounted to:

• 2003/04 $981 million
• 2004/05 $1.273 billion
• 2005/06 $1.463 billion  
• 2006/07 $1.360 billion  (Q3 Update for 2006-07)

Budget 2006 forecast that oil prices for 2006-2007 will average $US50 bbl (West Texas Intermediate) in 2006-2007.  The Third Quarter Update increased the forecast to US$64/b for 2006/07.   NOTE: Each US$1 rise or fall in the price of oil averaged over the full 2006-2007 fiscal year results in a $123 million difference in budget revenue. 

Natural gas

The royalty rate on natural gas is determined by:

• when the gas pool was discovered (vintage);
• the inflation adjusted price of gas less adjustments for the cost of processing the Crown’s royalty share of the gas; and
• whether the well is a low producing well.

About 90 per cent of Alberta’s current gas production was discovered in 1974 or later. The taking of gas in-kind has also been examined but market conditions are not as conducive to this type of physical disposition.   Crown's share of production:

• approx. 30% for new gas
• approx. 35% for old gas 
• approx. 50% on old pentanes plus and 35% on new pentanes plus.

There are cost allowances that are a deduction from the gross royalties payable on natural gas and by-products to reflect the costs of gathering, compressing, and processing the Crown’s royalty share.   Natural Gas and by-product royalty revenue amounted to:

• 2003/04 $5.450 billion
• 2004/05 $6.439 billion
• 2005/06 $8.388 billion 
• 2006/07 $5.555 (Q3 Update for 2006-07)

Budget 2006 forecast that natural gas prices will average Cdn$7.50/GJ in 2006-2007.  The Third Quarter Update forecasted that the 2006/07 price would average Cdn$5.95/GJ.   NOTE: Each Cdn10-cent rise or fall in the price of natural gas averaged over the full 2006-2007 fiscal year results in a $104 million difference in revenue.

Oil Sands

Alberta’s oil sands royalty was specifically designed to encourage development of the oil sands resource. The 1997 generic oil sands regime takes into account some of the barriers – higher technological risk and higher capital costs – faced by oil sands developers.

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.    Prior to a project’s “payout” (The point at which the developer has recovered all allowed costs plus a return allowance), the applicable royalty is 1% of the project's gross revenue. Following a project's payout, the applicable royalty rate is the greater of 25% of project net revenue, or 1% of gross revenue.   Oil sands royalty revenue amounted to:

• 2003/04 $197 million
• 2004/05 $718 million
• 2005/06 2005/06 $ 950 million
• 2006/07 $2.394 billion (Q3 Update for 2006-07)

Coal

The royalty rate for Crown-owned sub-bituminous (Plains) coal, used mainly for electricity generation, is $0.55/tonne.

The royalty rate for Crown-owned bituminous (Mountain/Foothills) coal, used primarily in steel manufacturing, is:

• Before  mine payout: 1% of mine mouth revenue
• After mine payout: 1% of mine mouth revenue plus 13% of net revenue

Coal royalty revenue amounted to:

• 2003/04 $ 9 million
• 2004/05 $11 million
• 2005/06 $11 million 
• 2006/07 $16 million  (Q3 Update for 2006-07)

Additional Revenue

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.

Bonuses and sales of crown leases

The Department of Energy administers Crown mineral rights on behalf of Albertans in the form of licences or leases acquired through a competitive sealed bid auction held about every two weeks.

• 2003/04 $967 million
• 2004/05 $1.252 billion
• 2005/06 $3.490 billion
• 2006/07 $2.434 billion (Q3 Update for 2006-07)

Rentals and fees

The Crown attaches several expectations to the licences and leases issued including an annual rent of $3.50 per hectare for each hectare covered by the agreement.

• 2003/04 $154 million
• 2004/05 $153 million
• 2005/06 $155 million
• 2006/07 $169 million (Q3 Update for 2006-07)

Freehold mineral tax

The Crown owns 81 per cent of the province's mineral rights. The remaining 19 per cent are 'freehold' mineral rights owned by the federal government on behalf of First Nations or in National Parks, and by individuals and companies.   The Crown levies an annual tax on freehold oil and gas production..

• 2003/04 $288 million
• 2004/05 $306 million
• 2005/06 $334 million
• 2006/07 $315 million  (Q3 Update for 2006-07)