Alberta changing royalty system to encourage oilsands production, new investment
The Alberta government is introducing a new royalty payment program it says will encourage new oilsands investment and increase production as the province pushes for a new pipeline to the West Coast.
The Oilsands Growth Program would offer companies a guaranteed 10-year royalty schedule for eligible new projects and expansions, beginning with a two per cent royalty rate for the first five years.
The rate would then increase by one percentage point annually until reaching six per cent. After the 10-year period, projects would return to Alberta’s existing royalty framework.
“It’s likely to grow more investment,” said Richard Masson, a former chief executive of the Alberta Petroleum Marketing Commission who was also director of oilsands policy at Alberta Energy in the mid-1990s.
“What they’ve done is make it less onerous for companies in the early years of a new project. When companies have invested hundreds of millions — or billions — of dollars, they’re really keen to start to get their cash back early.”
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Premier Danielle Smith said the program is intended to encourage new operations, spur growth in the oilsands and eventually increase production to help supply the proposed Pacific Link pipeline.
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“If this allows for more projects, more new investment and incremental projects to happen, then overall the pie gets bigger,” Masson said.
“For Alberta and for the economy in Canada generally, it can be a good thing.”
The existing system has, for decades, resulted in a provincial budget tied to what many have dubbed the “resource revenue rollercoaster.”
Oil companies pay royalties to the owner of the natural resource. In Alberta, the provincial government holds the mineral rights to more than 80 per cent of the oilsands lands.
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Under the existing system, royalty rates vary, depending on the benchmark price of oil and whether a company has recovered the capital invested in a project.
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During the pre-payout phase, companies pay between one and nine per cent of gross revenue depending on the price of West Texas Intermediate. The maximum rate takes effect when WTI reaches US$120 per barrel.
As of Friday afternoon, WTI was trading at about US$88 per barrel.
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The Oilsands Growth Program would instead guarantee eligible companies a two per cent royalty rate for the first five years before gradually increasing the rate to six per cent.
The existing royalty framework would apply once the 10-year period ends.
The program would be available to new projects and expansions, and the government has set a deadline at the end of 2029.
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“Since the program’s deadline is set for the end of 2029, it will incentivize companies to make meaningful multi-billion-dollar investments in the oilsands and begin construction before that date,” Smith said.
So is Alberta setting itself up for another oil boom?
“I absolutely think things are heating up,” Masson said.
Masson said instability in other major oil producing nations — Russia with its invasion of Ukraine and the wars in the Middle East — make those regions an unreliable source of energy, and businesses want predictability.
“Asia is where the growth is and they’re looking for diversification. So that’s a driver for all the investment that’s going to come. Governments have now aligned themselves around that.”
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Masson predicts the royalty changes, combined with the federal government’s productivity mega deduction announced in September, will be a success.
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“All those things are working in concert to say, ‘Canada is going to be one of the best places to invest for oil and gas development,’” Masson said.
Masson said the potential cost to the province is difficult to determine because the program would apply to incremental projects, some of which may not be built without the incentive.
He said oil prices in the coming years would also influence how much energy companies would have paid under the existing royalty system.
“We expect to see over $20 billion of oilsands royalties paid this year — which is just a huge number.
“So this incremental investment approach could be a good thing because it allows those companies to go to their boards of directors and say, ‘It makes sense for me to take some of the cash that I’m generating right now and reinvest it to grow.'”
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The announcement comes days before a deadline involving the proposed West Coast pipeline, with the provincial and federal governments and an oilsands alliance working to reach an agreement on reducing oilsands emissions as production expands.
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“The people are working on it, we will get to a good outcome and I’m confident we will in the next little while,” federal Energy and Natural Resources Minister Tim Hodgson said.
The Alberta government says the Oilsands Growth Program will not change existing regulatory requirements.
New projects would still be required to meet environmental and Indigenous consultation requirements before they could receive approval.
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