In 1947, when the Leduc oil discovery changed
the future economic landscape of Alberta, the royalty rate in Alberta Crown leases
and most individual freehold owner leases was the same — 12�%.
In the mid-1970's, Premier Peter Lougheed’s
government retroactively changed the royalty rates in Alberta
Crown leases. Other western Canadian provincial governments
soon followed Alberta’s lead. These changes did not apply to
the royalty rates in freehold leases within the provinces.
Today, the royalty rate on gas from a pool
discovered prior to 1974 (‘old’ gas) produced through a well
on Alberta Crown lands at an average rate greater than 16.9
x 103 m3 (600,000 ft3) per day is 35%. The Crown royalty rate on
natural gas liquids (propane, butane and pentanes plus) recovered
from this gas currently varies between 30% and 50%. In comparison,
the royalty on gas and natural gas liquids from the same pool
but produced through a well on individually-owned freehold mineral
rights is typically 12�%.
The Alberta government has designed its oil and gas
royalty regime to accomplish a two-fold purpose - to extract
what it perceives to be fair value for the Province, as owner
of the resource, and to encourage the economic spinoffs
associated with an active oil and gas industry within Alberta. The royalty regimes of the other western
Canadian provinces are designed to accomplish similar goals
in the context of those provinces’ particular hydrocarbon resource
bases.
Alberta Crown royalties vary with:
- the year in which the pool that the
oil or gas is produced from was discovered - a higher royalty
is paid by producers on so-called ‘old’ oil or gas;
- the price received for the oil or gas
- the royalty rate increases with price;
- the productivity of the well - below
certain specified levels of production, Alberta Crown royalties
are reduced;
- in the case of oil, the gravity of
the oil - a higher royalty is paid by producers of light oil
which is typically cheaper to produce than heavy oil.
There would have to be a very significant
decline in the price of gas to materially impact current Alberta
Crown gas royalty rates. For example, if the weighted average
price of Alberta gas in December of 2000 had been $1/gigajoule
(GJ) instead of $8.67/GJ, the Crown royalty in the above example
would have declined from 35% to about 31%. Current Alberta Crown
gas royalties are more sensitive to well productivity, but the
productivity of the well in the above example would have to
decline to about 70,000 ft3 (70 Mcf/d)
to reduce the Alberta Crown royalty to the 12�% level received
by most Alberta freeholders on gas discovered prior to 1974.
Gas from pools discovered after 1974 and produced from wells
on Alberta Crown lands (‘new’ gas) is subject to the same type
of price and productivity adjustments, but with a maximum 30%
royalty rate.
According to Alberta Government officials,
the overall effective royalty on all gas produced from Crown
lands (both old and new gas and after taking into account low
productivity adjustments and various incentive programs which
are tied to Crown royalty rates) in 2000 varied between 25%
and 30%, before deductions.
With current oil prices, the principle
variables influencing Alberta Crown oil royalty rates are well
productivity, the ‘vintage’ of the oil produced, and the quality
of the oil. At average monthly production rates of greater than
approximately 120 barrels/day, royalty rates are capped at 35%
for ‘old’ oil (produced from a pool discovered prior to 1974),
30% for ‘new’ oil (produced from a pool discovered between 1974
and 1992) and 25% for ‘third tier’ oil discovered after 1992.
There is no lower limit to the Alberta Crown royalty rate. A
well producing old oil at a rate of 5 barrels/day results in
a Crown royalty of approximately 3%. Heavy oil (oil with a gravity
of greater than 900 kg/m3) is subject to lower royalty rates.
According to Alberta Government officials,
the effective royalty rate on all oil produced from Crown lands
(old, new and third tier heavy and non-heavy oil and after taking
into account low productivity adjustments and various incentive
programs tied to Crown royalty rates) was 14% in 1999. Higher
oil prices in 2000 resulted in an increase in the average Crown
oil royalty rate to 18%.
A 1999 study by the Alberta Department
of Resource Development1
found that Alberta’s Crown oil and gas royalties were, in most
instances, lower than, or comparable with, the royalties charged
by the other western Canadian provinces
High oil and gas prices have resulted in
unprecedented profits for oil and gas companies. Alberta’s non-renewable resource revenue in the
year which ended March 31, 2003 was $7.1 billion of which $5.1
billion was natural gas royalty. Clearly, producing gas from Alberta Crown
lands under the existing Crown royalty regime is highly lucrative
for both the Canadian oil and gas industry and the Alberta Government.
Is the oil and gas industry making
windfall profits on gas produced from freehold lands under royalty
rates which are fixed at levels significantly below those currently
charged by provincial governments? Would a price- and productivity-
sensitive freehold royalty regime be fairer to both the freehold
owner of the resource and the producer? Such a regime would
not only provide the freeholder with a larger royalty share
of production as the profit to the producer increased, but also
would reduce the freeholder’s royalty share as the producer’s
profit declined, thereby allowing wells which would otherwise
be shut-in or abandoned as uneconomic to continue to be produced
for the benefit of both the producer and the owner.
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End Notes:
- Oil and Gas Fiscal Regimes of the Western Canadian Provinces
and Territories, http://www.energy.gov.ab.ca/its/docs/Fisreg.pdf
- Government of Alberta Third Quarter Fiscal Update, February
5, 2001 http://www.treas.gov.ab.ca/publications/budget/index.html#2000?2001%20Budget%20documents
- Government of Alberta Annual Report, June 29, 2000
