Price-Sensitive Oil Royalties and What it Means for Alberta

Date: Tuesday, February 14 2017 Time: 11:30 AM - 1:00 PM Location: Calgary Petroleum Club For more info refer to this link: goo.gl/yoccMZ

In 2012, The School of Public Policy compared the fiscal distortions in oil investment in Canada, United States and several major oil producers around the world as measured by the marginal effective tax and royalty rates (METRR). The study found that Alberta had one of the highest tax burdens on marginal investment in upstream oil of all the jurisdictions considered. Five years later, the economic landscape in the oil market looks significantly different, in particular with the collapse of oil prices starting in 2015. At the same time, several jurisdictions have operated changes in their tax and royalty regimes for oil.

In Alberta, the NDP government raised the corporate income tax from 10 to 12 percent in 2015 while commissioning a review of the royalty regime for oil to ensure that the province was receiving its “fair share.” Following this review, new formulas were proposed for calculating conventional oil royalties, with oilsands largely left untouched. While the changes announced for conventional oil were designed to be revenue neutral, they do have a substantial impact on incentives for new investment. We find that Alberta’s new royalty regime has made the province a much more rewarding place to invest in conventional oil. The changes in the royalty formulas are significant enough that they entirely overcome the additional fiscal burden created by the increase in the provincial corporate income tax.

As a result, today Alberta is significantly more competitive in terms of conventional oil investment than it was in 2012, and is currently bested only by Australia, the United Kingdom, Pennsylvania and, in Canada, Nova Scotia and Newfoundland & Labrador. Most notably, Alberta is more competitive now than its immediate neighbours, British Columbia and Saskatchewan.

However, Alberta and Saskatchewan remain the only jurisdictions in our study to practice price-sensitive oil royalties. If and when the oil prices will increase, the royalty rates in both provinces will automatically adjust upward, increasing the METRR on investment. While Alberta will continue to remain competitive for a range of oil prices, it is important to continuously monitor the evolutions in the oil market and the fiscal changes in competing jurisdictions to ensure that Alberta remains an attractive destination for investment in oil and gas.