Alberta’s New Royalty Regime is a Step Towards Competitiveness: A 2016 Update

Abstract

Alberta’s new royalty regime has made the province a more rewarding place for anyone looking to invest in conventional non-renewable resources. After Alberta’s NDP government commissioned a review of the royalty regime to ensure the province was receiving its “fair share,” it ended up determining that revenue-neutral changes were warranted to the royalty system for conventional oil, with oilsands largely left untouched. However, the few changes that were made have had a substantial impact on incentives for new investment. Those changes have, in fact, only made it more lucrative for investors in Alberta’s conventional oil and gas. This paper focuses on oil and the fiscal regime (it does not consider other regulatory and carbon policies that affect competitiveness). The changes for conventional oil are significant enough that the new regime entirely overcomes the competitive disadvantages for non-oil sands producers created by the NDP government’s increase in provincial corporate income taxes last year. Under the current regime, Alberta conventional oil bears a marginal effective tax and royalty rate (METRR) of 35.0 per cent (the METRR is relevant for new investment decisions). The changes have sharply reduced that to 26.7 per cent. This year, when compared against its peers in the U.S., Europe and Australia, Alberta has one of the highest METRRs for conventional oil. When the new royalty regime takes fully effect in 2017, it will have one of the lowest, 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, for conventional oil investment. It is also less distorting across different types of wells, which is an important quality in a well-designed royalty system. Alberta continues to implement a system of price-sensitive royalty rates with the government’s take increasing with the oil price. Our results are derived using a certain projected oil price and a certain projected exchange rate — in this case US$50 per barrel of West Texas Intermediate and 77 U.S. cents per dollar — with changes to either potentially altering the rankings and making Alberta more or less competitive, depending on what happens with those two variables. Under the new regime, Alberta’s tax burden on conventional oil projects is reduced for a wide range of oil prices. Whether the Province will attract investment for conventional oil once the market conditions improve will depend as well on other policies being adopted but at least the new royalty regime will help boost interest in the Province.