New tidewater connections for oil exports would increase royalties for Alberta

The importance of crude oil prices in the determination of Alberta royalty revenues from conventional crude oil and bitumen production was brought home by the large downward adjustment in estimated royalty revenues in the province’s October 2015 fiscal year 2015/16 budget.

Royalty revenues from bitumen production were projected to reach only $1.5 billion in 2015-16 compared with $5.0 billion during the preceding year despite an estimated six per cent increase in production. The plunge resulted from reductions in the oil price assumptions used to estimate oil royalty obligations. In the same budget royalties from conventional oil production were estimated at $0.5 billion compared with $2.2 billion in 2014-15. Most of that drop can also be attributed to lower oil prices.

The royalty rate on conventional production is determined by the producer’s monthly production and by the price of oil in the month. The rate varies with the price up to a ceiling of 40 per cent. For example, at an average monthly production rate of 50 barrels (bbl) per day, and an oil price of C$40/bbl, the applicable royalty rate is about 16 per cent. At the same production rate, if the price were to increase C$50/bbl the royalty rate would jump to 22 per cent. In January 2017 Alberta will be revising the royalty scheme applicable to new wells but royalty rates at given levels of production will still fluctuate up to 40 per cent with crude oil prices.   

Royalties on oilsands bitumen production are applied to gross or net revenue (rather than production), respectively, depending on whether a project’s capital costs have been recovered and, if they have, which rate yields the most revenue for the province. In pre-payout cases the royalty rate varies from one per cent of gross revenue to nine per cent. In post-payout situations the rate is either calculated in the same manner or ranges from 25 per cent to 40 per cent of net revenue, whichever approach is most favourable to the government. Regardless, the rate schedule applicable depends on the price of West Texas Intermediate (WTI) crude in terms of Canadian dollars.

Other things equal, as bitumen sales grow and/or the price of WTI moves up sufficiently to move the rate higher in accordance with the applicable schedule, bitumen royalty revenues will increase. By way of example, if 500,000 barrels of bitumen were exported per day as a consequence of new tidewater connections; exports to the U.S. were unchanged; net revenue from the additional oilsands operations at a WTI Canadian dollar price of $60/bbl averaged 20 per cent of gross revenue; and the “after payout” royalty rate of 26.15 per cent applied, the annual royalty revenue would increase by an estimated $570 million. If the WTI price were to rise as a consequence (e.g. less supply available in the market region where that price is determined), bitumen royalties could receive an additional boost.

For more, see our new study detailing Western Canadian oil producers are being constrained by the inability to access new markets via ocean ports.