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Land tops production royalties Canadian think tank urges Western Canadian provinces to rely more on land auctions, less on royalty-raising schemes like Alberta’s Gary Park For Petroleum News
Still reeling from the aftershocks of its failed attempt to hike royalty rates in 2007, the Alberta government — along with neighboring British Columbia and Saskatchewan — is again being urged to rethink its methods of taxing oil and gas development.
The C.D. Howe Institute, a respected independent think tank, has recommended changes it believes would result in greater fiscal certainty for industry and higher returns for the provincial governments, which, under Canada’s Constitution, own the natural resources within their borders.
A report by the institute argues the traditional collection of royalties from oil and gas production, rather than maximizing resource revenues, may actually discourage development of unconventional oil and natural gas.
And it cautions against temptations to stage a revenue grab by taking advantage of the rise in oil prices.
Emphasis on auctions Instead, it says the provinces could increase their total resource revenues by increasing their reliance on auctions to explore and drill for resources, resulting in more predictable revenues and reducing the “economic distortion caused by royalties.”
The report noted that in response to Alberta’s 2007 royalty hike, the average auction bids for exploration licenses fell 59 percent in average value and the number of bids declined “because producers stopped making bids on otherwise marginal reserves.”
C.D. Howe said that although it is “not able to point to a specific optimal royalty rate,” its analysis does indicate the “superiority of lower royalty rates and the substantial effect that gross royalty rates have on distorting investment decisions.”
As a result, it calls for the provinces to lower royalties on new, conventional oil and gas and shale gas production, regardless of whether those plays are mature or emerging, such as the shale gas fields in British Columbia and Quebec.
The report said high royalties would restrict development and have a negative impact on revenues where there were few existing producers and would also discourage new development in mature areas if remaining resources were rendered uneconomic.
Impact of global downturn Co-author Bev Dahlby, an economist with the University of Alberta, said that what the Alberta government failed to take into account in launching its first royalty increase in 30 years was the impact of a global financial downturn.
The combined recession and an industry backlash against higher royalties forced the Alberta government to backtrack by reducing rates seven times over two years before effectively returning to square one.
Alberta Energy Minister Ron Liepert, who was not in the post during the royalty overhaul, credited an incentive program introduced in 2009 with restoring “trust” between government and industry and Alberta’s standing as a competitive place for investment.
The C.D. Howe report actually concluded that during the royalty debacle Alberta saw its land sales and other fees in the face of reduced drilling and well counts drop by about the same C$2 billion it anticipated collecting from higher royalties.
Dahlby said auctions of public lands are a better way to gauge the speculative value of natural resources and stimulate higher levels of industry activity.
Increasing reliance on land auctions “could make government revenues more predictable and help policymakers better understand that resource revenues are akin to asset sales,” he said.
Dahlby said the current heavy reliance on royalties impedes resource exploitation and development, while a shift in emphasis to auctions revenues would ease government revenue volatility that results from short-term energy price shocks.
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