Alberta royalty regime design should be overhauled, says C.D. Howe Institute

The C.D. Howe Institute has some advice for Alberta's royalty review panel: focus on the design of the system rather than the rates oil and gas producers have to pay.

Focus on design of system rather than rates oil producers have to pay, think tank says

As the Alberta government tackles the thorny subject of oil and gas royalties, a C.D. Howe report suggests basing royalties on a cash-flow tax rather than gross revenue would be a better way to increase the government's take without discouraging investment. (Larry MacDougal/Canadian Press)

The C.D. Howe Institute has some advice for Alberta's royalty review panel: focus on the design of the system rather than the rates oil and gas producers have to pay.

A new report from the think-tank argues Alberta's current regime for conventional oil and natural gas royalties in Alberta leaves a lot to be desired.

Right now, those royalties are calculated based on gross revenues, but the report says a cash-flow tax would be a better way to increase the government's take without discouraging investment.

It says a cash-flow tax would better account for the cost of doing business than a gross revenue royalty and would require more profitable companies to pay a higher share.

The report cites Norway and Australia as having regimes that work well.

Report co-author Benjamin Dachis says the paper has been submitted to the royalty review panel chaired by ATB Financial boss Dave Mowat.

"Many in Alberta's oil and natural gas sector have looked to the royalty review panel with a lot of trepidation. But this fear is going to be misplaced if the royalty review panel, instead of raising rates, recommends that the province have a best-in-class resource tax," Dachis said in an interview.

"Rather than just looking at the rate, it's time to look at the design."

Royalty changes not to take effect until 2017

The royalty review has been the source of much consternation in Alberta, especially with the price of U.S. benchmark crude hovering around US$46 a barrel — half of what it was a year ago and below what many producers need to turn a profit.

Energy Minister Marg McCuaig-Boyd has promised that if there are any changes as a result of the review, they would not take effect until 2017.

The left-leaning NDP government has already raised corporate taxes to 12 per cent from 10 per cent and doubled the carbon levy for large industrial emitters that exceed targets in 2017.

The Canadian Association of Petroleum Producers has said that between those two changes, the industry is facing up to $800 million in additional costs over the next two years.

So far, the royalty panel has held public engagement sessions in the energy-centric cities of Grande Prairie and Fort McMurray, with stops in Calgary and Edmonton next.

Dachis said Alberta's current regime for oilsands producers is "pretty good" right now, as it has a cash flow-based element to it. But he said more can be done to protect companies that are taking on the risk of new exploration projects that may not end up being profitable.

The gross revenue-based regime for conventional oil and gas belongs to a "different era" when the government had to collect royalties from myriad individual wells throughout the province and administering a cash flow based system would have been too complicated.

But these days, with the advent of fracking, a single site can have numerous wells stretching out of one pad.

So, when it comes to overhauling the design of the system, Dachis said "it's becoming a lot more feasible, both administratively and technologically."

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