Comparing royalty rates in Alberta, Saskatchewan, Texas and North Dakota
With royalties up for debate in Alberta, we examine the rates on a well in 4 places
The jokes started on Twitter the night Alberta elected an NDP government.
Saskatchewan is asking for tents, blankets, water purifiers for corporate refugees from Alberta. Also spare batteries for Blackberrys.
—@DWHauthorSoon after, two energy companies suggested they would consider moving more of their investment dollars to Saskatchewan, in reaction to the promised review of Alberta's royalty structure.
Changing royalties and taxes isn't going to change where the oil is."- Jim Roy, Delta Royalties
It's one of those oilpatch truisms that the capital investment will flow to where it will make the most money.
So with that in mind, we are taking the average Alberta oil well and calculating the approximate royalties and taxes paid in four jurisdictions: Alberta, Saskatchewan, North Dakota and Texas.
Disclaimer: comparing apples to oranges
Each analyst I spoke to said that this is a tricky exercise. First of all, royalty regimes in Canada are complex.
"The government has to take into account an amazing variety of factors to create a royalty system," said Gary Leach, president of the Explorers and Producers Association of Canada, an industry group for smaller energy companies.
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Leach says that Alberta's system is complex because the province produces conventional oil, natural gas, oilsands bitumen, along with other products.
He also points out that costs vary wildly depending on the location, but are high in Alberta, certainly relative to the United States.
Then there's the weather. How do you compare royalties in Texas, where you can drill 12 months of the year, to Alberta where the weather is harsher and the drilling season short?
As well, both Texas and North Dakota have corporate income tax rates of less than five per cent.
With all that in mind, here are some numbers to work on.
Alberta oil well
Our sample well produces conventional crude, since oilsands royalties aren't directly comparable to other jurisdictions.
Right now, many Alberta oil wells aren't paying any royalties at all, simply because prices are too low. In April, approximately 30 per cent of Alberta's oil wells paid no royalties at all. The province's royalty regime is structured that way to give a break to producers during a crash in oil prices.,
For our example, we will use a well producing 33 barrels per day. Around 50 per cent of Alberta's annual conventional oil production comes from wells producing at least that amount. We assume that it is an established well and not subject to incentives for horizontal drilling.
Using April's prices, that oil well will pay a royalty of seven per cent in April. That seems low, but last April, when prices were much higher, that same well, would have paid a royalty of 32 per cent.
Saskatchewan oil well
In you transport our oil well to southwest Saskatchewan, where companies like Crescent Point Energy operate, it will pay a higher royalty rate of 16 per cent. There are then rebates, taxes and more rebates that result in an end royalty rate of just under 15 per cent.
What's interesting is that, at last April's prices, the royalty rate of the Saskatchewan well will only increase to 18 per cent, much lower than the Alberta rate at the same time.
North Dakota oil well
As we cross the border to the United States, the calculations get more complex because most mineral rights are privately owned.
According to Jim Roy, a royalty consultant and former analyst with the Alberta government, the going private royalty rate in North Dakota is 12.5 per cent, but it can be higher in areas that produce more.
Since North Dakota naturally wants a cut from energy production, it also collects two state severance taxes that total 11.5 per cent.
That adds up to a royalty rate of 24 per cent, no matter what the price.
Texas oil well
Most mineral rights in Texas are also privately owned and Texas collects its own set of taxes above the royalty (assuming 12.5 per cent) paid to the private landowner.
According to Roy, Texas collects taxes that total 12.85 per cent on oil and gas production, again bringing to total royalty equivalent to 25.3 per cent, no matter what the price or the production level.
What does this all mean?
The examples above show how difficult is it to directly compare jurisdictions. Alberta is collecting very little in the way of royalties now, something that has blown a hole in the provincial budget. But when times are good, Alberta collects much more.
It's more instructive to look at the total amount of royalties collected. Roy says that over the past 10 years, the overall take in Alberta has dropped from an average of 20 per cent of total production to closer to 10 per cent. Saskatchewan and B.C. have followed suit in what he calls a race to the bottom. The intent of that race is to attract investment dollars to your province.
It raises the question of whether Alberta can now put a stop to that race. Saskatchewan's Premier Brad Wall said after the Alberta election that the NDP's promise to raise corporate income taxes in Alberta takes the pressure off Saskatchewan to lower those taxes further. Could the same happen with royalties?
"Industry goes to where the oil is," said Roy. "Changing royalties and taxes isn't going to change where the oil is. Industry always looks first at how much oil are we going to get here, only after that do they work out these other issues."
Gary Leach of the Explorer and Producers Association says in the meantime, while Alberta waits for the royalty review, investment will be on pause.
"I would say there's a wait and see attitude and when you're waiting, you're not investing, you're not drilling."