Highlights of Alberta’s New Royalty Framework

Alberta’s New Royalty Framework is the culmination of detailed study and analysis, extensive consultation, thoughtful deliberation, and a commitment to ensure Albertans receive their fair share from energy development. It represents fundamental change to current royalty structures, and based on current estimates, is expected to increase royalty revenues by approximately 20 per cent in 2010.

Conventional Oil

• The government will simplify royalties for conventional oil, eliminating specialty royalty programs and tiers. Royalties will be set by a sliding rate formula containing separate elements that account for oil price and well production. Royalty rates will range up to 50 per cent, with rate caps at $120 per barrel.

• Gas royalties will be set by a sliding rate formula sensitive to price and production volume. New royalty rates will range from five per cent to 50 per cent with rate caps at $17.50 Cdn /MMBtu (Million British Thermal Units).
• The government will eliminate all tiers, but will retain natural gas programs for the Otherwise Flared Solution Gas Royalty Waiver Program, which improves air quality through solution gas conservation. New incentives consistent with the current Deep Gas Drilling Program will be implemented to support development of costly deep reserves.
• Royalties for natural gas liquids will be set at 40 per cent for pentanes and 30 per cent for butanes and propane.
• The government will continue to use deemed fees for gathering and compression in Alberta. It will move to a facility-level calculation for capital costs and continue to recognize actual costs for gas plant processing, where the cost differences are more significant.

• The government will increase its royalty share from oil sands development by introducing price-sensitive formulas both pre- and post-payout, rather than implementing an industry-wide tax on oil sands production.
• The base royalty will start at one per cent, and increase for every dollar the world oil price, as reflected by West Texas Intermediate (WTI), is priced above $55 per barrel, to a maximum of nine per cent when oil is priced at $120 or higher. The net royalty will start at 25 per cent and increase for every dollar oil is priced above $55 per barrel to 40 per cent when oil is priced at $120 or higher.
• Government will work with Syncrude and Suncor over the next 90 days to reach an agreement on a transition plan to the new royalty framework. In the event an agreement cannot be reached, the government will take other measures to ensure a level playing field for all industry stakeholders.
• The government will adopt a permanent generic “bitumen valuation methodology” by June 30, 2008, after consulting with stakeholders and independent advisors.
• The government will comprehensively and extensively review and tighten, if required, current rules and enforcement procedures to ensure that absolutely clear, transparent, auditable and appropriate definitions exist for oil sands projects and eligible expenditures.
• Companies with primary wells in areas designated as oil sands will continue to have the option of electing oil sands royalty status.
• The province will eliminate the provincial portion of the Accelerated Capital Cost Allowance consistent with the decision outlined by the federal government for oil sands projects.

• By exercising its right to collect royalty-in-kind where feasible, the province will be able to receive raw bitumen in lieu of royalties, which can be sold to upgrading facilities in Alberta.
• The government will consider other ways to attract investment in the construction of additional upgraders and refineries in Alberta. This will include further study of an upgrader credit.
• The government will consult with industry on its options, determine the most effective approach, and announce its decision in 2008.

• The government will assess and recommend improvements in the systems, structures and resources that support the collection, verification and reporting of energy revenues.
• Former Auditor General Peter Valentine will lead this project, which will begin in November 2007 and will be completed by March 31, 2008.

• The current Freehold Mineral Rights Tax structure will not be changed, but will be reviewed to ensure it is fulfilling its intended objectives.

• With the exception of the accountability initiative, all changes will take effect on January 1, 2009.

Media enquiries may be directed to:

Jason Chance Director, Communications Alberta Energy 780-422-3667 cell 780-905-0294

To call toll free within Alberta dial 310-0000.

History of Alberta’s royalty regime

Alberta has made significant changes to royalty rates on four occasions over the past 60 years:

• 1941 - Alberta shifted royalty rates on oil from a flat rate of 10 per cent to a choice of a 12.5 per cent flat rate or a five to 15 per cent royalty based on production levels.
• 1972 - Royalty rates were raised at a time when the world price of oil averaged $3 per barrel.
• 1974 - Royalties were raised again in response to higher world oil prices, which averaged $12 per barrel.
• 1997 - the Oil Sands Generic Royalty Regime set rates and established the federal accelerated capital cost allowance for oil sands projects to encourage development. The world price of oil averaged $22 per barrel, dropping to $10 per barrel in 1999.
• 2006 - announced changes to four royalty programs and the elimination of the Alberta Royalty Tax Credit. Once fully implemented, changes will increase revenues by nearly $300 million a year.

• Significant changes to the royalty regime require new legislation, changes to existing legislation and regulations and the Department of Energy’s proprietary software used for calculation and collection of royalties. The estimated date for implementation is January 1, 2009.

• The proposed changes will require new legislation and amendments to 11 existing Acts and Regulations:

• Mines and Minerals Act
• Mines and Minerals Administration Regulation
• Petroleum Royalty Regulation
• Oil Sands Royalty Regulation, 1997
• Oil Sands Tenure Regulation
• Natural Gas Royalty Regulation
• Freehold Mineral Tax Regulation
• Four regulations regarding royalty reduction for low productivity or high cost wells.

• Alberta Energy currently utilizes five software systems to calculate and collect royalties from industry. Implementing the changes outlined in Alberta’s new royalty framework will require new programs as well as substantial re-writes to existing software programs.

Media enquiries may be directed to:

Jason Chance Director, Communications Alberta Energy 780-422-3667 cell 780-905-0294

To call toll free within Alberta dial 310-0000.

Public Input - Royalty Review 2007

Before, during and after the Royalty Review Panel began public hearings in late April 2007, Albertans have expressed their views on Alberta’s royalty regime.

Presentations to the Royalty Review Panel (http://www.albertaroyaltyreview.ca/index.html)

• The panel conducted public hearings in Grande Prairie, Edmonton, Calgary, Fort McMurray and Medicine Hat.
• The panel heard more than 100 submissions from individuals and organizations, and received 224 submissions in total, including those delivered by fax, mail, online and in person.
• The Royalty Review Panel website was visited 56,000 times.
• Of the 15 per cent of visitors to the panel’s website who answered the question, “Are Albertans getting a fair share?”, 66 per cent responded no, while 33 per cent said yes.
• Almost 56 per cent of visitors to the website expressed a direct opinion as to whether royalties should be increased, decreased or left the same: 37 per cent supported an increase; only one per cent favoured a decrease; while 18 per cent felt that the royalty rate should not be changed.