HOW ALBERTA COLLECTS
VALUE FROM ITS RESOURCES
Royalties are based on Albertans’ underlying ownership
of the oil, natural gas and oil sands resources that are
being produced and sold. Energy companies play a big
role in exploring for, producing, moving and selling those
resources on our behalf. But at the end of the day, the
resources belong to Albertans. They have value, and as the
owners, we should receive that value.
Royalties are all about getting that value. But how do we
do that? Well, different approaches are used by different
jurisdictions. For example, some countries use state-owned
entities to undertake all of the exploration and production
themselves. These places are typically not open to private
investment, or they have restrictions on private investment.
Still other places use other methods such as production
sharing or service agreements.
Alberta’s approach is to collect the value of its resources
through two major mechanisms: land sales and royalties.
Land sales are auctions held twice per month. Through a
competitive bid process, energy companies are awarded
the rights to explore for and produce oil, natural gas and oil
sands on certain parcels of land and at certain depths (or geological zones). In return for the payment that it offered during the
bid process (called a “bonus bid”), the successful company receives a mineral lease (or other similar agreement) to develop the
applicable resources. The company must take certain steps to develop or prove the resources within a certain period of time,
otherwise it forfeits its mineral lease. (Alberta keeps the bonus bid.)
Once the energy company commences production of the resources, it pays royalties to the government each month. In the case
of conventional oil and natural gas, the amount of royalties depends primarily on how much oil and gas is produced, and on the
price received for those resources. In the case of oil sands, the amount of royalties depends on a formula that involves the price
received for the resources and the allowable costs involved in producing and selling the resources.
Together, these two mechanisms are used by the government to get at the value of Alberta’s resources, and create a balance
between short and long-term revenues.
• Through the use of land sales, Alberta collects a portion of the resources’ value upfront, long before it is produced (and
even if the resource is never produced, or is produced during a time of low prices).
• Through the use of monthly royalties, Alberta collects a regular income stream over the entire life of the well or project.
This enables Alberta to take advantage of favourable price
changes, or larger resource finds being produced, over the
life of the well or project; or to account for low prices or
smaller resources over that same time.
Another way to look at this is to consider a vehicle sale.
Imagine you want to sell your car. The car is an asset that
you own, and you want to get the value of it. You advertise
the sale, and after considering several offers, you select the
buyer who makes you the best offer.
The buyer gives you a down payment for your car right
away. Right off the bat, you’ve collected a portion of the
car’s value.
The buyer also commits to give you monthly payments,
over the next 10 years, according to terms and formulas
that you’ve established. If you’ve done a good job setting
those terms and formulas, then at the end of those 10
years you will have collected the remaining value of your
car that you sold.