CAPP urges the royalty review panel and the government to re-establish Alberta as a place that attracts capital investment
| Date Published | November 26, 2015 |
| Company | Canadian Association of Petroleum Producers (CAPP) |
| Article Author | Tim McMillan |
| Article Type | November 2015 Issue |
| Category | Articles, Oil & Gas |
| Tags | E&P, Oil & Gas Future, Oil & Gas Industry, Royalty Review |
| HUB SEARCH | Leadstone |
CAPP urges the royalty review panel and the government to re-establish Alberta as a place that attracts capital investment
Alberta is losing its competitive edge. The United States, Alberta’s number one customer for oil and gas exports, is quickly becoming its top competitor. The industry is challenged not only by price, but transportation to existing and new markets, and by rising costs.
The collective opportunity, therefore, is to diversify the customer base and extract more value for Alberta’s oil and gas resources.
Overall, CAPP urges the royalty review panel and the government to re-establish Alberta as a place that attracts capital investment, to pursue market access, to recognize that cumulative costs work against competitiveness, and to support innovative technology for its ultimate and ongoing value to Albertans.
The oil and natural gas industry is Alberta’s number one economic driver and job creator. Industry employs approximately one in three Albertans, generates 42% of Alberta’s GDP, and is responsible for 36% of provincial revenues, including royalties, corporate and personal taxes and fees. This includes the substantial benefits created in related sectors such as hospitality, transportation, food services, consultation, construction and real estate. Finding the right balance on royalties means the province can continue to develop its resources to improve the quality of life in Alberta.
To this end, CAPP has identified 60 recommendations for the Panel to consider.
Oil and natural gas royalties are part of a larger fiscal system that drives investment, creates jobs, generates government revenue and builds Alberta communities. The royalty review is an opportunity to re-establish Alberta’s overall competitiveness and to pursue access to new markets.
The royalty structure must take into account the entire lifecycle of oil, natural gas and oil sands extraction projects – including investment and cost-recovery, profit sharing, extended recovery of resources, shut-down, closure and reclamation – in addition to all costs, taxes and fees paid by Alberta producers.
Alberta’s current royalty structure, put in place five years ago, has helped achieve these goals in a manner that is responsive to the evolving nature of the industry. That said, some changes are recommended to make the system more transparent, stable, effective and competitive.
CAPP’s recommendations are aligned with the royalty review principles that were set by the Alberta government:
1
Continue to
encourage industry investment
2
Provide optimal returns to
Albertans as owners of the resource
3
Support responsible
development of the resource
4
Assessment of near-term
diversification opportunities
CAPP is supportive of the government’s principles. In addition, we recommend any changes to the royalty system embrace these priorities:
BENEFITES TO ALBERTANS
The Oil and
Natural Gas Industry
is a significant contributor
to the Alberta economy.
$10.7 BILLON
in Royalties, Land Sales, Corporate and Municipal Tax and Carbon Levy
20,000
Alberta Companies have Direct Business with the Oil and Natural Gas Industry
375,000
Direct and Indirect Oil and Natural Gas Jobs Across Alberta
SOURCE: Government of Alberta and CAPP
• Alberta must be competitive. Alberta must be competitive with other jurisdictions to encourage investment to be made here. Investment in Alberta means prosperity for Albertans through job creation and maintenance of government revenues. In addition to government take, consideration needs to be given to capital recovery timelines, internal rates of return, stability and revenue risk.
• Predictability is needed for investment. Predictability around Alberta’s royalty system is critical for investment in our province to proceed. Predictability restores investor confidence, attracting and maintaining capital.
• Cumulative costs impact competitiveness. Alberta’s competitiveness, along with the associated jobs and investment, is affected by the cumulative costs borne by industry. Royalties are just one part of the bigger fiscal system that drives our province’s success going forward.
The current economic and policy climate has made it challenging for industry to have the confidence to invest in the provincial economy. To date, capital investment in the sector is down $29 billion or 40 per cent from 2014, a decline greater than all the capital invested in Canada’s utility sector. Upstream oil and gas investment will likely not recover until these issues are resolved. While global commodity prices are well beyond the government’s control, the royalty and climate panels are two initiatives that need to be resolved sooner rather than later.
Certainty around Alberta’s royalty system is critical for investment in our province to proceed, and is needed as soon as possible. With the myriad of changes to the Alberta royalty system since 2007, Alberta’s status as a stable investment jurisdiction is at risk.
Capital investment is highly mobile and flows to markets where investment returns are favorable and predictable. For this reason, it is critical the Alberta government work to provide certainty in both policy and regulation to attract investment and enable the province to compete on the world stage.
Alberta’s competitiveness, along with the associated jobs and investment, is affected by the cumulative costs borne by industry. It is critical the province undertake budget, climate and royalty policy reforms that not just maintain, but enhance competitiveness and grow the economy.
In Alberta’s two most recent fiscal years, industry payments included royalties of more than $8 billion per year and corporate income tax of about $1 billion per year. In addition, municipal property taxes paid by the industry were $1.1 billion in 2014. These taxes increase by about $60 million (seven per cent) annually and are the industry’s second-largest payment.
The 20% increase in corporate income tax rates introduced by the Alberta government in June 2015 is estimated to increase the industry’s corporate income tax payable by $185 million annually, and has resulted in balance sheet impairments totaling $2.6 billion for CAPP member companies.
Changes to the Alberta carbon levy will result in an incremental $600 million burden over two years. Forthcoming financial changes expected from the climate and royalty review panels have the potential to create additional financial burden on the industry.
CAPP’s submission makes recommendations on how to not only preserve, but also enhance economic competitiveness, and attract capital that creates jobs for Albertans and fuels the provincial economy.
MORE THAN ROYALTIES: THE COST OF DOING BUSINESS IN ALBERTA
$500 Million Additional Costs
(Recent Increases in Provincial corporate Income Tax, Carbon Policy, and Municipal Taxes)
Mineral Rights and Feeds
$649 Million
Municipal Property Tax
$1,1 Billion
Carbon Policy
$83 Million
Provincial Corp. Income Tax
$924 Million
Royalties
$8.3 Billion
Royalties are just one part of a larger fiscal system. The royalty regime should consider all costs facing industry and balance those with the need to keep the oil and natural gas industry generating jobs and government revenues for Albertans.
SOURCE: Government of Alberta and CAPP
• Market access is key. Tidewater access for Alberta production is the single greatest factor that will have the biggest impact in optimizing returns. By allowing producers to receive global prices for their products, market access will directly increase royalties paid to the government and encourage investment, job creation and prosperity across the province.
• Consider comprehensive economic benefits. Optimizing returns means ensuring Albertans benefit from the development of the resource in all ways (e.g. royalties, provincial and municipal taxes, direct and indirect employment, across all areas of the province) and throughout the lifecycle of oil and gas development (e.g. exploration, production and mature phases).
• Expand the resource. Optimizing returns means encouraging investment to develop additional resources (i.e. growing the pie) as opposed to taking a larger share of the existing resource.
The only way Alberta can get full value for its abundant oil and natural gas resources is to ensure the province is globally competitive and connected to more customers in new markets.
Capturing the value of oil and gas first requires the resources be developed. That means royalty and other programs need to keep Alberta competitive with competing jurisdictions to attract capital investment. Once developed, the best way to capture value is to sell the products, at the best price, to the most customers.
Alberta faces significantly increased competition for investment dollars, primarily a result of growing hydrocarbon production in North America. In 2014, Alberta’s share of upstream oil and gas industry capital investment was 17 per cent, down from 35 per cent in 1994.
Given the presence of large deposits of unconventional resources coupled with the technological expertise to develop them, the future focus of petroleum industry activity in Alberta is anticipated to occur in three main areas: tight oil, deep/shale gas and oil sands.
Producers looking to develop tight oil prospects will find opportunities with similar geological potential in Saskatchewan, North Dakota, Montana and Texas.
In the case of deep/shale gas prospects, producers interested in developing these opportunities can look to British Columbia and prolific shale gas plays located in the United States such as the Marcellus and Utica shale deposits in Pennsylvania and Ohio.
Relative to resource opportunities such as Alberta’s oil sands deposits, investors will have the option of investing in large scale offshore opportunities such as the North Sea and Mexico, and perhaps most similar in terms of resource characteristics to the oil sands, the ultra-heavy crude oil deposits found in the Orinoco Belt in Venezuela.
CAPP’s submission makes recommendations on how to ensure Alberta can compete with other jurisdictions, create jobs and strengthen the provincial economy.
• Manage growth thoughtfully. The pace of investment is influenced by a number of factors. Royalty and tax programs are best suited for ensuring a competitive and equitable distribution of costs and benefits, while the sequencing of development is best managed through the current robust land management system, informed by well-developed land use planning thresholds, as opposed to the tax and royalty system.
• The market distributes wealth. Oil and gas investment has led to higher real wages within the sector and across the entire economy, relative to other provinces. All Albertans in all regions and sectors benefit from continued oil and gas development.
• Climate policy matters. The upstream oil and gas sector recognizes the importance of mitigating climate impacts, and will continue to work with the province to achieve meaningful results, informed by its recommendations and commitments made to the Alberta Climate Change Advisory Panel.
Responsible development is a core tenant of industry practice. CAPP members recognize the importance of responsible stewardship in the development of Alberta’s natural resources. Responsible development requires consideration for the environmental and social impacts of development, in addition to equity in the distribution of the economic benefits of resource development across the province.
COMPETING WITH
OUR BIGGEST CUSTOMER
+0.8
–1.5
OIL: MILLION BARRELS/DAY
NATURAL GAS: MILLION CUBIC FEET/DAY
PRODUCTION GROWTH OVER
THE LAST FIVE YEARS
+3.2
+14
• By encouraging innovation, Alberta will be a leader. Innovation and technological advancement is key to maintaining and expanding energy supplies in a responsible manner, while addressing societal and environmental needs. Innovation unlocks energy resources, identifies energy development efficiency opportunities, improves environmental performance, and helps to address the cost structure challenge. The key is to remove barriers to R&D investment in the industry through programmatic and cost allowance changes.
• Partnerships add value. Industry has a long history of collaboration with government and within the sector to advance innovation and technology commercialization. Examples include the Alberta Oil Sands Technology and Research Authority, the Canada’s Oil Sands Innovation Alliance, and the Alberta Innovates Energy and Environment Solutions. Enhancing the collaborative partnership approach between industry and government going forward will add value.
• Diversify within your strengths, where economics and opportunities permit. The evolution of the oil and gas industry is one of diversification. While market fundamentals currently do not support refining and upgrading economics, opportunities exist to add value and achieve climate policy objectives through cogeneration and natural gas electricity fuel switching. There may also be an opportunity to extract some low value bitumen components as feedstock for conversion to potentially higher margin economic products as a means to diversify Alberta’s economy.
Horizontal drilling, hydraulic fracturing and pad drilling technologies are examples of innovations that have been adopted widely by the unconventional oil and gas industry and are credited with vastly expanding the reserve potential of the Alberta oil and gas basin.
Industry has invested in a number of areas to add value to Alberta’s oil sands and to increase the diversity of the economy. The industry supports value-added investments when the actual value created is greater than the cost required to create them.
Oil sands innovations such as bitumen upgrading have enabled the substantial growth in Alberta’s oil sands. Continued innovation through research focused on improved resource recovery, lower costs and reduced environmental impacts will be required to ensure the competitiveness of this resource.
Industry-government partnerships are key to unlocking the innovative potential of new technologies in the upstream oil and gas sector, and this activity needs to continue because it shows Alberta leadership in responsible resource development. An oil and gas focused R&D authority is recommended to enhance innovation and commercialization of conventional extraction technologies and environmental performance.
CAPP’s submission makes recommendations for responsible resource development, research and development investment and diversification opportunities.
Oil and natural gas royalties are part of a larger fiscal system that drives investment, jobs, economic success, societal well-being, prosperity and quality of life.
Investment in Alberta means prosperity for Albertans through job creation and maintenance of government revenues. Certainty around Alberta’s royalty system is critical for investment in our province to proceed, and is needed as soon as possible.
Alberta’s competitiveness, along with the associated jobs and investment, is affected by the cumulative costs borne by industry. It is critical the province undertake budget, climate and royalty policy reforms that not just maintain, but enhance competitiveness and grow the economy.
Innovation and technological advancement is key to maintaining and expanding energy supplies in a responsible manner, while addressing societal and environmental needs. Innovation unlocks energy resources, identifies energy development efficiency opportunities, improves environmental performance and supports diversification.
The key to maximizing and diversifying the value of oil and gas for Albertans is to ensure the province is globally competitive and connected to more customers in new markets.
PART 1: Royalty Review Panel
Tim McMillan
President & CEO
CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS
Originally published in the