Changes to royalty rates for oil sands a success

Sep 15, 2011, 14:08 ET from University of Calgary - School of Public Policy

Analysis reveals $1B boost in government revenue, minor impacts on sector investment

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CALGARY, Sept. 15, 2011 /PRNewswire/ - In a study released today by The School of Public Policy, Professor Ken McKenzie examines how Alberta's oil sands have been affected by the controversial New Royalty Framework.

Using economic data, McKenzie finds "incremental revenue for the government of Alberta over the last two years in excess of $1 billion."

"This has been done without generating the political outcry that accompanied much of the changes to conventional oil and gas as a part of the royalty review process," McKenzie writes. The reason that oil sands producers have not met the new royalty rates with much opposition lies in the structure of the royalty system for that particular sector.

The oil sands royalty "allows for the deduction of operating and capital costs, thus the government shares equally in both the revenues and costs of oil sands projects," he writes. This creates a system where the net impact on producers is only a fraction of the increase in royalty rates.

As such, McKenzie argues investment in the oil sands is expected to shrink only slightly, while the increase in government revenue is significant.

So where does that leave conventional oil and gas producers who vehemently opposed the royalty changes in 2009?

The oil sands example proves "we can pluck the goose that lays the golden eggs without killing it," McKenzie writes. "The structure of the system —the base upon which the tax or royalty is applied - is at least as important as the rates. This lesson may well be applied to royalties in the conventional oil and gas sector."

The study can be found by going to policyschool.ca/publications.

SOURCE University of Calgary - School of Public Policy

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