Newfoundland sets poor example in oil royalties for others: economist

Moira Baird
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Oil and Gas

A University of Calgary economist says Alberta has the least competitive oil and gas royalty system on the continent - but he wouldn't recommend following Newfoundland and Labrador's royalty model.

In a study released Wednesday, co-author Jack Mintz said offshore royalties in both Newfoundland and Nova Scotia are complicated, poorly designed and distort investments in oil and gas projects.

Hibernia workers make adjustments to equipment in this file photo. The province's oil royalty regime has come under fire in a report called Taxing Canada's Cash Cow: Tax and Royalty Burdens on Oil and Gas Investments. - Telegram file photo

A University of Calgary economist says Alberta has the least competitive oil and gas royalty system on the continent - but he wouldn't recommend following Newfoundland and Labrador's royalty model.

In a study released Wednesday, co-author Jack Mintz said offshore royalties in both Newfoundland and Nova Scotia are complicated, poorly designed and distort investments in oil and gas projects.

"This is not a system to copy," said Mintz, a fiscal and tax policy specialist who advises provincial and federal governments.

"In fact, I would not recommend it to any government I work with around the world."

Entitled Taxing Canada's Cash Cow: Tax and Royalty Burdens on Oil and Gas Investments, the report recommends a single rate similar to Alberta's pre-2009 oil sands royalty system.

Mintz is no fan of Newfoundland's multi-tiered royalty systems that began with the Hibernia oilfield.

"It's not very well structured. In fact, some of the costs in the pre-production stages are not deductible - particularly unsuccessful exploration costs," he said.

"It's much better to have a simpler, cleaner system.

"Make it simpler, get rid of all these tiers, allow full cost deduction and have just a single rate that's applied to collect the rents."

Mintz said such single royalty rate systems are used in the mining industries in British Columbia and Australia.

"You just apply a royalty rate or a tax rate on cash flows basically, allowing a full deduction on costs and just keeping it simple."

Newfoundland has a different royalty regime for each of its three producing oilfields.

Hibernia, Terra Nova and White Rose have all reached payout - the point at which oil companies recover the cost of developing the oilfield, plus interest. The current royalty rate for the three oilfields is 30 per cent.

Under recent equity deals, Newfoundland has also added "super" royalty rates for the Hebron, Hibernia South and the White Rose expansion oilfields. They allow higher rates to kick in as world crude prices rise.

'Wrong direction'

"I think this is all going in the wrong direction," Mintz said.

His report examines the impact of corporate income taxes, sales taxes, other taxes and royalty regimes on oil and gas investments.

Its conclusion: Texas has a competitive royalty structure, while Alberta's oil and gas industry faces a higher tax and royalty burden than any other sector in that province.

Not far behind are royalty systems in Saskatchewan and British Columbia.

Newfoundland and Nova Scotia impose "very low" tax and royalty burdens - but not for good reasons, according to the report.

It said both provinces have complex, unique royalty regimes that encourage companies to front-load the costs of developing projects. They also qualify for a 10 per cent federal Atlantic investment tax credit.

"Similar to the Alberta oil sands royalty, current and capital expenditures are deducted from the rent base to determine the royalty payment," said the report. "However, the royalty rate varies by 'tiers' whereby cost deductions are carried forward at large allowance rates to determine the new level of rents subject to a higher royalty rate."

The report also said the Atlantic tax credit is no longer necessary.

"If it should be retained, however, the rate should be cut significantly and broadened to include all industries," the report said.

Currently, the tax credit applies to manufacturing and resource industries, such as agriculture, fishing and forestry. It does not apply to the construction, communications or transportation sectors.

The report is available online at: http://www.policyschool.ucalgary.ca/files/publicpolicy/mintz3.pdf.

mbaird@thetelegram.com

Organizations: University of Calgary

Geographic location: Newfoundland and Labrador, Alberta, Nova Scotia British Columbia White Rose Australia Terra Nova Hebron Hibernia South Texas Saskatchewan

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Recent comments

  • Robert
    July 02, 2010 - 13:30

    Bert, either you are talking through your hat or you deliberatly telling lies.
    There never was a royalty ''system'' in place remotely close to the one that you suggest, and oil exploration is way down over past years - not up. You need to do some research, or put down the pom-poms, they're blocking your vision.

  • Bert
    July 02, 2010 - 13:23

    Robert, our system may not be perfect but it sure beats the hell out of the old system, whereby the other partner gets 99% to our 1% don't you agree. You say NL is a risky place to explore for oil, tell this to the major oil companies who are spending hundreds of millions on our offshore. Apparently they are not aware of this. It would be worth their while to give you a few million dollars for your expert incite and move elsewhere. Don't you agree????

  • Peter
    July 02, 2010 - 13:22

    What a joke, this guy is arguing for the shareholder's interest. What I get is that all this money going to our province is bad because it takes away from the investors profits.

    The profits absolutely should go to the provinces and not the private investors.

  • keith
    July 02, 2010 - 13:20

    if they want our oil they'll have to pay for it, and they obviously want our oil because they're paying for it. this is good for NL and thats who matter

  • George
    July 02, 2010 - 13:19

    Hey Robert, if it risky doing business in NL, quote 'similar to third world jurisdictions'. Can you please explain why the rig Eric Roude is currently on a three year contract off the coast of Africa at a rough expense of $500,000 per day?

  • Saucy Face
    July 02, 2010 - 13:18

    Suck it in Mr. Mintz; there's a new sherriff in town and the oil and gas industry knows it.

  • Robert
    July 02, 2010 - 13:17

    Peter - you must have read a different article than the story above. Despite stating that Alberta has the least competitive structure, nowhere does the article suggest that those in NL should be designed to provide most benefit to shareholders. It does state that the NL royalty structure is too complicated, is inconsistant, and imposes low tax burdens. If anything, the current regieme (or lack of) discourages exploration and investment in NL, and does not capture the maximum benefits for the province.
    Corporations need certainty and transparency (regardless of the amounts taxed) to make their business decisions. We are losing opportuniites due to that uncertainty.
    Saucy Face, the oil and gas industry is well aware of the ''new sheriff'' and his ways - and have been making their investments elsewhere. The ''new sheriff'' has yet to attract any significant new exploration activity, and has only succeeded in delaying existing projects for no proven gains to the provincial treasury.
    NL is viewed as a risky place to explore for oil and gas due to the uncertainty and lack of defined royalty scheme - similar to third world jurisdictions with unstable governments. That's hardly anything to brag about. We would be better served with a defined and transparent roylty structure that enables us to collect ''our fair share'' of the value of our petroleum assets. What we have is quite the opposite.

  • Stamp
    July 02, 2010 - 13:16

    Essentially Mintz is saying that Alberta oil is too heavily taxed and that while NL's offshore is less heavily taxed, it is nonetheless less attractive for exploration because our tax and royalty regimes are too complicated and unpredictable. He argues for a stable tax and royalty structure nationally and from field to field. I can't offer an opinion on whether our tax and royalty structure is sub-optimal. I would be interested in hearing from someone like Wade Locke. But Mintz may be ignoring some of the larger macro-economic and political factors at play. NL operates in a much more difficult and complicated legal/political/tax environment than Alberta. Many years ago the federal government made an outright transfer of oil and gas ownership from its Rupert Lands to Alberta and other provinces. In contrast, we still do not own our offshore oil and gas resources. The feds merely allow us joint control of their development. The Atlantic Accord, the equalization formula, and other tax protocols unique to this province and NS have influenced (complicated) the design of our tax and royalty structure. They have not been consistent or stable, because, unlike Alberta, we are relatively new at this game. And we have to remember that it is a game. Before negotiating the Hibernia deal, Mobil drastically downgraded its estimate of recoverable reserves in order to poor-mouth its way to what was an extremely generous deal. Once the deal was struck, it spiked the reserves in the opposite direction to cater to investors. This is normal stuff, of course, but the point is that Hibernia could hardly be used as a model for subsequent field developments. Each new field and field extension has presented its own unique circumstances. Remember that Williams was dragged through the mud by the national press for insisting on a better deal from Exxon. (Robert is absolutely wrong in his assertion that that deal did not produce significant incremental benefits.) And while Alberta may be suffering a slowdown in its oil and gas sector, that province's accumulated wealth and vibrant economy allow it the luxury of having an uncompetitive (demanding) tax regime. It is a non-renewable resource and there is no benefit in pumping it all at once. We are not nearly as well off but even in this province, there is a strong argument for caution. We still have to find ways to translate those important offshore oil and gas revenues into something that will serve not only the Avalon Peninsula, not only oil and gas related businesses, and not only this generation. There is another less well off world just beyond the Isthmus which needs something more now, and twenty years from now, to hang onto other than the trans-shipment of unprocessed fish to China.

  • George
    July 02, 2010 - 13:15

    Holy cow, I never knew that Alberta, Saskatchewan and British Columbia had offshore oil fields????? maybe that's why the NL tax bite is different. We don't take up huge swathes of land.

  • Paul
    July 02, 2010 - 13:15

    Sounds like we may actually want to raise our royalties to get more inline with other jurisdictions. Have to make sure you stay attractive to investment though, and probably a more clear, simple, all the same for everyone system would be better in that regard.

  • Been there
    July 02, 2010 - 13:14

    Another way to look at this is this way. If the oil and gas companies did not set up shop here do any of you think that the province would invest the same or pay the same wages? I doubt it.

    Things will change, that is a given. Either the payments to government will be cut or our pay cheques will. One will have to give a little to remain competitive.

    These companies can head to Russia or Africa and pay pennies on the dollar, what makes anyone think that they will continue to waste billions just to play at home?

  • member of the 20%
    July 02, 2010 - 13:11

    I agree with I.P. about the obscene profits that oil companies make by gouging the public. But, I. P., that's precisely what your esteemed Interim Premier Thunderdale signed off on last week by tying NL royalities to super profits. Now the oil companies have more latitude to inflate prices and gouge further with the support of government. And, gov't won't regulate prices because they have a vested interest. Don't you see I.P. and Bert; your Tory regime has been snookered again by big oil.

  • I. P. Freely
    July 02, 2010 - 13:11

    When you look at the obscene profits that these companies earn, the pittance received by the province is a joke. If the oil companies thought the template was unfair they would be drilling elsewhere, or taking us to court.

  • Robert
    July 01, 2010 - 20:18

    Bert, either you are talking through your hat or you deliberatly telling lies.
    There never was a royalty ''system'' in place remotely close to the one that you suggest, and oil exploration is way down over past years - not up. You need to do some research, or put down the pom-poms, they're blocking your vision.

  • Bert
    July 01, 2010 - 20:07

    Robert, our system may not be perfect but it sure beats the hell out of the old system, whereby the other partner gets 99% to our 1% don't you agree. You say NL is a risky place to explore for oil, tell this to the major oil companies who are spending hundreds of millions on our offshore. Apparently they are not aware of this. It would be worth their while to give you a few million dollars for your expert incite and move elsewhere. Don't you agree????

  • Peter
    July 01, 2010 - 20:06

    What a joke, this guy is arguing for the shareholder's interest. What I get is that all this money going to our province is bad because it takes away from the investors profits.

    The profits absolutely should go to the provinces and not the private investors.

  • keith
    July 01, 2010 - 20:03

    if they want our oil they'll have to pay for it, and they obviously want our oil because they're paying for it. this is good for NL and thats who matter

  • George
    July 01, 2010 - 20:01

    Hey Robert, if it risky doing business in NL, quote 'similar to third world jurisdictions'. Can you please explain why the rig Eric Roude is currently on a three year contract off the coast of Africa at a rough expense of $500,000 per day?

  • Saucy Face
    July 01, 2010 - 19:59

    Suck it in Mr. Mintz; there's a new sherriff in town and the oil and gas industry knows it.

  • Robert
    July 01, 2010 - 19:58

    Peter - you must have read a different article than the story above. Despite stating that Alberta has the least competitive structure, nowhere does the article suggest that those in NL should be designed to provide most benefit to shareholders. It does state that the NL royalty structure is too complicated, is inconsistant, and imposes low tax burdens. If anything, the current regieme (or lack of) discourages exploration and investment in NL, and does not capture the maximum benefits for the province.
    Corporations need certainty and transparency (regardless of the amounts taxed) to make their business decisions. We are losing opportuniites due to that uncertainty.
    Saucy Face, the oil and gas industry is well aware of the ''new sheriff'' and his ways - and have been making their investments elsewhere. The ''new sheriff'' has yet to attract any significant new exploration activity, and has only succeeded in delaying existing projects for no proven gains to the provincial treasury.
    NL is viewed as a risky place to explore for oil and gas due to the uncertainty and lack of defined royalty scheme - similar to third world jurisdictions with unstable governments. That's hardly anything to brag about. We would be better served with a defined and transparent roylty structure that enables us to collect ''our fair share'' of the value of our petroleum assets. What we have is quite the opposite.

  • Stamp
    July 01, 2010 - 19:56

    Essentially Mintz is saying that Alberta oil is too heavily taxed and that while NL's offshore is less heavily taxed, it is nonetheless less attractive for exploration because our tax and royalty regimes are too complicated and unpredictable. He argues for a stable tax and royalty structure nationally and from field to field. I can't offer an opinion on whether our tax and royalty structure is sub-optimal. I would be interested in hearing from someone like Wade Locke. But Mintz may be ignoring some of the larger macro-economic and political factors at play. NL operates in a much more difficult and complicated legal/political/tax environment than Alberta. Many years ago the federal government made an outright transfer of oil and gas ownership from its Rupert Lands to Alberta and other provinces. In contrast, we still do not own our offshore oil and gas resources. The feds merely allow us joint control of their development. The Atlantic Accord, the equalization formula, and other tax protocols unique to this province and NS have influenced (complicated) the design of our tax and royalty structure. They have not been consistent or stable, because, unlike Alberta, we are relatively new at this game. And we have to remember that it is a game. Before negotiating the Hibernia deal, Mobil drastically downgraded its estimate of recoverable reserves in order to poor-mouth its way to what was an extremely generous deal. Once the deal was struck, it spiked the reserves in the opposite direction to cater to investors. This is normal stuff, of course, but the point is that Hibernia could hardly be used as a model for subsequent field developments. Each new field and field extension has presented its own unique circumstances. Remember that Williams was dragged through the mud by the national press for insisting on a better deal from Exxon. (Robert is absolutely wrong in his assertion that that deal did not produce significant incremental benefits.) And while Alberta may be suffering a slowdown in its oil and gas sector, that province's accumulated wealth and vibrant economy allow it the luxury of having an uncompetitive (demanding) tax regime. It is a non-renewable resource and there is no benefit in pumping it all at once. We are not nearly as well off but even in this province, there is a strong argument for caution. We still have to find ways to translate those important offshore oil and gas revenues into something that will serve not only the Avalon Peninsula, not only oil and gas related businesses, and not only this generation. There is another less well off world just beyond the Isthmus which needs something more now, and twenty years from now, to hang onto other than the trans-shipment of unprocessed fish to China.

  • George
    July 01, 2010 - 19:55

    Holy cow, I never knew that Alberta, Saskatchewan and British Columbia had offshore oil fields????? maybe that's why the NL tax bite is different. We don't take up huge swathes of land.

  • Paul
    July 01, 2010 - 19:54

    Sounds like we may actually want to raise our royalties to get more inline with other jurisdictions. Have to make sure you stay attractive to investment though, and probably a more clear, simple, all the same for everyone system would be better in that regard.

  • Been there
    July 01, 2010 - 19:52

    Another way to look at this is this way. If the oil and gas companies did not set up shop here do any of you think that the province would invest the same or pay the same wages? I doubt it.

    Things will change, that is a given. Either the payments to government will be cut or our pay cheques will. One will have to give a little to remain competitive.

    These companies can head to Russia or Africa and pay pennies on the dollar, what makes anyone think that they will continue to waste billions just to play at home?

  • member of the 20%
    July 01, 2010 - 19:48

    I agree with I.P. about the obscene profits that oil companies make by gouging the public. But, I. P., that's precisely what your esteemed Interim Premier Thunderdale signed off on last week by tying NL royalities to super profits. Now the oil companies have more latitude to inflate prices and gouge further with the support of government. And, gov't won't regulate prices because they have a vested interest. Don't you see I.P. and Bert; your Tory regime has been snookered again by big oil.

  • I. P. Freely
    July 01, 2010 - 19:47

    When you look at the obscene profits that these companies earn, the pittance received by the province is a joke. If the oil companies thought the template was unfair they would be drilling elsewhere, or taking us to court.