Newfoundland sets poor example in oil royalties for others: economist

Oil and Gas

Moira Baird mbaird@thetelegram.com
Published on February 25, 2010
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.

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