A royalty regime made right here

Brian Jones bjones@thetelegram.com
Published on October 12, 2012

If you’re gullible enough to believe Premier Kathy Dunderdale’s recent diatribes against Quebec, perspective might be found by pondering some policies that were made right here.

You can be aided by a recent study called “Capturing Economic Rents from Resources Through Royalties and Taxes,” by Jack Mintz and Duanjie Chen of the University of Calgary’s School of Public Policy.

With that title and those credentials, you wouldn’t expect it to be reader-friendly, and it isn’t. It takes only a few of its 46 pages to convince you that royalty calculations here and elsewhere in the world are incredibly complex. People with an MBA or master’s degree in economics can probably zip through it without having to flip back to check what METRR stands for (marginal effective tax and royalty rate), but most commoners will have to read it more carefully.

Newfoundlanders (and Labradorians) face a further challenge. The reports states, “Newfoundland and Labrador presents one of the most complicated royalty regimes in Canada.”

The authors are mainly concerned with how taxes and royalties in the oil industry affect investment and exploration by companies.

Of greater interest, though, are the tables that provide comparisons of various regions’ METRR — what the layman or laywoman would refer to as the amount of oil money that gets deposited in the public’s bank account.

In Newfoundland (and Labrador) this figure is 13 per cent.

(Note: nowhere in “Capturing Economic Rents from Resources Through Royalties and Taxes” do Mintz and Chen allege that Quebec coerced Newfoundlanders to agree to this level of remuneration for their offshore resources.)

According to the report, the royalty rate in B.C. is 30 per cent. In Saskatchewan, the royalty rate is 37 per cent.

Alberta has two sets of royalty rates: 40 per cent for conventional oil and 28 per cent for the oilsands.

The report also outlines some royalty rates that prevail beyond Canada’s borders. In Texas, the royalty rate is 32 per cent. In Norway, it is 28 per cent.

The usual explanation — or excuse, if you prefer — for Newfoundland’s relatively low royalty rate is that offshore oil is very expensive to exploit. After all, they’re out there bobbing on the North Atlantic in a floating drill rig or such, pushing pipe down to and into the ocean floor.

Fair enough. But extracting oil from the oilsands is also vastly expensive and complicated, yet the Alberta government sees fit to charge companies a royalty rate that is more than double Newfoundland’s offshore royalty rate.

The report’s jargon can be jarring, as it always is, whether you’re talking oil, education, police-speak, etc. If the table outlining various levels of METRR leaves you wondering whether you’ve misread it, you can double-check it against Table 3, which describes the “Effective Tax/Royalty Rate” in a dozen or so jurisdictions.

But the listing of royalty rates is virtually unchanged: in Newfoundland, 13 per cent; B.C., 30 per cent; Saskatchewan, 37 per cent; Alberta, 40 per cent for conventional oil and 28 per cent for oilsands oil; Texas, 32 per cent; Norway, 28 per cent.

“Capturing Economic Rents from Resources Through Royalties and Taxes,” being a technical report concerned with hard economic facts rather than political interpretations, doesn’t offer much explanation for the varying royalty regimes, other than what they mean for exploration, investment and so on.

It’s too bad Mintz and Chen

didn’t devote even minimal attention to the social aspects of royalty rates. For instance, maybe Albertans and Texans, having a century or so of experience, know what to expect from their oil riches. Maybe Newfoundlanders are just happy to have streets paved in asphalt, never mind in gold.

 

Brian Jones is a desk editor at The Telegram. He can be reached by email at bjones@thetelegram.com