Canada increases royalty rates to between 5% and 40% on oil companies

May 29, 2022 News

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– US raised theirs to higher than the 18.75% it was receiving
– Guyana maintains sanctity of contract for meagre 2% royalty

By Kiana Wilburg

Kaieteur News – British Columbia (B.C.), Canada’s westernmost province, appears to be following in the footsteps of the United States of America (USA) as it has announced that it will be increasing royalty rates to raise additional money annually for its people. The revelation was made by Premier John Horgan. The official recently said that for too long, “a broken system of fossil-fuel subsidies” has failed to ensure citizens “fully benefit” from their resources.

The Premier said the new and improved measure will not only make his province more competitive but “will give British Columbians a fair return and allow us to invest in their priorities — like improving services, bringing down costs and tackling carbon pollution.”
Under the royalty system, Horgan explained that companies will have to pay top dollar to get access to British Columbia’s natural gas resource and share their revenue with the provincial owner. The amount that companies pay has been determined by a complex calculation that provides credits for infrastructure such as access roads and allows for some costs to be deducted. Horgan said the changes to a system in place for nearly three decades will be phased out in the next two years.
Kaieteur News understands that the changes came after it was found that the royalty system was failing the people of British Columbia. This newspaper learned from the Vancouver Sun—a daily newspaper which dates back to 1912— that royalties had topped a billion Canadian dollars a year for almost a decade starting in 2000, largely from natural gas. Gas royalties then peaked in 2005/06 at CAD$1.92 billion, but by 2010 royalties had plummeted to sometimes less than CAD$150M, even though gas production was rising.
In light of the deep losses, the government said a new minimum royalty rate of five percent will replace the old rate of three percent.
The new rate will be in effect while companies pay off costs of newly drilled wells. Once that point has been reached, the royalty rates will slide between five to 40 percent, depending on the price of natural gas.
One of the authors of a royalty review commissioned last year by the B.C. government — which found the royalty system was “broken” — lauded the changes.
“The new system is a good start to simplify, modernise, and eliminate outdated programmes,” said Nancy Olewiler, Director and Professor at the School of Public Policy at (the) Simon Fraser University.
The move by British Columbia also follows those made by the Joe Biden Administration in December 2021. Kaieteur News had reported that a report by the U.S. Department of the Interior (DOI) on Federal oil and gas leasing and permitting practices, had found that the modernisation of the Federal oil and gas programme was delayed for decades to the detriment of the American public, their public lands and waters, the environment, wildlife, and more. In its current form, the report said the programme falls short of serving the public interest in a number of important respects.
It was found that royalty rates had not been increased in over 100 years. It was also found that the system provides insufficient opportunities for public input, shortchanges taxpayers and States, and tilts toward opening up low potential lands without adequately considering competing multiple-use opportunities.
Furthermore, the review found that the Federal oil and gas programme which fails to provide a fair return to taxpayers, even before factoring in the resulting climate-related costs that must be borne by taxpayers; inadequately accounts for environmental harms to lands, waters, and other resources; fosters speculation by oil and gas companies to the detriment of competition and American consumers; extends leasing into low potential lands that may have competing higher value uses, and leaves communities out of important conversations about how they want their public lands and waters managed.
The document also notes that the fiscal components of the onshore Federal oil and gas programme are particularly outdated, with royalty rates that have not been raised for 100 years. Companies typically have been charged 12.5 percent the value of oil and gas extracted from onshore leases, under a rate dating to the 1920s. For offshore leases, royalty rates have ranged recently from 12.5 percent to 18.75 percent. But the Biden administration has ordered that these rates be increased.
In Guyana, current and future generations are shackled to a two percent royalty and a host of other debilitating provisions in the Stabroek Block Production Sharing Agreement (PSA), which the government insists it has shown no interest in amending. It has affirmed that sanctity of contract must be maintained, lest Guyana scares away valuable investors like ExxonMobil, Hess Corporation and CNOOC, the partners currently running rapid oil development projects in the Stabroek Block.

 

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