Is Alberta Receiving its Fair Royalty Share? Alberta Oil Sands Fair Share

Transcription

1 Is Alberta Receiving its Fair Royalty Share?

2 Outline Context Government Revenues Oil Prices Carbon Costs Economics Security of Supply Fair Share Economic Rent Oil Sands Royalty System Policy Deflections Bonuses vs Royalties METRR Analysis Costs & Competitiveness Other Jurisdictions Royalties vs Jobs Savings & Risk

3 CONTEXT THE BIG SHIFT!

4 The Big Shift (4):

5 The Big Shift (1): U.S. Natural Gas Production 4

6 The Big Shift (2): U.S. Crude Oil Production 5

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8 The Big Shift (3): U.S. Crude Oil Movements 7

9 The Big Shift (4):

10 The Big Shift (5) Gas to Oil Sands 9

11 CONTEXT OIL SANDS FUTURE BRIGHT! OIL SANDS REMAIN a WORLD CLASS ATTRACTIVE INVESTMENT!

12 Oil Price Forecasts 11

13 Oil Sands Price

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15 Cost of the Carbon Levy

16 Oil Sands Economics Update 2016 Strong Go-Forward Economics Download full report:

17 Oil Sands Security of Supply Post Alberta competing with new USA Supplies Fracking Technology USA Tight Oil Supply USA Supply Not Sustainable Growing Need for Oil Sands

18 Bright Future for the Oil Sands Alberta has demonstrated its ability to build projects competitively when proper preparation and planning is done. OIES, The Future of Canadian Oil Sands, 2016, p. 40. From , conventional crudes and NGLs, oil sands and biofuels become increasingly important sources of supply growth as tight crude production reaches a maximum and then contracts. OPEC, World Oil Outlook 2015, p.93.

19 What About Royalties?

20 SHOULD ROYALTY RATES BE INCREASED? SHOULD MORE ROYALTIES BE SAVED? If Yes - What should be done about both the lost jobs and lost or reduced investment income? Should a worker that decided 20 years ago to make a career in an expanding oil sector based on a lower royalty rate policy now, at age 45 or 50, be asked to pay if such subsidies are removed? Equally, what about the oil producer who invested under the same policy? Economists that recommend saving all royalties Like Norway assume perfect markets and competition, and full employment. Remember that Norway has also decided to accept a tradeoff by having higher general taxes and by limiting the number of projects and jobs occurring at a given time. 19

21 Key Concept: Economic Rent

22 ECONOMIC RENT Economic rent is: The price that the owner of a natural resource charges for the use of this resource. Synonymously The share remaining after the investor has earned a competitive rate of return and ALL costs have been recovered, including exploration, investment, risk, and uncertainty. How much of the Economic Rent should the resource owner capture? Investor Share Economic Royalties + Rent Bonus Non- Measurable Risk Taxes Total Revenues Government Divisible Share Income Investor Costs + Return Royalty Land Bonus Provincial Tax Federal Tax Risk Operating Costs Return on Investment Investment 21

23 Economic Rent Economic Rent = Hotelling Rent + Ricardian Rent Hotelling Rent = Scarcity Demand > Supply = P 2 P 1 Ricardian Rent = Quality Increasing Costs P 1 less price at S Max = P 1 P 0

24 Oil Sands Royalty Framework 9% of Gross Revenue; e.g., 0.09 x 100 = % of Net Revenue; e.g., 0.40 x 65 = = 26% of Gross Revenue Final Royalty = the Greater of the Gross and Net Components Royalty range is based on the CNDe of the WTI crude oil price 1%/25% for P <= $55/bbl to 9%/40% for P >= $120/bbl

25 Alberta s Oil Sands Fiscal System Corporate Income Tax Illustration* Federal 15% $ 2.34/bbl Provincial 12% $ 1.87/bbl Royalty 1% - 40% Bonus Bids Carbon Levy $30/t Municipal/Property Tax $ 9.58/bbl $ 0.02/bbl $ 0.58/bbl $ 0.27/bbl $14.66/bbl * Based on a go-forward project of 225 MM WTI = USD $70/bbl

26 Can Bonus Bids Capture the Economic Rent? 25

27 Bonus vs. Royalty

28 What is METER Analysis? Is METER Analysis Useful? 27

29 Impact of METR Analysis Results of METR analysis must be interpreted with due caution, bearing in mind the simplifying assumptions behind the neo classical theory of investment upon which the methodology is based. A number of the key assumptions typically invoked are untenable OECD,

30 Problems with METR Analysis METR Analysis: METR = Marginal Effective Tax Rate Limited Application: Results of METR [and METRR] analysis must be interpreted with due caution, bearing in mind the simplifying assumptions behind the neo-classical [economics] theory of investment upon which the methodology is based. [OECD, 2009] Irrational Decisions: METR is normally inconsistent with wealth maximization and is not used by the oil & gas industry to make investment decisions. [Devereux, 2008] Illustration: Jurisdiction A Project with METR = 40% and ROR = 20% Jurisdiction B Project with METR = 10% and ROR = 8% METR analysis says Invest in Jurisdiction B and earn a lower ROR!! This clearly does not make sense. CONSIDER THE U.S. EXAMPLE: The USA has high fixed-royalties with a high CIT rate. This results in a high METR. If a high-meter jurisdiction is not a good place to invest, why is it that the USA has: (a) high levels of investment and activity; (b) the lowest industry cost structure; (c) the highest levels of innovation? Royalties help incent industry to be innovative and to cut costs. High tax rates share a higher portion of the exploration risk thereby encouraging innovation. 29

31 Why do some suspect that Alberta is not receiving its fair royalty share?

32 HISTORICAL TREND

33 Global Fiscal Context

34 COMPARISONS Other Jurisdictions 33

35 What About the Oil Sands?

36 COUNTER INTUITIVE RATES: Prices Increasing But Rates Decreasing AB Rates Are Well Below the Minimum U.S. Rates Also, Statutory Rate Not-Equal-To The Effective Rate. 35

37 There Is More To The Story! Common View: Royalties vs Jobs Alternate View: Costs & Sustainability

38 COMMON VIEW Part I (Jobs, Investment) LOWER ROYALTY RATES = HIGHER INVESTMENT = MORE JOBS 37

39 COMMON VIEW Part II (Share) PRINCIPLE - Royalty Share Is Determined by Costs COSTS: Higher Costs = Lower Royalty 38

40 Alternate View: Two Aspects 1. Costs & Sustainability 2. Saving/Future Generations

41 ALTERNATE VIEW Part I (Rent Creation) PRINCIPLE - Royalty Is Not The Same As Costs Royalty is a Price Not A Cost Rate Increases Should Only Be At High Prices Jobs are not threatened Competitive Pricing Leads to the Greatest Overall Value - Rates that are too low lead to waste/less efficient operations and reduced innovation. LOWER THAN COMPETITIVE PRICES CAUSE OVER INVESTMENT AND REDUCES THE INCENTIVE TO MINIMIZE COSTS OVER INVESTMENT CAUSES COST INFLATION COST INFLATION CAUSES REDUCED COMPETITIVENESS NOT SUSTAINABLE 40

42 ALBERTA COST INFLATION COMPARISON AB Oil Sands Cost Escalation Far Exceeds the International Experience. This Situation May Be Seen as a Direct Result of Past Policy Choices Low Royalties & Minimal Regulation 41

43 GOVERNMENT REVENUE AND COST INFLATION Reduced Cost Competitiveness Leads to a Disproportionate Reduction in Government Share 42

44 ALTERNATE VIEW Part II (IN-TRUST) In-Trust Resource Management PRESENT GENERATIONS HAVE A RESPONSIBILITY TO FUTURE GENERATIONS PARTICULARLY WHEN MANAGING A NON-RENEWABLE RESOURCE SUCH AS OIL & GAS, AND THE ENVIRONMENT.

45 Return To The Question: Is Alberta Receiving its Fair Royalty Share? Its Really About Balance

46 HOW TO THINK ABOUT BALANCE (1) INVESTOR PERSPECTIVE A company can earn a higher ROR in Jurisdiction A than in jurisdiction B : Should all investment go to A? No; unless the company has perfect knowledge and there is no risk. For the oil company the issue is about securing oil reserves and a return for shareholders, but it is equally about managing risk. This is why multinational oil companies invest in a variety of jurisdictions, all with differing economic expectations, obligations, and risks. 45

47 HOW TO THINK ABOUT BALANCE (2) GOVERNEMNTS PERSPEVTIVE Governments, like corporations, try to maximize the overall value. Problems arise when one or some options appear to offer much higher benefits than others The Extremes Jobs Now (Benefit); or, Unemployment Now (Cost). This situation is really no choice. 46

48 HOW TO THINK ABOUT BALANCE (3) IN-TRUST FISCAL OPTIONS Two Separate Questions: 1. Charge Competitive Prices The Royalty Rate or Share 2. What to do with the Royalty OPTIONS Save Nothing» Pure Consumption; e.g., Ralph Bucks,» Fiscal Stimulus - Create Extra Jobs Save / Invest» Investments - Pay off Debt, R&D, Education & Training, Infrastructure, Economic Diversification (Invest Outside of Alberta s Oil and Gas Sector) 47

49 HOW TO THINK ABOUT BALANCE (4) The challenge is To recognize that any decision about the future will depend on current understanding and expectations IMPERFECT KNOWLEDGE. THERE IS NO SINGLE RIGHT ANSWER! EXCEPT! To get to a position where an effective balance and therefore, real choice, is possible. JOBS ROYALTIES SAVING RISK 48

50 THANK YOU! Thanks for Attending.