Western Canadian settlers who acquired homestead lands from the Dominion Government prior to 1887 (1889 in Manitoba) also acquired subsurface oil and gas rights. In 1930, the Dominion Government agreed to transfer all un-disposed oil and natural gas resources in western Canada to the prairie provinces. The timing of the settlement of western Canada had proceeded from east to west and while most of southwest Manitoba had been settled by 1889, very little of Alberta had been. Consequently the Dominion Government transfer resulted in Alberta acquiring significantly more of the subsurface oil and gas resources within its borders (∼81%) than either Saskatchewan (∼70%) or Manitoba (∼25%). The distribution of oil and gas resources in the subsurface of the prairie provinces also greatly favoured Alberta.
Presumably because Alberta has both more Crown mineral rights and more oil and gas resources than the other prairie provinces, for many years most of the Alberta government’s policies with respect to oil and gas, including its regulatory and Crown royalty policies, were mirrored by the governments of Saskatchewan and Manitoba.
The royalties which provincial governments (the ‘Crown’) charge on production of oil and gas from Crown lands comprise the most obvious benefit the provinces receive from the oil and gas resources within their borders. The second obvious benefit is comprised of the proceeds from land sales – the sale of Crown licenses and leases to energy companies. In general, the two revenue streams are inversely proportional – because the energy industry is willing to pay more upfront if it knows it will pay lower royalties going forward, a lower overall Crown royalty regime gives rise to higher Crown land sales proceeds. For instance, in the year ended March 31, 2008, the year in which Alberta adopted the higher royalties associated with the Our Fair Share report, the Province collected $6.9 billion in conventional oil and gas royalties but only $1.3 billion in land sales. In the year ended March 31, 2012, after the Province introduced lower royalties and royalty incentives, Alberta collected only roughly half as much in conventional oil and gas royalties ($3.6 billion) but almost three times as much in Crown land sales ($3.3 billion).
The benefits of Crown royalties and Crown land sales to the prairie provinces are easily measured and are reported in the annual financial statements of each of the provinces. A benefit which is more difficult to quantify is the economic spinoff associated with energy industry activity. Similar to the provincial benefit associated with land sale bonuses, the economic spinoff associated with industry activity is generally inversely proportional to Crown royalties – lower royalties lead to increased industry activity.
In recent years, the economic spinoff benefit appears to be increasingly driving the Crown royalty regimes of the prairie provinces.
In 2002, the Saskatchewan government amended its Crown royalty regime to include royalty and freehold mineral tax incentives for new oil and gas wells. Depending on the depth of the oil well and whether it was vertical or horizontal, the Crown royalty on the first 4,000 to 16,000 m3 of oil (25,000 to 101,000 barrels) was reduced to 5% and freehold mineral tax was eliminated. For exploratory gas wells, the Crown royalty on the first 25 e6m3 (880 MMcf or Million cubic feet) was also reduced to 5% and freehold mineral tax was eliminated. Notwithstanding the three-fold increase in the price of oil during the five year period following introduction of these incentives, Saskatchewan’s revenue stream from Crown oil royalties increased only modestly. However, Saskatchewan Crown land sales in the following five years quadrupled in comparison to the previous five years. Similarly the number of wells drilled in Saskatchewan increased by a factor of approximately 50%. The economic spinoffs associated with the incentive program helped to turn Saskatchewan from a ‘have-not’ into a ‘have’ province.
In October of 2007, the Alberta government adopted most of the Crown royalty increases proposed in the ‘Our Fair Share’ report. While the Province’s revenues from oil and gas royalties remained largely unchanged in the two years following the increase in royalty rates as compared to the two prior years, Crown land sale bonuses fell almost three-fold and drilling activity fell by more than 40%. While these changes may largely be attributed to the great recession of 2008, the energy industry succeeded in hanging the blame on Premier Stelmach’s royalty increases. In March of 2010, the Stelmach government reversed the increases in Crown royalty rates and introduced temporary royalty rate incentives which largely mirrored the 5% royalty incentives in Saskatchewan except for the fact that Alberta’s incentives did not apply to freehold mineral tax. In May of 2010, the Alberta incentives were made permanent. Although the Alberta government’s revenue stream from Crown land sales tripled subsequent to the introduction of the royalty incentive program, the number of wells drilled did not increase and the Province’s oil and gas royalties declined.
In June of 2010, the Saskatchewan government responded to Alberta’s changes by lowering its Crown royalty during the incentive period to 2.5%.
The changes in Crown royalty rates are clearly being driven by an interprovincial competition for industry drilling dollars. Whether this competition is ultimately in the best interests of anyone other than the energy industry remains to be seen, but it is certainly not in the best interest of individual freehold owners (see “Crown v. Freehold Royalty Rates”)