In 1947, when the Leduc oil discovery changed the future economic landscape of Alberta, the royalty rate in Alberta Crown leases and most individual freehold owner leases was the same 12 1/2%. In 1948, Alberta Premier Earnest Manning increased the Crown royalty rate to 16 2/3% and, in 1951, the late Premier Manning introduced sliding scale Crown royalties. In 1971, then Premier Peter Lougheed significantly increased Alberta Crown royalties. Other western Canadian provincial governments soon followed the late Premier Lougheed’s lead. These changes did not apply to the royalty rates in freehold leases within the provinces.
Throughout the latter half of the 20th century, the royalty rate for a typical producing well on Crown lands in the prairie provinces significantly exceeded the royalty rate for a similar well producing from freehold mineral rights. The rationale for the freehold mineral tax charged by the governments of the prairie provinces on production from freehold rights was, in part, to level the playing field between Crown and freehold mineral rights so as to prevent the oil and gas industry from developing freehold lands in preference to Crown lands.
In early 2007, then Alberta Premier Ed Stelmach appointed a blue ribbon panel to review Alberta’s Crown royalty regime. The Royalty Review Panel released its ‘Our Fair Share’ report in the fall of 20071. The panel concluded that “Albertans do not receive their fair share from energy development and they have not, in fact, been receiving their fair share for some time”. The Stelmach government implemented most of the panel’s recommendations in late 2007. Alberta Crown royalty rates were increased in some instances to as much as 50%2. Unfortunately for Premier Stelmach, the ‘great recession’ of 2008 caused both oil and gas prices to plunge. Premier Stelmach’s problems were compounded by the fact that the Saskatchewan government had introduced royalty incentives in 2002 and Manitoba’s government followed suit in 2008. These incentives reduced the Crown royalty for new wells in Saskatchewan to 5% and new wells in Manitoba to 0% for periods of time or volumes of production which varied based on the type of well (see “Crown Royalties”). In response to the Alberta government’s adoption of Our Fair Share royalty recommendations, energy companies operating in Alberta moved their operations, or threatened to move their operations, to Saskatchewan or Manitoba. In March of 2010, the Stelmach government effectively caved in to the oil and gas industry, reversed essentially all of the 2007 royalty rate increases, and introduced permanent royalty incentives for new wells similar to those in Saskatchewan3.
The effect of the Crown royalty incentives for new wells in the prairie provinces has been to unbalance the Crown/freehold playing field and focus industry activity on Crown lands. Alberta freeholders have been particularly hard hit because in Saskatchewan and Manitoba the royalty incentive programs include a reduction or elimination of the freehold mineral tax payable for new wells on freehold lands whereas in Alberta the government continues to collect freehold mineral tax from any new wells on freehold land. Alberta Energy justifies this because “Alberta does not receive any royalty from production of freehold rights”4. A resource ‘royalty’ is generally defined as a production-based periodic payment made to the owner of the property. Alberta Energy does not own the freehold mineral rights upon which it periodically collects freehold mineral tax but the distinction used to justify its position seems particularly mean spirited. Removing or reducing freehold mineral tax on new Alberta freehold wells would help to re-balance the Alberta Crown/freehold playing field – it is not a matter of definition but of fundamental fairness.
4. http://www.energy.alberta.ca/About_Us/1558.asp - Why is freehold not included?