AIMS study shows that royalty regimes provide a fair return to the provinces and
encourage further development

[HALIFAX] — AIMS today released Atlantic Petroleum Royalties: Raw Deal or Fair Deal? a report authored by noted Canadian oil and gas expert Dr. G. Campbell Watkins.

Since Atlantic Canadian offshore oil and gas production became a reality in the 1990s, criticism of the royalty regimes and associated agreements has been a regular occurrence in both the media and the respective provincial legislatures. As a result, the public is subject to considerable uncertainty and anxiety about whether returns from resource exploitation are fair. This paper is the first independent investigation to determine if the criticisms and anxiety are justified.

Concludes Dr. Watkins, “Although there is room for improvement, the regimes in fact stand up to close examination: they do provide a fair return to the provinces and citizens while not, in themselves, discouraging further development of the industry.” Watkins emphasizes that royalties should be mainly directed at economic rents. In essence, economic rent is ultimately the difference between the money coming in and the money that has been spent to develop the project, plus a reasonable return on investment for the people who have put up the money to make the project happen.

This paper establishes the basis for evaluating the royalty regimes in Nova Scotia and Newfoundland, sets criteria for assessment, and applies those criteria to the two Atlantic Canada regimes. In setting the criteria, the author draws on his extensive international experience. To help put the Atlantic Canada royalty regimes in perspective, he outlines regimes established under similar development conditions in Australia (offshore projects, 1984), Canada (federal frontier lands, 1987), and the United Kingdom (North Sea, 1975). Royalty schemes such as Alberta’s, which focus on wells, are not attuned to high-cost inhospitable regions such as the East Coast offshore. Therefore, reliance on the Alberta royalty model would not be suitable.

The royalty regimes in both Nova Scotia and Newfoundland are competitive when compared with relevant international practice. Thus the regimes are not vulnerable to criticism that the governments are not getting fair value for the resources on behalf of their citizens. By the same token, the fact that the industry is not complaining too much and has broadly endorsed the regimes suggests there is no compelling need for reductions. Governments are not trying to grab too much and producers are not enjoying a free ride.

“Royalties are not a tool for macroeconomic policy. Royalty schemes should be developed in the context of the overall fiscal system in which they are embedded,” warns Watkins. “ For producers, what is crucial is the overall tax burden imposed by governments. The two regimes examined should not be etched in stone. Adjustments may well be required over time.”

Royalties, of course, are only one part of the public policy puzzle. This paper lays important groundwork for understanding the offshore oil and gas industry in Atlantic Canada. The next logical step would be empirical analysis, which would include the impact of income taxes. Beyond that, analysis of the overall fiscal framework must take into account interaction with other programs, especially Equalization, a subject on which AIMS has recently published another paper (Taking off the Shackles: Equalization and the Development of Nonrenewable Resources in Atlantic Canada, by Ken Boessenkool).

These are the first two papers in the new AIMS series called The Oil and Gas Papers, edited by the Institute’s President, Brian Lee Crowley. -30-

For further information, contact:
Brian Lee Crowley, President, AIMS, 902-499-1998
G. Campbell Watkins, 250-544-6776