UCP guarantee 10-year freeze on NDP royalty rates. Kind of.

While researching for another potential story, I came across a bill passed by the Alberta government last year that I was surprised seemed to have received little media coverage.

Bill 12, also called the Royalty Guarantee Act, was passed in July 2019. What searching I did do on the act didn’t turn up any coverage from the main media outlets. All I could find was a writeup from JWN Energy and then a passing reference from CBC in sort of related article from a year later.

So, I thought I’d do a writeup, just so there was something out there for people to refer to.

Bill 12 was first introduced into the Alberta legislature on 20 June 2019 by Sonya Savage, energy minister. It added an entirely new section ( 34.1) to the Mines and Minerals Act, which basically legislated no changes to fossil fuel royalties for the next 10 years.

During second reading of the bill, Savage claimed that recent royalty reviews (presumably Ed Stelmach’s 2007 review and Rachel Notley’s 2015 review)-while reaffirming “that royalty rates in Alberta are competitive with other energy jurisdictions”-themselves negatively impacted “investor confidence and [Alberta’s] ability to compete with other jurisdictions”.

The new bill essentially comes down to 2 main changes.

First, is section 34(2):

For a period of 10 years after this section comes into force, no fundamental restructuring of the legislative framework generally applicable to hydrocarbon royalties reserved to the Crown in right of Alberta shall be implemented.

This means that the provincial government won’t change fossil fuel royalties for the next 10 years (until July 2029).

Second, is section 34(3):

Subject to the regulations, no fundamental restructuring of the legislative framework applicable to hydrocarbon royalties reserved to the Crown in right of Alberta in place on the date a well commences production shall be implemented with respect to that well for a period of 10 years after that date.

What that means, if I understand it correctly, is that fossil fuel wells will see no increases for 10 years from the date they start producing, irrespective of the 10-year limit on royalty reviews.

So, for example, if a well goes into production in 2028, it’s locked into 2028 rates until 2038, even if a new royalty rate comes in after 2029.

In summary, the two main changes are:

• No changes for royalties until at least 2029
• Wells are locked for 10 years into whatever rates are in place when they start producing

Here’s the thing though.

The royalty review report published in 2016 by the Royalty Review Advisory Panel already recommended a 10-year freeze on rates.

For example, recommendation #2 was “Modernize Alberta’s royalty framework for crude oil, liquids and natural gas”, and within it, we find the following:

Apply all changes to new wells only. Existing royalties will remain in effect for 10 years on investments already made.

This same statement is repeated on page 57 of the report. The 10-year limit is mentioned on page 60 as well, in the section on modernizing Alberta’s royalty framework:

Since the MRF creates an “old well” and “new well” distinction, our Panel also recommends that a sunset provision be established to transition all old wells (drilled before the implementation date) into the modernized structure at the end of 10 years from the MRF implementation date.

And finally, in Appendix E, which discusses implementation:

Our Panel suggests that 10 years will allow industry plenty of time to adjust for any changes in royalty rates or administration, and the termination of any benefits from any existing programs.

So, functionally, all the UCP government did with last year’s Bill 12 was legislate this specific recommendation from the report. But since the new royalties were implemented by the NDP government in January 2017, I suppose the 10-year moratorium would’ve expired January 2027. That means the UCP pretty much just extended the NDP royalty freeze another 2.5 years.

So, that’s cool.

Except there’s a catch.

With the passing of Bill 12, the UCP government has given itself 5 exceptions to the 10-year moratorium through section 34.1(1). These exceptions allow the government to change royalty rates if such changes:

• Simplify or streamline cost calculations, processes, reporting, or other similar requirements of an enactment or policy
• Address significant changes in technology and markets
• Are in accordance with an enactment already in force as of July 2019
• Are in accordance with a relevant policy, including the planned transition to the Modernized Royalty Framework, 2017
• Are appropriate and consistent with section 34.1.

So, basically, they guaranteed the NDP 10-year limit to royalty changes but gave themselves broad enough exceptions that they can still make changes if they need to.

Plus, according to 34.1(1)(b), hydrocarbon doesn’t even include coal. All bets are off on coal royalties, I guess.

Bill 12 eventually passed 32 to 6 during third reading. Royal assent was given on 18 July 2019, less than a month after the bill was introduced into the legislature.

However, the story doesn’t end there.

Another bill passed a year later- Bill 22, also known as the Red Tape Reduction Implementation Act -gave the energy minister absolute control over implementing any royalty rate changes that the UCP determines fall under those 5 exemptions.

Prior the passing of Bill 22, section 9 of the Mines and Mineral Act stated:

Notwithstanding anything in this Act or any regulation or agreement, the Minister, on behalf of the Crown in right of Alberta and with the authorization of the Lieutenant Governor in Council, may (a) enter into a contract with any person or the government of Canada or of a province or territory respecting . . . (iv) the royalty reserved to the Crown in right of Alberta on the minerals recovered; (v) the provision for a consideration . . . instead of royalty on the minerals recovered; (vi) any matter that the Minister considers to be necessarily incidental to, in relation to, or in connection with any of the matters referred to [these] subclauses

Bill 22 removed the part of the quote in italics-”and with the authorization of the Lieutenant Governor in Council”-which refers to the cabinet of the government.

Likewise the bill changed “authorized by an order in council” in section 50(5)(d) in the MMA to “entered into”:

“royalty return” means a report or other record obtained
under this Act or under an agreement authorized by an order
in council under section 9 of this Act that is used to
determine or verify royalty liability or to collect or forecast
royalty.

In other words, the energy minister can unilaterally change the royalty rate structure any time in the next 10 years without approval from anyone else in the government and without consultation, as long as she can justify it as falling under one of the 5 broad exceptions.

To be fair, she wasn’t the only one given carte blanche with Bill 22. The agriculture minister was as well, for several sections of the Marketing of Agricultural Products Act.

On the plus side, now the other ministers don’t have to get together to hash out what qualifies as exempt. Frees up their time.

Maybe that’s what they meant by “red tape reduction”.

Originally published at https://kimsiever.ca on January 7, 2021.