Canada’s oil sands reserves are second in size only to the oil reserves of Saudi Arabia.¹ The oil sands are located in three distinct regions encompassing 140,800 square kilometres of northeastern Alberta and are estimated to contain over 174 billion barrels of recoverable oil using current technology.² Oil sands are increasingly seen as a source of oil for rising demand in North America and the Far East as production of conventional light oil declines. The Alberta Energy and Utilities Board’s (EUB) Alberta’s Energy Reserves 2005 and Supply/Demand Outlook 2006-2015 predicts that the province’s production of bitumen (the raw oil product...

In Alberta, the vast majority of non-renewable resources, including oil sands resources, are owned by the citizens of the province.⁵ The Department of Energy manages the publicly owned oil sands resources on behalf of the citizens.⁶ In its role as resource manager, the government allows companies to acquire rights to develop the oil sands resource. These companies incur development costs and if they are successful and produce oil, they also receive revenue from its sale. The government is responsible for ensuring that an appropriate portion of the revenue, determined by the amount of economic rent available (see text box), from...

The oil sands tax and royalty regimes were established to spur oil sands development in Alberta. The regimes were designed to provide incentive for capital investments. The idea was for the federal and provincial governments to limit the risk to oil sands investors by helping to overcome barriers related to high initial capital investments, while at the same time providing uniformity and certainty to the oil sands projects.

Alberta’s oil sands are subject to the Oil Sands Royalty Regulation, 1997, commonly referred to as the “generic royalty regime.” The regime was implemented in 1997 following recommendations of the National Task...

The generic royalty regime and the federal tax break for capital investments were intended to overcome barriers associated with the high initial capital costs required for oil sands developments. These barriers have been overcome. Since 1997 we have seen massive capital investments in the oil sands and significant increases in oil sands production. We have also seen significant increases in the price of oil and bitumen (the oil product of the oil sands).

An examination of the trend in capital expenditures since the royalty and tax regimes were introduced demonstrates the effectiveness of the policies at overcoming barriers related to...

The generic royalty regime for oil sands combined with the federal government’s tax break for capital investments have facilitated massive capital investments and increases in production. At the same time, technological improvements have occurred, and the price of bitumen has increased by over 200%.

Oil sands developments are no longer considered a marginal resource with underlying technological and economic disadvantages. Instead, they are a knowledge-based, technology driven resource of substantial quality and value. The production industry is now well established on a commercial scale.²⁰ Despite this shift in the oil sands industry from fledgling to mature as well as the...

As conditions change, so too should fiscal policy. It is irresponsible for the governments of Alberta and Canada, as the people’s representatives, to keep tax and royalty regimes stagnant in the face of increasing oil prices, technological improvements and massive capital investments. While the low royalty rates and tax breaks may have been justified in the early days of oil sands developments, they are no longer needed. The royalty and tax regimes applicable to Alberta’s oil sands need to be adjusted to reflect today’s economic reality and ensure that the citizens of Alberta are obtaining maximum revenue from the development...

Ten years ago the provincial government implemented the generic royalty regime for oil sands. At the same time, the federal government announced key changes to the tax treatment of oil sands projects. The royalty regime, which imposes a 1% royalty on production until all costs are recovered and then a 25% royalty on net revenues, combined with a federal tax break, in the form of a 100% accelerated capital cost allowance, have facilitated massive capital investments in the oil sands and spurred production beyond all expectations and earlier projections.

When the royalty and tax changes were announced, the price of...