Alberta producers, government pleased with RIK arrangement

Alberta producers and the government are generally satisfied with the province's royalty in-kind (RIK) program for conventional crude oil.

The province produces more than 80% of Canada's oil and gas. In addition to the RIK program for conventional crude, there is a separate cash system for non-conventional crude, such as bitumen and synthetic crude oil, and for gas and natural gas liquids. Also, there is a mineral tax system for freehold production, a relatively small part of production where companies own the mineral rights.

Greg Stringham, vice-president of markets and fiscal policy for the Canadian Association of Petroleum Producers, said a primary difference between petroleum production in Canada vs. the U.S. is that, under the Canadian constitution, provinces own natural resources in their jurisdictions, including oil and gas. In the U.S., governments only own hydrocarbon resources on state or federal lands.

Background

Individual producers got the right to market their own production as part of deregulation in the mid-1980s. APMC retained responsibility for marketing the Alberta share of RIK volumes.

Former Energy Minister Pat Black privatized marketing of RIK oil in 1996. She said a cash royalty system would result in financial loss to the province and create an administrative burden for both industry and government. That position was confirmed by consultants Purvin & Gertz Inc.

Three companies-Gulf Canada Resources Ltd., PanCanadian Petroleum Ltd., and Canpet Energy Group Ltd., a consortium of smaller to medium-sized independents-were selected to gather and market RIK oil under contract.

The allocations to the three companies are based on a pooling strategy to ensure that light sweet, light sour, and heavy oil streams are marketed by companies with strength in these individual areas. The companies are paid a marketing fee of 5¢/bbl.

The Alberta Department of Energy (ADOE) determines a monthly par price for conventional crude, which, in conjunction with the royalty formula, is the basis for calculating the number of barrels that non-freehold producers must direct to Alberta. The province takes possession of these barrels and, on a stream basis, redirects them to one of its agents.

High-production wells deliver RIK crude on a monthly basis. Low-production wells may deliver crude intermittently, with production tied to batteries with storage facilities.

Pros and cons

"It is a little onerous because we have to keep separate books and report monthly to the government. We meet with government on a monthly basis to give them feedback on the market, and this helps them with their information on market conditions," Stevens said.

"We don't make a lot of money on marketing RIK oil, but it strengthens our marketing and makes us a major player with bigger volumes."

In 1997, Alberta RIK crude volumes totaled 29.6 million bbl of sweet crude, 6.3 million bbl of sour crude, and 10.1 million bbl of heavy crude.

Klaus Rehaag, of ADOE, said segments of the industry argue that a cash royalty system would let them control and leverage production, maintain confidentiality, and command a "premium" price given their "unique" understanding of the market.

At the same time, he said, industry acknowledges that there are benefits to the current RIK system.

He said RIK gives the government a window on the industry, allowing it to be better informed and positioned to understand industry's requirements.

The government has control over the resources necessary to implement certain policy initiatives, such as the recent reversal of a crude oil line between Sarnia, Ont., and Montreal.

The government is generally perceived to be an unbiased and impartial third-party marketer. And the RIK system is less burdensome administratively for industry, as there are no audits over prices.

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