Tracing the Oil Sands Money

I've been doing a lot of thinking lately about the oil sands.  Who owns them?  Who should benefit from them?  I'm scared that Alberta and the Federal Conservatives seem to want to rip this stuff out of the ground as quickly as possible.  Certainly, this benefits the oil sands companies.  This creates jobs.  But is this what is best for Canada?  Where does all the money go?

I tracked down this report.  It claims that the Alberta Government owns 97% of the mineral rights to the Oil Sands.  And it seems to me that the various governments get paid in two ways: Royalties (Alberta Government) and Income Tax (Alberta and Canadian Government).  I think that the income tax revenue is great and all, but it seem disingenuous to get really excited about taking a (already mandated) portion of the massive profits companies create by extracting something owned by the Government.  I'm more interested in Royalties.

Here is where I become a little less sure of my analysis.  It seems like there are two different types of royalty programs for Oil Sands projects.  One set of Royalties of 1-10% on Gross Revenues, and one set of Royalties of 25-40% of net revenues.  On the surface, this sounds impressive, but the more I think about it, the more it feels like Alberta and Canada are getting a bit of a raw deal here.  Yes, these companies are putting out huge sums of money to build infrastructure.  But it seems to me that they have pretty much guaranteed profits.  Let's dig a little deeper.

I see similar numbers popping up in many places, but this Wikipedia article is a good summary.  It places cost of bitumen extraction at $18-22 per barrel.  Include refining and it gets to $36-40 dollars per barrel.  Lets take a look at both ends of the spectrum on this.

$50 a barrel seems to be a pretty terrible price for oil and is where the royalty calculator bottoms out, so let's start there.  $50 per barrel means that:
$40 - Cost of Oil Production (We'll take worst case)
$0.5 - Royalty Paid on Gross Revenue Model
$2.50 - Royalty Paid on Net Revenue Model

So, absolute worst case, an oil company makes $7.50 to $9.50 on a barrel of oil, while the government (who owns the oil) takes in a whopping $0.50 to $2.50 on that same barrel of oil.  Worst case, the oil company sees a profit of 15%?  Not too bad.

Let's take a look at better case.  Let's say $100 per barrel:
$40 - Cost of Oil Production
$6.50 - Royalty Paid on Gross Revenue Model
$21.00 - Royalty Paid on Net Revenue Model

So when we have a decent oil price, the oil company makes from $39.00 to $53.50 on a barrel of oil, while the government (once again I'll mention that they own the oil) makes from $6.50 to $21.00 on that same barrel of oil.  So, when things start to look a bit better, the company is making up to 53.5% profit from something that the government owns.  Yes, we get income tax paid on this profit.  Yes, the employees pay taxes and jobs are created.  But is it any wonder these companies are fighting so hard to do us the favor of extracting our oil?  Does it not feel like perhaps we are selling our limited natural resource a little bit too cheaply?  Why are foreign companies so willing to invest in Canada?  Why don't we invest in ourselves rather than selling out?

I'm actually really hoping that somebody is going to come along and poke all sorts of holes in my very simple analysis.