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Alberta Should Scrap its Outdated Bitumen Valuation Methodology

October 7, 2021 – Given the substantial contribution of Alberta’s oil sands to both the province and Canada’s economy, a stable, competitive and fair oil sands regime is essential, according to a new report released by the C.D. Howe Institute.

In “An Oil Sands Inequity: Alberta’s Outdated Bitumen Valuation Program,” authors Joel Balyk, Benjamin Dachis and Charles DeLand examine the Bitumen Valuation Methodology (BVM), a government regulation that sets the price for the royalty paid for bitumen that changes hands through non-market transactions – usually between affiliates, such as when oil sands production is sent to an upgrader owned by the same company. They argue that the royalty price for all bitumen sales should be determined by market prices, not formulas.

“The BVM has consistently overvalued the production to which it is applied, compared with market-determined values, by between $3 and $11 per barrel in recent years, thereby increasing calculated royalties for those producers,” Balyk, Dachis and DeLand write. “With well over a million barrels per day of oil sands crude oil sold at market prices, the impressive maturation of the oil sands market now provides clear price discovery.”

Designed to approximate a market price for the royalty share of non-arm’s-length bitumen, the authors found that between 2016 and 2020, BVM mining projects were assessed a higher price than their non-BVM counterparts in every year.

“To the extent that the BVM price is greater than the market price, assuming no quality or other differences, the royalty burden falls heavier on investments subject to the BVM,” they say, adding that any difference in royalty treatment tilts investment incentive away from activities that are at non-market prices, such as upgrading and refining.

Balyk, Dachis and DeLand recommend that the Alberta government replace the BVM with bitumen prices calculated from actual third-party market oil sands sales and transportation data, which could be backstopped by market-based benchmark prices for western Canadian oil sands diluted bitumen (dilbit). As well, the province should eliminate the floor-price provision, the price beneath which the calculated BVM price cannot fall.

“Eliminating the Bitumen Valuation Methodology in favour of a market-based solution would improve royalty equity between project types, increase transparency, eliminate the distortionary floor price, improve incentives for investment and reduce administrative burden,” they conclude.

Read the Full Report

For more information contact: Charles DeLand, Associate Director, Research, C.D. Howe Institute; Lauren Malyk, Communications Officer, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.