Page 53 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.71, # 1, 2014, pp. 53-79

THE ECONOMICS OF FINANCIAL SECURITIES FOR ENVIRONMENTAL
OBLIGATIONS AND THEIR IMPACT IN ROYALTY REVENUES FROM ALBERTA
OIL SANDS IN NORTH AMERICA

Fariz Ariz oghlu Guliyev

MBA in Natural Resources, Energy and Environment, University of Alberta
BS in Economics, Azerbaijan State University of Economics
Mobile tel: (+994 50) 2091054
e-mail: [email protected]

Received 17 January 2014; accepted 30 May 2014; published online 15 July 2014

Abstract

The use of natural resources comes with dramatic responsibilities for producers and resource

owners. According to Alberta Environment and Sustainable Resources Development mining

companies must plan for suspension, abandonment, remediation and surface reclamation of the

territory they utilise. These companies, also known as Approval Holders, have choices as to which

security types to use in order to satisfy their environmental liabilities. These choices have material

impact in determining annual royalty and tax revenues collected by the government.

Royalty regulation in Alberta allows Approval Holders to deduct their annual costs from

revenues. QETs (Qualifying Environmental Trusts), unlike Letters of Credit, are allowed for such

deductions. As a result, when used by Approval Holders QETs shrink the royalty revenue materially,

since its full value is tax and royalty deductible. However, Approval Holders cannot deduct QETs

from taxable income if the mine field is no longer recoverable and the production of bitumen has

stopped permanently. As time horizon of existing mine fields in Oil Sands shrinks and future

commodity prices stay uncertain we expect that Approval Holders will make a quick use of QETs to

reduce their taxable income in the near future. In this paper, we explain why oil sands operators have

not used QETs as financial securities and which uncertainties should play critical roles in identifying

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