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Differential royalties for upgraded vs. non-upgraded bitumen

Tonight, I am looking for some informed opinions on a topic about which I do not know much.  I spent some time this evening looking into whether a differential royalty regime for oilsands bitumen based on its eventual use would survive a challenge under either the NAFTA or the WTO.  This inquiry was was motivated by a line in the Alberta NDP platform which commits to, “develop a differential royalty system on bitumen and upgraded products that encourages value added in Alberta.”  While the NDP are the only party proposing a differential royalty regime, other parties are proposing various measures with the desire to drive more upgrading in Alberta.

My question is this – when, and under what conditions, would such a policy survive a NAFTA or WTO challenge?  I think the answer is clear – a differential royalty rate for exports would not stand up in almost any form.

I know a little more about NAFTA than about the WTO, so I started there. The legal text of NAFTA seems very clear on this issue.  Exhibit A (boldface is mine):

Article 604: Export Taxes

No Party may adopt or maintain any duty, tax or other charge on the export of any energy or basic petrochemical good to the territory of another Party, unless such duty, tax or charge is adopted or maintained on:

 a) exports of any such good to the territory of all other Parties; and

b) any such good when destined for domestic consumption.

A differential royalty which sets a different price for bitumen, clearly an energy good, for export as for domestic use would seem to directly contravene this Article.

Second, we have (boldface is mine):

Article 605: Other Export Measures

Subject to Annex 605, a Party may adopt or maintain a restriction otherwise justified under Articles XI:2(a) or XX(g), (i) or (j) of the GATT with respect to the export of an energy or basic petrochemical good to the territory of another Party, only if:

a) the restriction does not reduce the proportion of the total export shipments of the specific energy or basic petrochemical good made available to that other Party relative to the total supply of that good of the Party maintaining the restriction as compared to the proportion prevailing in the most recent 36month period for which data are available prior to the imposition of the measure, or in such other representative period on which the Parties may agree;

b) the Party does not impose a higher price for exports of an energy or basic petrochemical good to that other Party than the price charged for such good when consumed domestically, by means of any measure such as licenses, fees, taxation and minimum price requirements. The foregoing provision does not apply to a higher price that may result from a measure taken pursuant to subparagraph (a) that only restricts the volume of exports; and

c) the restriction does not require the disruption of normal channels of supply to that other Party or normal proportions among specific energy or basic petrochemical goods supplied to that other Party, such as, for example, between crude oil and refined products and among different categories of crude oil and of refined products.

So, we can charge a higher price for our products, and there is no barrier to that under NAFTA, as long as we impose it on everybody – in other words, as long as we don’t impose trade barriers to provide an advantage for domestic processors.

It seems pretty clear to me that, based on Articles 604 and 605 of NAFTA, we would have no legal ground to stand on to charge a differential royalty rate for exported bitumen heading to the US for upgrading vs. that used by firms operating in Canada.  I expect the waters get a little cloudier where the WTO is concerned, but I would love your opinions, parallels, precedents, etc. on either.

4 responses to “Differential royalties for upgraded vs. non-upgraded bitumen”

  1. Tammy Nemeth

    Hi Andrew,
    I concur with your conclusion that a differential royalty rate for exported bitumen would violate NAFTA. My understanding is that Article 604 was inserted specifically to prevent Canada from imposing export taxes as they did after the 1973 oil crisis. Since the NAFTA chapter incorporates the relevant articles from the GATT (which is now the WTO) it would seem likely that a WTO challenge against Canada in such a situation would succeed. However, it is more likely that if Alberta were to implement a differential royalty regime a challenge would first be made under NAFTA before the WTO.

  2. Refine it where you mine it?

    […] bitumen for local processing seems unlikely to survive a NAFTA challenge, so I think that’s off the table.  Clearly, the option to sign commercial processing […]

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