Alberta’s government has arrived at a political intersection that’s becoming too familiar. After delivery of recommendations from the Alberta Royalty Review Panel, it must choose between the market orientation that comes naturally and excess governance.
The problem isn’t just that the panel wants to hike the royalty on oil, gas, and oil sands, beyond anyone’s expectations (OGJ, Sept. 10, 2007, p. 17). It’s that the recommendations shove energy politics in a vital producing region sharply leftward.
Oil sands hit
Royalty reform under the panel’s recommendations would hit bitumen from oil sands harder than it would conventional oil and gas, largely through imposition of an “oil sands severance tax.” In all three categories, the proposals would raise the total government “take”-the share of profits claimed by federal and provincial governments through royalty and taxes. The increases: to 64% from 47% for oil sands, to 49% from 44% for conventional oil, and to 63% from 58% for natural gas.
Government take, the panel says, “can be increased with Alberta still remaining an attractive investment destination.” The important question is whether Alberta would be anywhere near as attractive an investment destination if it hiked royalty to the extent proposed as it would be if it left well enough alone.
The answer, of course, is no. By the panel’s estimates, Alberta would collect about $2 billion/year more in total royalties under its proposals at current prices and production rates than it would under the status quo-an increase of 20%. This is money that can’t be invested in oil, gas, and oil sands projects, costs of which are soaring. It’s about 12% of the investment projected this year in oil sands and 7% of forecast capital spending in conventional oil and gas. The Edinburgh consultancy Wood Mackenzie estimates that the recommendations would slash the net present value of current and planned oil sands projects by $26 billion (OGJ Online, Sept. 25, 2007).
That seems not to concern the review panel. “Albertans do not receive their fair share from energy development,” it asserts. “The royalty rates and formulas have not kept pace with changes in the resource base and world energy markets.” Analysis proceeds from there, scarcely noticing such other changes as rising costs and toughening environmental regulation.
The panel reveals much about its orientation by linking Albertans’ interests exclusively with provincial royalty receipts, as though wealth confers no advantage until it passes through government hands. In fact, Albertans benefit greatly from oil and gas production under the existing royalty regime. The finance ministry notes that oil and gas account for 20-50% of the Albertan economy, depending on industry definitions and economic measures. And the economy has been growing nicely. Last year Alberta’s gross domestic product increased 6.8%, highest among Canadian provinces and territories. The projection this year is for growth of 4.1%, second behind Newfoundland. The ministry estimates Canadian GDP growth in both years at 2.7%.
A royalty hike certain to discourage oil and gas investment would slow Alberta’s economic growth. To gloss over economic effects and focus on royalty-rate comparisons is to overlook much of importance to Albertans.
Transparency charges
Similarly suspect are allegations about accountability lapses. “The panel is unanimous in declaring that Albertans do not presently enjoy a transparent and readily evaluated royalty regime for oil and gas,” the report declares, specifically criticizing governmental performance and industry compliance. These are serious charges. But they’re supported only by vague complaints about answers the panel sought but didn’t receive from the Department of Energy, isolated numbers it couldn’t reconcile, cost data it couldn’t find, and a consultant’s worries about record-keeping that the panel didn’t have time to investigate.
To the contrary, facts about Alberta’s oil and gas industry have never been difficult to find. Maybe the accounting system strains under pressures of heavy activity. That can be fixed. But the sweeping claim about transparency is overstatement. Responding with a new level of bureaucracy would be overkill.
The panel’s report is a blueprint for bigger government and slower economic growth. Albertans should hope it dies at the recommendation stage.
