ALBERTA'S WELCOME ROYALTY MOVE

The government of Alberta has joined a growing list of sovereignties able to recognize economic jeopardy when it clobbers them in the treasury and respond appropriately. This year the province, which accounts for 80% of Canada's oil production, has watched its most important industry collapse. Oil production has declined by 60,000 b/d since January. Only 34% of the rig fleet is at work. Royalty revenues are plummeting.

Dec. 2, 1991

3 min read

The government of Alberta has joined a growing list of sovereignties able to recognize economic jeopardy when it clobbers them in the treasury and respond appropriately.

This year the province, which accounts for 80% of Canada's oil production, has watched its most important industry collapse. Oil production has declined by 60,000 b/d since January. Only 34% of the rig fleet is at work. Royalty revenues are plummeting.

Oil companies, reporting sharply lower profits or losses for the first 9 months of the year, are laying off employees by the hundreds. That means lower government revenues from individual and corporate income taxes. It means slumping retail sales in hard-hit areas and further tax revenue losses.

THE GOVERNMENT INTUITION

In tough periods like this, governments sometimes try to offset their losses by raising tax and royalty rates. They thus discourage economic activity, further pinch taxable revenues and incomes, and aggravate problems for themselves and their industries--outcomes that officials then errantly attribute solely to market conditions.

Alberta didn't yield to this all too common intuition. Last month it temporarily suspended royalties on new oil wells in an effort to stimulate production and drilling. Provincial officials said they also will consider permanent changes in the royalty scheme. According to industry estimates, the royalty suspension immediately will put 30-40 drilling rigs back to work.

To be sure, it required no great surge of political courage to make royalty adjustments favorable to the oil industry in Alberta. The province is, after all, a major oil producing region, with citizens sympathetic to the industry's problems and needs. And the measure, restricted as it is by well type and location, is at best a stop-gap measure.

Still, it represents official response to shared problems, government action taken in concert, rather than conflict, with business. Beyond that, it acknowledges that tax rate reduction, in this case selective royalty breaks, can increase government revenues overall.

In some places, supply side prescriptions like this still provoke snickers. But Alberta apparently heeded a study by a University of Calgary economist, sponsored by the Independent Petroleum Association of Canada, recommending royalty reductions as a way to boost provincial revenues. The government didn't cut royalties enough to enjoy the full financial lift envisioned in the study. But at least it saluted the principle and held open the prospect for broader, permanent royalty reform.

Further encouragement for Canadian producers comes from the federal government, which is considering relaxation of limits on foreign investment in Canadian petroleum operations. Officials have begun to doubt that key oil and gas projects can be financed without more foreign capital than is available under current limits. With state-owned Petro-Canada reporting a $234 million loss for the first 9 months of the year, they have a fair sense for current petroleum industry doldrums.

WHAT GOVERNMENTS CAN DO

Ultimately, industry slumps have more to do with markets than with anything else. Canada is no exception. The main problems in Alberta are oil and natural gas prices too low to generate sufficient returns. Governments can't do anything about that.

Governments can, however, acknowledge the financial interests they share with oil and gas producers and, when those interests suffer, improve business conditions shaped by their policies. Governments can--as demonstrated by Alberta, Ottowa, and the many nations improving petroleum laws to attract investment--conduct their affairs with simple common sense.