Panel Review means fall in Royalties

Gordon Laxer

Edmonton Journal

October 19, 2007

 

 

Albertans have been led astray by the heated rhetoric around the recommendations of the Royalty Review Panel’s “Our Fair Share”. Rather than increasing royalties by 20% as headlines tell the public, the Panel’s recommendations would, if fully implemented, drop by 20% by 2016.

 

That’s right. According the Review Panel, its proposals would have Alberta collect $2 billion less per year nine years from now, even though oil sands production is projected to more than double.

 

 

Alberta would collect only $7.6 billion in 2016, compared to $9.5 billion in royalties in 2006. And that doesn't seem to take inflation into account, meaning that in real dollars, the province’s royalty revenues would fall more.

 

 

Where does the promised extra $2 billion from the Review panel come from then? Without the Panel’s recommendations, royalties would drop even farther – to $5.6 billion. The status quo would mean a drop of $4 billion or 42%, whereas the panel’s plan means a drop of 20%.

 

 

The net drop in the Review Panel’s royalty revenues can be partially explained by the forecast royalty cuts on conventional oil and gas. Natural gas revenues are projected to fall by over 50%, or over $3 billion per year, even though production is projected to drop by only 14.5%. A royalty shortfall is also projected in oil sands production, which is expected to rise by 111%, while royalties rise by only 81%.

 

 

These are hardly the increases that will drive the oil corporations out of Alberta. The forecast drop in Alberta’s royalty take comes at a time when practically every other oil jurisdiction in the world is substantially jacking up its rates. Why? Because they can. The world oil price quadrupled in the past five years, leaving so much more room for economic rent.

 

 

Rents or royalties are not taxes. They are the unearned profits due to owners, in our case, Albertans, not to the service contractors, the oil corporations. The latter have temporarily leased land from we the owners. As Peter Lougheed wisely advised, “think like an owner”.

 

 

As a home owner, you hire a contractor to redecorate your kitchen. You pay the contractor enough, including the going profit rate, to entice him to do the work, but no more. The value of your house goes up, partly because of the improved kitchen. But you, the owner, get all of the increased value of the house. The contractor gets none of it.

 

A royalty, or economic rent, is that increased value, the difference between the price and the costs, the costs already include a normal profit rate.

 

It’s the same way with oil and gas. Oil corporations are the service contractors. We Albertans are the owners. Think like an owner.  

 

 

We should not accept that Alberta must compete only by offering big oil lower royalties than elsewhere. The Panel report admits that if it recommendations are accepted, Albertans will still get less than American states.

 

 

Why? It’s totally unnecessary. Alberta does not need to be in the bottom half of oil and gas jurisdictions in royalty takes. 80% of the world’s oil is in government hands and off limits to private investors. According to Jeff Rubin, chief economist for CIBC, the oil sands represent over half of all oil reserves in the world that are open to private investment. Alberta is in a very strong bargaining position.

 

 

Alberta has lots of advantages, political stability, first world infrastructure, proximity to oil markets. We do not need low royalties to compete. That would offer an unfair share to Albertans.

 

 

Promoters of big oil present two faces, one to the public and another to oil corporations. The scary face tells the public don’t raise royalties or you will kill the golden goose. The happy face tells a different story to select audiences.

 

 

Last October, Murray Smith, Alberta’s representative to the US, told a prestigious oil executive audience in the States “the royalty structure for oil sands is we ‘give it away’ at a one per cent royalty structure”.

 

 

Roland Priddle, former head of the National Energy Board, based in Calgary, pitched Alberta to Texas oil executives as a place to invest last year by asking “where else can you purchase in place oil (well, bitumen) for one cent a barrel?”

 

 

Big oil portrays the Review panel as radical. The language of Bill Hunter, the Panel’s chair sounds like he took a tough position: “As Albertans we own 100% of the resource, and we should expect nothing less than 100% of the rent. It’s up to industry to convince us that we should take a decrease”.

 

 

Exactly right. But unfortunately the Review Panel failed to take up those noble ideas in its very timid report. 

 

 

It was in the spirit of Hunter’s remarks, and the shortcomings of the panel’s report, that Parkland Institute issued its report Selling Albertans Short, by Diana Gibson.

 

 

The review panel’s recommendations are far too timid. The oil corporations don’t like the Review Panel’s report because royalties would fall by another 2 billion, if the status quo prevailed. Are there any limits to how much unearned profits big oil corporations are prepared to fight for, even if they are not the owners?

 

 

Parkland Institute was the first voice to say that Alberta’s royalty rate was way too low. Our 1999 report, Giving Away the Alberta advantage, was the first to compare Alberta’s take with Norway’s and with U.S. states such as Alaska. Parkland recommended a yearly review of royalty rates and comparisons with other countries. We applaud the Review Panel for taking up this cause. Albertans deserve full disclosure.

 

 

Parkland’s 1999 report showed that Alberta was receiving half the royalty rate in the 1990s than it did under Peter Lougheed’s regime. Premier Lougheed was courageous enough to double royalty rates in 1972, when prices were low, not to lower them by 20% as the Panel Review is recommending.

 

 

The oil corporations were outraged and carried out a scare campaign, much like we see today. In fact, many of the leaders of today’s scare campaigns are the same ones who threatened to leave in 1972 if royalties were increased.  But the Lougheed Conservatives toughed it out, and far sightedly used higher royalties to set up the Heritage Fund.

 

 

Don’t sell Albertans short. Where is today’s Peter Lougheed when we need him or her?