Alberta’s Compromised Compromise on Royalties

Notwithstanding the usual doom and gloom from the oil industry and its cheerleaders, Premier Stelmach’s decision to increase oil and gas royalties by $1.4 billion in 2009 is an unduly timid move in the right direction. 

The provincial NDP leader summed it up as follows: “The premier has compromised yet again a report that represented a compromise in the first place, and Alberta will still be among the lowest royalty jurisdictions in the world with this new proposal.”  The risk is that Albertans and/or their government may view yesterday’s announcement as a permanent solution rather than as a first step toward appropriate royalties.

The Edmonton-based Parkland Institute hit the nail on the head:

Stelmach royalty decision shows it will be business as usual for Alberta
by Ricardo Acuña and Diana Gibson
October 26, 2007

Albertans can finally stop holding their breath. After extensive public consultation by the royalty review panel, lukewarm reception of the panel’s report and extensive backroom consultation with industry, Premier Ed Stelmach has finally made his royalty policy announcement.

And his policy represents a significant watering down of the panel’s original recommendations.

The new policy significantly modifies the price-capture mechanism recommended by the panel. It urged a price-sensitive severance tax which would kick in when oil reached $40 US per barrel. The premier scrapped this recommendation and instead made his whole regime price sensitive, but not until oil hits $55.

And although the new sliding royalty rate tops out at 40 per cent (when oil reaches $120), it still works out to less than the Panel’s recommendation of a 33-per-cent royalty plus a severance tax.

The new policy regime will not kick in until January 2009, which gives industry over a year to prepare for it. Between now and the time the regime kicks in, according to the government’s own calculations, we will have lost another $2 billion in royalties — that should certainly make it easier for industry get used to the idea.

The Panel’s recommendations represented the bare minimum. Their report even acknowledged that the proposed changes would take the province from the very bottom in terms of international comparisons to somewhere in the lower end. By not even going that far, the Stelmach regime has seriously undermined the public interest in favour of corporations.

So much so that it is misleading to even talk of an increase in royalties. In reality, royalties will fall by over $2 billion over the next ten years — even with the changes announced Thursday.

The changes just mean a slightly lower fall in royalty rates than had been expected, in spite of a doubling of production from the oilsands.

Parkland Institute’s analysis in Selling Albertans Short, a report on the royalty review, revealed that in terms of global oil dynamics and international comparisons, even the panel’s recommendations were timid at best.

Canada has 50 per cent to 60 per cent of the world’s investable oil, and the other half is in jurisdictions with a high risk politically or high exploration costs. In this context, Alberta can afford to be in the higher range for royalties while still remaining very competitive in terms of attracting investment.

Many Albertans will also be disappointed with the continuation of the pre-payout royalty holiday. Albertans know that the frenzied pace of development in the oilsands has spilled over to cause problems across the province. Many have called for a slowdown. In that context there is no reason for a two-tiered royalty rate in the oilsands. The royalty holiday until capital costs are recovered is an incentive that was put into place when prices were low and costs high.

The precise reverse is the case now. Oil is at $80 per barrel and international corporations are literally lining up to buy oil- sands leases. Whether it is one per cent or nine per cent, this investment incentive is not necessary, and is not in the public interest.

It is also of concern that, although the premier accepted in principle the panel’s insistence on greater accountability and transparency in royalty reporting and collection, he has committed his government to studying the issue rather than immediately implementing changes. Both the panel and the auditor general made very specific recommendations for increasing accountability, another round of studies and consultations is not required.

In the end, Alberta’s new premier missed this chance to show the kind of leadership that has been lacking in this province for far too long.

He failed to take a stand in the interests of Albertans and instead showed that it will be business as usual for Alberta.

Instead of adopting his own panel’s report, he based his new regime on what he heard in backroom meetings with industry. In good Alberta tradition, he has made a farce of the public consultation process and ignored the needs and wishes of Albertans. At best, the new regime is a compromise on a compromise — and both times, it is the public interest that has been compromised.

Ricardo Acuña is Executive Director, and Diana Gibson is Research Director, of the Parkland Institute, a policy think-tank based at the University of Alberta.