Saskatchewan’s Resource Royalties

Yesterday’s Leader-Post included the following report on my speech to the Saskatchewan Federation of Labour’s annual convention.

My topic, “Is Saskatchewan getting a Fair Return on its Resources?,” may have been poorly timed given the recent crash in resource prices. However, it is important to put this crash in perspective. The current world oil price of around $70/barrel is still far above the $20/barrel price at which oil companies made money for many years. Indeed, $70/barrel was the average world oil price in 2007, a banner year for the petroleum industry.

The value of other Saskatchewan resources has not declined at all. On Thursday, PCS reported that it sold potash for an average of $590/ton in the third quarter of 2008 and has locked in such prices for months to come. Only a few years ago, it was selling potash for fewer than $100/ton. Since all of these prices are denominated in US dollars, today’s lower exchange rate makes them higher in Canadian dollars.

These higher resource prices have expanded Saskatchewan’s economy, but have not fully “trickled down” to the people of Saskatchewan. In 2007, Gross Domestic Product per person was 10% higher in Saskatchewan than in Canada as a whole. However, personal income per person was 10% lower in Saskatchewan than in Canada as a whole. More of the resource-driven economic expansion has gone into corporate profits than employment earnings.

One way to translate higher resource prices into a higher standard of living for Saskatchewan people would be for the provincial government to charge higher resource royalties. It could distribute the additional revenue back to residents directly or through improved public services and infrastructure.

Unfortunately, in an effort to accelerate resource extraction, the provincial government has instead slashed royalty rates. In 2007, Saskatchewan’s resource sales were worth $14.4 billion, but the provincial government collected only $1.8 billon in resource royalties. Since the vast majority of these resources are Crown-owned, it seems to me that the Government of Saskatchewan should be able to collect more than 13% of their value.

Some 80% of Saskatchewan’s resource sales and more than 80% of its royalty revenues come from two commodities: oil and potash. Despite rising prices and falling royalty rates since 2000, Saskatchewan’s oil production has not increased. The petroleum industry appears to have been producing at full capacity in Saskatchewan, which implies that the government could raise royalties somewhat without reducing production.

The following table assumes that the industry needs 150 Canadian dollars per cubic metre (provincial documents use this measure instead of barrels) to generate a healthy profit producing at full capacity. In theory, the Government of Saskatchewan should be able to collect all of the revenue beyond this price. In reality, a more achievable goal might be to collect three-quarters of this surplus revenue.

The same type of calculation for potash suggests that, in 2007, the government could have collected $1.1 billion instead of $0.3 billion in royalties.

Oil royalties could give $2.7B more

The Leader-Post (Regina)
Saturday, October 25, 2008
Page: D3
Section: Business & Agriculture
Byline: Neil Scott

 

The provincial government could be earning as much as $2.7 billion more per year in oil royalties, according to an economist who spoke Friday at the Saskatchewan Federation of Labour convention in Regina.

Erin Weir, an economist employed by the United Steelworkers Union, said the tax breaks provided to Saskatchewan citizens by the provincial government earlier this week only cost an amount equal to about one-ninth of the revenues lost by the province by not charging oil companies appropriate royalties.

“The government of Saskatchewan has some room to increase oil royalties,” Weir told an audience of more than 600 at the Conexus Arts Centre.

Weir said he believes there was room last year for the provincial government to have charged $2.7 billion more in oil royalties while still leaving oil companies room to make an adequate profit.

The provincial government could also have earned about $800 million more last year by raising potash royalties, Weir said.

Weir dismissed any suggestion that his proposal for higher oil royalties is a radical left-wing proposal. Conservative governments in both Alberta and Newfoundland have squeezed oil companies for more royalties, Weir said.

And Weir said he isn’t especially worried that oil companies will pack up their oil-drilling equipment and leave the province if royalties are raised.

“If Saskatchewan raises its royalties where are they (oil companies) going to go — go back to Alberta?” Weir asked.

Alberta itself raised its oil royalties not too long ago, Weir said, and that move by Alberta opens the door for Saskatchewan to also raise its oil royalties but still remain competitive.

But Weir also conceded there is a potential that higher royalty charges could slow down activity in the Saskatchewan oil patch. That slowdown may be a price worth paying, he said.

“Each barrel of oil we can only sell once, so we better get the best possible price,” he said.

Money raised by increasing resource royalties could be used to provide benefits to Saskatchewan residents in the short term, Weir said.

But the extra money could also be used to pay down the provincial debt and even create a fund of money that could be used by future generations when the province’s resource riches are depleted, Weir said.

While Saskatchewan is now a “have” province in Confederation, Weir said wages paid in the province — despite some increases in the last year or two — continue to lag behind the national average.

Unions, including unions that represent workers in resource industries, have a role to play in pushing for higher wages for the workers they represent, Weir said.

But only a small percentage of Saskatchewan workers are employed directly in resource-based industries, Weir said.

The government has a responsibility to make sure that all people in the province get a fair share of the revenues from the province’s resources, Weir argued.