Goofy Oil-Industry Advocacy

The Alberta government is reversing its modest increase in conventional oil and gas royalties. Albertans will now receive an even smaller fraction of the value of their resources. The saving grace is that the provincial government did not cut royalties on the oil sands, which are projected to provide more revenue than conventional reserves going forward.

Corporate executives welcomed Thursday’s announcement. Oil and gas companies will enjoy even higher profits given lower royalties, so their response was logical.

I was more struck by the strange comments from the industry’s supporters on the political right:

1. Danielle Smith

The pull-out quote in yesterday’s front-page Globe and Mail story (repeated in today’s editorial) was: “They didn’t say the words that I think industry wanted to hear: ‘We were wrong, and we’re sorry’.” – Wildrose Leader Danielle Smith

Similarly, The National Post’s Kevin Libin noted, “Mr. Stelmach avoided offering the unreserved apology many Calgary executives had wanted.” (Incidentally, Smith and Libin have been the Alberta panellists on The Michael Coren Show the couple of times that I have appeared.)

So, in addition to giving away Alberta’s resources more cheaply, the government is supposed to apologize to the companies? If the apology is really more important than the money, maybe Premier Stelmach should have just said he was sorry and left royalty rates where they are.

2. Andrew Coyne

On Thursday, Coyne seemed to be filling in for Kevin O’Leary on CBC’s Lang & O’Leary Exchange. He made two arguments against higher royalties: they are offset by lower auction revenue and Alberta does not need the revenue anyway.

The first point is actually a much improved version of one that he has made before. His final National Post column presented auctioning access to oil and gas reserves as a brilliant new idea that had not been previously considered. In fact, the western provinces have always collected both royalty and auction revenue.

There is some tradeoff between the two. With higher royalty rates, companies will be willing to pay relatively less to access any given resource deposit. However, since auction revenue is small compared to royalty revenue, one cannot simply assert that a decrease in the former would be large enough to wipe out an increase in the latter.

Coyne’s point about Alberta not needing the revenue also harks back to the same Post column, but has gotten more ridiculous with time. It is now self-evident that the Alberta government could use more revenue to reduce its budget deficit.

When the Alberta government was running huge surpluses, one could plausibly ask how badly it needed more money. But if nothing else, it should have been collecting and saving more for the benefit of future generations, especially since the resources in question are non-renewable.

3. Jack Mintz

I have not seen Mintz respond to Thursday’s announcement. However, the paper he released last month helped pave the way for it.

Among other things, he combined taxes and royalties to argue that oil companies bear a heavier “fiscal burden” than other industries. But royalties are fundamentally different than taxes.

Royalties are the price that resource owners charge companies for the resources. In Canada, most resources are owned by the people of the provinces in which they are located.

In Texas, private resource owners charge the same type of royalties as western provincial governments. Counting royalties as taxes to claim that oil companies are overtaxed is like counting the cost of iron ore as a tax to claim that steel companies are overtaxed.

Mintz urged provincial governments to levy royalties only after oil companies have paid off all of their capital costs. This approach can work in mining, where each mine is a separate operation with identifiable costs and revenues. However, Alberta’s experiment with this approach in the oil sands from 1997 through 2008 failed.

Without clear boundaries between oil-sands projects, companies perpetually avoided paying royalties by writing off new investments against income from established facilities. This problem would be even worse for conventional oil and gas, where companies continually drill new wells in established fields. Mintz neither acknowledged this problem nor proposed solutions.

Therefore, one is hard-pressed to read his paper as a serious proposal to improve Alberta’s royalties. Its function was to bolster the industry’s position that royalties were too high and should be cut.