Leader-Post Debate on Oil Royalties

The Regina Leader-Post recently ran an editorial opposing my proposal for higher resource royalties. My response is printed in today’s edition:

The Leader-Post’s October 28 editorial critiqued my suggestion that the government of Saskatchewan increase oil royalties. It emphasized volatile oil prices, the volume of oil production in Saskatchewan and competition with Alberta. In fact, all three issues strengthen the case for higher royalties.

This summer, the price of oil rising to $147 per barrel created massive unanticipated profits on oil that was already being produced. This windfall should have gone to the people of Saskatchewan, to whom the oil belongs. However, the province’s low royalty rates collected only a fraction of it.

The government of Saskatchewan should reform its royalty regime in preparation for future price spikes. It is reasonable for oil companies to receive healthy profits and pay moderate royalties up to an appropriate benchmark price. But the provincial government should collect most of the value above that price.

Oil prices have declined to around $70 per barrel, still far above the price of $20 at which the petroleum industry prospered for years. My estimate of $2.7 billion in uncollected royalties is based on figures for 2007, when oil averaged $70 per barrel.

The Leader-Post argues that low royalties are needed to “encourage more production.” In fact, Saskatchewan’s Ministry of Energy and Resources indicates that the volume of oil production was exactly the same in 2007 and 2001.

Royalty reductions since 2001 have not increased production, but simply reduced revenues from existing production. In any case, more oil production may not be desirable since it entails faster depletion of a nonrenewable resource and additional greenhouse-gas emissions.

The most recent Statistics Canada figures on the conventional oil and gas industry are for 2005. As a share of marketable production, royalties and land sales were 22% in Alberta and 18% in Saskatchewan.

The government of Alberta has announced significantly higher royalty rates beginning in 2009. Simply matching Alberta’s rates would be a boon to Saskatchewan’s treasury.

The Leader-Post worries that Alberta might then slash royalties, prompting oil production to relocate from Saskatchewan to Alberta. Provinces should co-ordinate to ensure that they all collect maximum royalties, rather than competing in a race to the bottom.

But even if other jurisdictions undercut Saskatchewan’s royalties, there are few realistic opportunities for conventional oil producers to relocate. It would be extremely difficult to shift to Alberta or the United States because both are running out of conventional oil. The oil sands and offshore oil require completely different equipment than is employed in Saskatchewan’s conventional oilfields.

Globally, some 80% of oil is produced by state-owned enterprises. As one of the world’s few jurisdictions with conventional reserves open to private companies, Saskatchewan is strongly positioned to request higher payments from these companies.

The Leader-Post concludes its editorial with an appeal to “keep royalties sensible.” It is not sensible for Saskatchewan to collect less than one-fifth of the value of oil production in royalties. It would be sensible to seek a better return on the depletion of the province’s nonrenewable resources.

UPDATE (November 18): An excellent letter from Evan Morris makes the case for higher royalties in today’s Leader-Post.