Friday, October 19, 2007

RBC Capital Markets Weigh In On Royalty Review With Same Old Argument

The RBC Capital Markets analysts have weighed in on the “Our Fair Share” Royalty Review Report and see it as “Short-term Gain for Long-Term Pain.” By way of full disclosure the RBC is my bank and they are a great institution. However, I have to say they don’t "get it" about the "Our Fair Share" Royalty Review based on their recently published analysis.

This RBC Capital Markets report is well written but it is a perfect example of the old adage that if your only tool is a hammer, every problem looks like a nail. The RBC focus is only on the economics and they ignore the environmental and societal tolls the rapid uncontrolled growth the energy sector is having on Albertans outside the oil patch and the oil sands.

The energy industry, and their advisers, like the RBC Capital Markets, needs a more robust set of analytical tools in their kits going forward. They have to broaden their perspective and deepen their understanding using a more integrated model of how they impact the world around them. They have to start thinking in terms that are more complicated and comprehensive and have goals greater than just getting rich quickly.

I want to challenge the RBC report's stated assumption that the Royalty Review recommendations are at cross-purposes to maintaining current relationships between government and the energy industry. They say “If it is the intention of the Province to maintain its current relationship with oil and gas industry, global capital markets, the other province, and the Federal Government, we believe the Panel’s recommendations are at cross-purposes, and the implied policy shift away from working in Partnership with the oil and gas industry is not in the best interests of Albertans.”

First off I think it is up to Albertans to decide what is in their best interests, not RBC Capital Markets. Secondly it is not the intention of the The “Our Fair Share” Review Report to maintain the current relationhip. The Panel answers this comment fully in the Review Report on page 7. It is the opening paragraph of the Executive Summary. It says that the current relationship with the industry should not be maintained but should be changed. It is not about cross-purposes with the status quo…it is about changing the status quo.

The Review says the formula and royalty rates “…have not kept pace with changes in the resource base and world energy markets.” It puts the “onus” on the government to “re-balance the royalty and tax systems so that a fair share is collected.”

The Panel makes it explicit there needs to be a policy shift on royalties. It is not making an “implied policy shift” as suggested by the RBC. The change needs to reaffirm the fundamental principle that it is all ALBERTANS who own these non-renewable natural resources and that is their right pursuant to the Constitution of Canada.

The Royalty Review clarifies that the Government of Alberta is the trustees for the citizen's natural resources and they are mandated to protect the interests of the citizen’s of Alberta. The energy industries are tenants who are granted permission through the EUB regulatory approvals to do business on the public’s property and to exploit the public’s resources for the greater and common good as well as their own self interests.

The RBC comment on the need for a sharing of “risk and reward” is a tad ironic. This “sharing” benefit has not been fair for a long time – and the rewards have mostly been in industry’s favour, especially with the current high commodity prices and unbridled growth that is spurred by the current inadequate royalty regime. The new severance tax is a perfect example of the Review Panel recommending a risk-reward sharing model. This new tax has recommendation an oil commodity floor price of $40 before it kicks in and then maxes out at $120 per barrel oil. That is a true risk and reward sharing regime than anything that exists at present.

As for reward sharing, according to the Auditor General's recent report, we had an Alberta government that, for years, did not even bother to correctly calculate or collect the royalties due under the current regime. Albertans end up taking all the risk, the energy industry reaps the rewards and it is all government's fault under that scenario. Not good stewardship. Not good trusteeship. Not good enough!

The relationship between the energy industry and the government from now on will be open, public, transparent and accountable. Citizens will see to that in the next election. Any politician, regardless of party affiliation, who wants to continue to govern this province, had better start living up to their trusteeship and stewardship responsibilities relating to resources, environment and societal needs.

The past model of these decisions being made behind closed door and the inappropriate cosiness of the energy industry with some of their passive and compliant political friends is over. How can that true “partnership” between the industry and the government be anything but healthy and better serve the common good – especially in the long term?