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Sunday, October 21, 2007

This Time an Eastern Business School Prof Warns Albertans over Royalty Rate Increases

Here is a Calgary Herald Editorial page piece written by a Queen’s University business professor that says Albertans should not be to “grabby” over royalty rates. It makes you wonder if he even read the “Our Fair Share” Royalty Review. Grabby it is not. It even recommends a final royalty rate below the benchmark 66% in all cases and provided incentives for new technology adoption and setoffs for upgrader investments, to name a few non-grabby features.

He seems not to know of the Alberta government largess that was given to the oil sands sector in 1997 with the introductions of 1% royalty until project payout and then 25% on NET PROFIT royalties…when oil was under $20, not the $88 it is today. Albertans have been sharing the risks of these projects for a decade but they are not participating appropriately in the royalty rewards under that old regime.

The rapid growth in the energy sector is driving the inflation, making housing unaffordable for middle class people and the competition for staff and materials is stifling the rest of the Alberta economy, and destroying the capacity of social service providers to do their jobs.

He also says: “To compound matters, such companies extract stuff that belongs "to the people," so claiming the people ought to get their fair share strikes a populist chord that governments find hard to ignore. It's a wonder the province waited as long as it did to do the review. The energy industry is perceived to be where government can extract wealth, and be rewarded politically for do so. The temptation to increase the take from a booming energy sector is almost impossible to ignore.”

Damn straight, but this is not about an overreaching “grabby” Alberta public and a hard done by energy industry. The Alberta industry has enjoyed record profits over the past 5 years, and currently record share prices. They have the benefits of dealing with an Alberta government that is democratic and sometimes responsible. They have stable long term leases in place, with a skilled well educated workforce. In Alberta they can develop their projects without needing a private army to protect workers and assets as are required in many other part of the oil world.

This is not about being grabby. It is about citizens of Alberta today and for future generations, getting a fair return of economic rents for this non-renewable resource with a one-time revenue stream. The “Our Fair Share” recommendations would even put Alberta in the lower half of the “take scale” relative to the international royalty marketplace in the world today. Grabby is not what the "Our Fair Share" Royalty Review recommendations are all about.

This royalty issue is more about good stewardship and trusteeship of government and the Auditor General has recently shown just how pathetic a job our government has been at honouring that responsibility. They have not even monitored, calculated or collected the correct royalty amounts under the current regime.

I agree the industry needs to be rethought. The industry players individually need to reconsider what they need to do to justify its continuing social licence to operate in Alberta. We need to look to investments and market from beyond North American sources. We need to find ways to make this sector sustainable in the sense it must be green and profitable the same time. It is not an option it is a requirement for the Alberta energy sector going forward. That is the big “re-think” that has to happen within the Alberta energy sector right now.

The citizens of Alberta are way head of the government and some of the industry, in this thinking. They will elect a new government this spring that will align with and act on those ends. Premier Stelmach knows this as does every other political party leader except of course for all the old die-hard Reform types and their Libertarians friends. They want to eliminate any government role entirely out of the energy sector revenue equation.

3 comments:

  1. Since our investment in the oil patch has not been recognized for what it is with low royalty and tax rates, its time to make the patch a Public Utility.

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  2. Eugene is not so far off the mark on this one. I'm prepared to acknowledge that early in the life of a resource's development, public ownership makes little sense, given that private firms generally have far greater expertise and capital ready at hand to exploit the resource. But, governments, like any organization, learn as they do and as time goes on, they inevitably gain the capacity to manage these operations as well as any private firm. Saskatchewan's experience with the development of Potash is instructive on this point. The Blakeney government nationalized the potash industry when the supply management cartel was attacked by the courts and the federal government.

    Is a public oilsands of the oil sands, really all that infathomable? Particularly if the government and the oil sands firms prove intransigent in the royalty debate. I'll be watching closely on Wednesday.

    Bets on what the government will decide?

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  3. Simon and Eugene - I think the development of the Alberta oil sands has matured past the point where we need state owned operators.

    We used to have state owned oil in Alberta and that morphed successfully into the private sector. That is where EnCana came from after all.

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