Friday, December 26, 2008


Vue Magazine out of Edmonton

Shannon Phillips /
Eighty-four per cent of Albertans think the province isn’t collecting enough royalties from our non-renewable resources, according to a May 2006 poll. But the government says their review of the system—which they won’t release to the public—concluded that we’re getting “our fair share” from multinational corporations reaping unprecedented profits.

Alberta energy minister Greg Melchin says his department finished a review of the province’s oil royalties last week, but controversy erupted when Conservative leadership candidates Ted Morton and Ed Stelmach told reporters the review was discussed at neither caucus nor cabinet. Morton told the Canadian Press that the exercise had not even begun, saying his understanding was that the review had been shelved pending the expected election.

The energy ministry did not return repeated requests from Vue for information on the review.

NDP leader Brian Mason has since written to the energy minister requesting the parameters of the review, its timeline and its participants.

“Basically, the government is saying that their dog ate the royalty review,” quipped Mason.

“During the last election, the NDP was out on its own, asking for changes to the royalty system. None of the other parties would touch it, as both the Liberals and the Tories depend so heavily on money from the oil and gas sector.

“But now, there seems to be a growing awareness that we’re not getting a fair return on our resources—that’s why the province agreed to this phantom review. Given all the fog around it, we’re simply renewing our call for a public, transparent process.”

Alberta’s last royalty review was in 1992, but no significant changes were made. 1997 saw some changes for oil sands producers, but conventional oil and natural gas calculations were designed in the mid-1980s, when oil prices dipped to $10/barrel and the undiversified Alberta economy suffered, with thousands of job losses and a mini-recession.Oil and gas royalties are not just another form of corporate tax—they’re less like tax deductions on a paycheque and more like the cash paid to a landlord. Policy wonks call the concept economic rent: by law, non-renewable resources belong to Albertans, not to the companies that exploit them. Economic rent is the difference between the value of the resource and the cost of producing the resource, including an allowance for a normal rate of return on investment (profit).

Royalties are calculated in many different ways, so comparisons between different countries, states and provinces are difficult. But the Pembina Institute, an Alberta-based environmental economics think-tank, has demonstrated that Albertans are being grossly shortchanged compared to other jurisdictions.
In 2004, Pembina found that Alaska charged $11.60 per barrel oil royalty, and Norway charged $14.10 per barrel. Alberta charged $4.30 per barrel.

Between 1995 and 2002, Alaska captured almost 100 per cent of the economic rent of the resource, and Norway captured almost 90 per cent. Alberta captured just 50 per cent.Calgary-based EnCana—one of Canada’s most prolific natural gas producers—is one of the few companies that disclose their average royalty rates. In 2003, EnCana paid an average of 12.9 per cent on the Canadian (mostly Alberta) natural gas they produced. They paid 20 per cent on their US-produced gas.Low royalties means that Alberta collects the same amount of money from gambling as we do from conventional crude oil ($1.4 billion). Liquor and tobacco taxes significantly outpace oil sands royalty revenue ($1.3 billion on booze and smokes last year compared to $950 million from the tar sands). Add low royalties to the lowest corporate taxes in Canada (reduced this year by another $365 million) and Alberta is by far the most lucrative place in the hemisphere for American oil and gas companies to do business.

The Canadian Association of Petroleum Producers says increasing royalties discourages investment. But that’s not what has happened in countries that have made recent changes to their royalties. Venezuela’s leftist President Hugo Chavez boosted royalties from one per cent to a whopping 30 per cent over the past two years, even charging back-royalties to make up for years of uncollected rent.

Foreign investments from Asia—particularly China—have increased. Only Texas-based Exxon-Mobil has refused to play ball.

Mason says a thorough public review of royalties would take the oil and gas industry’s disinvestment claims into careful consideration.“If the oil and gas industry is saying we’re not going to invest if you raise royalties, and if you look back and see that they were making investments with a third of the profits they are making now, then we need to scrutinize those claims very closely and decide what’s in the public interest,” says Mason.

Tar sands royalties are an entirely different Pandora’s box of complicated calculations. But the basic concept is simple: oil sands developers pay only one per cent royalty until they recover their capital costs—a scheme developed in the early 1980s and reworked in 1997. The one per cent rule was meant to give oil sands producers a helping hand with big-ticket technology and equipment required to strip mine and refine viscous, sandy tar into a usable final product.As production costs have declined and profits gone skyward, many observers are saying it’s time for a change—including former Premier Peter Lougheed. The man who first negotiated what the Pembina Institute calls a “sweet deal for companies” called for a moratorium on tar sands development and a renegotiation of royalty rates in early July. “[Albertans got] $2.85 from a barrel of oil from the oil sands in 1997. They got $1.74 in 2005,” says Amy Taylor, director of ecological fiscal reform at the Pembina Institute.“Keeping the decade-old royalty regime, designed to jumpstart oil sands production, when [the economy] is overheated, is irresponsible,” says Taylor.“At the end of the day,” concludes Mason, “the most important thing to remember is that Albertans own these resources, not the oil and gas companies. The smartest thing to do would be to capture an appropriate return on our non-renewable resources so that we can build an economy based on renewables.
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