Saturday, April 03, 2010

Alberta royalty scheme is a sham ; Excellent article breaking it all out!

In an expected about-face, the Alberta government effectively reversed the widely supported royalty increases that came into effect last year. According to Energy Minister Ron Liepert, it had "nothing to do with industry running the province" but "everything to do with what constituents have been telling MLAs across this province."
Royalty has dropped to zero since this post.
Except that, according to an Environics poll, a majority of Albertans -- including two-thirds of Tory supporters -- opposed this latest gift to the oilpatch.

Defending his government's undemocratic policy choice, Premier Ed Stelmach said it was "all about doing what's right."

One would hope there was compelling evidence pushing the government in that direction.

Unfortunately, that evidence has not been shown.

Ever since Stelmach's Tory government adopted a watered-down version of the Royalty Review Panel's modest proposals in 2007, Albertans have been told our province is too expensive and that billions of dollars in energy investment are fleeing to our neighbors.

Answering these tortured cries, the Tories established a committee of bureaucrats and representatives from the energy and investment industries to examine the situation.

This "competitiveness committee" recently submitted its final report and the Stelmach government accepted its recommendations, announcing royalty cuts on March 11.

However, a careful reading of the government's report, the competitiveness study and supporting documents reveals no real evidence supporting recommendations predetermined by energy and investment executives.

Perhaps the most curious aspect of the whole process is that the review took place before industry statistics for 2009 had been compiled.

One would assume it would be fairly difficult to examine the impact of royalties introduced in 2009 before those numbers are available.

They tried to argue Alberta is too expensive on other grounds, but those attempts leave a great deal to be desired.

Take, for example, the cost of an oil or gas well.

In the Stelmach government's Energizing Investment report, claims were made that Alberta had higher costs than the United States; however, the technical study on which their report was based concluded the opposite.

Buried nearly a hundred pages deep in the technical report appendices is the conclusion: the lower technical complexity of Alberta's wells make them 26 per cent cheaper than those in the U.S.

And though government skirts the issue, the competitiveness study further concedes that Alberta enjoys cost advantages when compared with British Columbia and Saskatchewan because of the size of our industry and our more established and extensive infrastructure.

So, it turns out, Alberta is cheaper. What about the fleeing investment we've heard so much about?

Though the competitiveness committee report claims that "oil and gas investment was reported to be flowing out of Alberta" after 2007's new royalty framework, this claim too was contradicted by the committee's own technical analysis.

The oil industry and their friends have been attributing the decline in Alberta drilling and rig activity to royalty changes, but according to the technical report, that decline began before the royalty reforms.

The report states: "this explanation is complicated as such change (royalty reform) did not come about until 2007, after activity had already begun to decline."

Instead, it suggests a more convincing explanation: " ... the recent change in activity patterns has to do with shale gas activity, including the associated impact on prices."

As for the royalty rates, everything the competitiveness committee and the government's Energizing Investment have to say is tainted by the fact that their comparisons ignore billions of dollars' worth of incentive programs put in place since royalties increased -- also a major flaw in Jack Mintz's recent University of Calgary report on royalties.

So if the Tories' royalty cuts can't be explained by public opinion and can't be justified by their own economic analysis, why did they do it?

According to Canada West Foundation president Roger Gibbons, "It will shore up support with the oilpatch," which had been shifting its support to the Wild Rose Alliance Party since the Tories implemented higher royalties.

"That is not insignificant in terms of financial and organizational support.

"That doesn't necessarily carry a lot of votes, but it's important."

As Energy Minister Liepert put it, "If we can turn around that very influential negative view by the leadership in the oil and gas industry to one of acceptance and co-operation and moving forward, it's going to make a big difference for me politically."

Trading Albertans' natural wealth for an extended stay in office might seem worthwhile to a few politicians, but Albertans should ask themselves whether it is in our best interests to continue to allow them to do so.

Regan Boychuk is a research associate with the Parkland Institute
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