Be Careful Not to Kill Alberta's Golden Oil Sands Goose

In a uniquely Canadian twist, the Alberta government may soon put an end to a royalties regime that achieved the goal of accelerating oil sands development and, in the process, turned the province's economy into the envy of the world.

That's not to say that oil sands production will cease. It won't. But if the recommendations of a provincial government-appointed review panel are adopted, it definitely will slow. Everyone is agreed on that, including the royalty review panel's chairman, Bill Hunter. The question is whether activity will ease back to a more normal and yet still healthy pace or whether it will stutter and stall as capital looks for other jurisdictions that are as out of line with the international norm as the panel fears Alberta has been.

The panel's report, embraced by some and branded as irresponsible by others, indicates that Albertans, as owners of the resource, have not been getting enough and should - at current prices - be taking in $2-billion more annually in royalties. It recommends:

Increasing the people's take from oil sands revenue to 64 per cent from 47 per cent;

Hiking royalties after payouts on development costs to 33 per cent from 25 per cent, plus a price-sensitive tax on each barrel of production from startup;

Banning "grandfathering" of current projects and energy developments;

Increasing price-related royalty caps to reflect current oil and gas prices.

Premier Ed Stelmach, who recently described how difficult it had been to "give away $10-billion" to his municipalities, says he will decide in a matter of weeks on how much of this, if any, he will implement. His promise that he will not be intimidated is a pretty clear indication, however, that he is going to at least adopt parts of the package. The "problem," according to the review panel, is that Alberta's royalty structure has been far more beneficial to private industry than is the case elsewhere. (This has prompted serious people to weigh Alberta's merits against socialist and recovering Communist jurisdictions such as Angola, Venezuela and Russia - apparent examples of where the people's interests are more paramount).

These differences have inspired opposition politicians and, for instance, the respected left-leaning Pembina Institute to point to the panel's report as proof that Albertans have been shortchanged over the past decade.

Finding the appropriate balance is always important in these matters. Yet, it does seem a bit of a stretch to imagine that Albertans, who live in a deficit- and debt-free jurisdiction, with multibillion-dollar budget surpluses, have somehow been ripped off.
Alberta has experienced close to the most rapid economic expansion, job growth etc. in the world in recent years. Workers making $100,000 in Alberta take home $5,000 a year more on average than Canadians in most other provinces, pay relatively modest property taxes and zero provincial sales tax. It is perhaps the most prosperous society in the course of human history, one in which the biggest problem facing its government hasn't been money but what to do with its massive surpluses (tax cuts oddly having been ruled out).

If Albertans have been harmed by past public policy, well, what can you say other than what does a fellow have to do to get in the queue to be so victimized? Regardless, it is apparent that the leaves are falling from the boom-town tree.
Already this year, drilling has slowed significantly. Low natural gas prices have combined with weak equity markets and massive cost increases so that the province's take from land sales is expected to do little better than $1.4-billion this year, compared with $3.43-billion in 2006 and $2.26-billion in 2005. The Canadian dollar's rise against its U.S. counterpart makes it likely that, despite rising oil prices, companies will be hard-pressed to increase profits beyond what they are today other than through cost containment (and we all know what that means).

The review panel has placed the people's hands firmly on the throat of the golden goose. Much will be determined by how hard they squeeze.