The Parkland Institute

Blog Entries | May 26, 2011

Oilpatch myths cost Albertans dearly

posted by Regan Boychuk

Alberta was blessed with trillions of dollars worth of non-renewable natural resources, but there are a variety of myths clouding the debate over how well the province’s Progressive Conservative governments have been managing that wealth on behalf of citizens.

If we were to believe two University of Calgary economists, Alberta has “a royalty arrangement that, broadly speaking, balances the needs of industry to be rewarded for risky exploration efforts and, more recently, extraordinarily expensive oil sands developments with ensuring a fair share for the owners of the resource – the people of Alberta.”[1]

Professors Emery and Kneebone offer no evidence or logical argument to support those assertions and the actual evidence suggests something rather different.

First of all, developing Alberta’s tar sands is not expensive. That’s because every single dollar spent building and operating those massive, multi-billion dollar projects is reimbursed with free oil. Oil companies front the money for a few years, but are given royalty-free oil – plus interest! – to cover all of their costs. (See Parkland’s November 2010 report, Misplaced Generosity, pp. 30-32)

Small wonder every oil company on earth is beating down the doors to get in on the action up in Fort McMurray.

Second of all, exploring for oil and natural gas in Alberta is not risky. According to a recent Conference Board of Canada study commissioned by Alberta’s Competiveness Review, the average success rate for drilling wells in Alberta has been about 93 per cent over the last five years. (See Misplaced Generosity, p. 18)

How ‘risky’ is a 93% success rate? Does hitting oil or gas more than 9 times out of ten really justify such princely compensation?

So, what if Albertans actually got their fair share of the wealth generated by their non-renewable resources. If we were to believe the oilpatch and their many cheerleaders in the media, we’d supposedly suffer greatly.

Repeating a well-worn myth, the editors of the National Post recently asserted that, “In 2009, Mr. Stelmach’s government announced a 50% rise in oil royalties – a policy it had to renege on when the move noticeably reduced investment in the province’s energy sector.”[2]

Actually, the royalty increases were announced in 2007, they were no-where’s close to 50%, and they were well on their way to being reneged before they ever even came into effect in 2009.

As for the tired line about Alberta losing energy investment, the actual evidence suggests this is little more than a self-serving argument to ward off denting the oilpatch’s enormous profits.

In reality, industry investment in exploration and development remained virtually unchanged the year following the royalty increases announced in 2007 – rather surprising considering the looming royalty changes and the severity of the recession that took hold in the fall of 2008.

Actual investment remained at 2007 levels in 2008 despite the recession, while planned investment (indicated by land sales) increased by 30 per cent. So, not only did Alberta NOT lose any energy investment after higher royalties were announced, but the oilpatch was actually set to INCREASE investment in subsequent years. (See Misplaced Generosity, pp. 21-22)

With literally hundreds of billions of dollars worth of non-renewable natural resources under development, Alberta desperately needs a serious debate over how that wealth is being managed.

A good first step would be casting aside the many myths that muddy the waters.

REFERENCES
[1] Herb Emery and Ron Kneebone, “Alberta’s problems of plenty”, Policy Options, May 2011, p. 10.

[2] Editorial, “Ottawa isn’t the oil sands’ enemy”, National Post, 25 May 2011, p. A10.
 

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