The Parkland Institute

Op-eds | December 05, 2010

Generosity for energy sector, tough times for everyone else

As industry rakes in billions, public services are cut and deficit grows

by Regan Boychuk

After a long string of billions in drilling incentives and royalty holidays for the oilpatch over the last two years, the latest provincial budget update recently confirmed the $5-billion scale of Alberta's expected deficit.
Already enduring a recession and a variety of cuts to public services, Albertans have every reason to expect more of the same from the Progressive Conservative government: generosity for the oilpatch, discipline for citizens.

A new report from the Parkland Institute -- Misplaced Generosity: Extraordinary Profits in Alberta's Oil and Gas Industry -- takes a closer look at whether the oilpatch was in need of those handouts, and asks some tough questions about the scale of their profits and how the Stelmach government has managed this province's most important economic file.

Let's not forget: the oilpatch doesn't own the oil, natural gas, or bitumen. Albertans own the resources.

In this sense, Albertans are like homeowners. The oilpatch is like a real estate agent. We hire them to sell our property for us.

We pay these oilpatch "real estate agents" well: We cover all of their costs and grant them a reasonable additional profit.

And we keep them busy: We sold about $700 billion worth of homes (oil/natural gas/bitumen) between 1999 and 2008.

This may seem reasonable so far, but Alberta's government also grants this real-estate agent at least 25 per cent of the equity generated by the home sales. So, besides being well paid for their work, our real estate agents get at least a quarter of the "home" equity.

To some Albertans, that may seem overly generous -- but not to others. One former energy minister told Alberta's auditor general in 2007 it was appropriate to give the oilpatch real estate agent 50 per cent of the equity. Recent Progressive Conservative government management of the energy sector has granted the real estate agent just that: nearly 53 per cent of Albertans' equity.

The "home equity" described above is basically the same as the "resource rent" calculated in Parkland's new report. Industry is allowed to cover its costs and earn a 10-per-cent profit before any resource rent is generated.

If the oilpatch/real estate agent is allowed to keep any of the resource rent/home equity, it is considered "excess profit" because it came over and above the recovery of their costs and a reasonable profit.

Between 1999 and 2008, the province's royalty regime has granted the oilpatch $121 billion in pre-tax excess profits -- $13.3 billion in 2007 alone and another $22.8 billion in 2008.

Alberta's department of energy aims to capture 50 to 75 per cent of the resource rent/home equity. Over the last decade, it has failed to capture even the bottom end of that target with royalties and land sales.

If Alberta Energy had managed to capture the upper end of their target, Albertans would have enjoyed another $65 billion in royalties/land sales. And don't forget that, even under that scenario, the oilpatch/real estate agent would still be allowed to keep 25 per cent of the resource rent/home equity.

So, even if Alberta Energy had managed to collect another $65 billion in royalties and land sales between 1999 and 2008, industry would still have been left with $56 billion in excess profit.

And that is only conventional oil and natural gas. The oilsands are in another league when it comes to generosity.

In the oilsands, things are mildly more complicated, but the gist of it is that we grant our real estate agents in Fort McMurray at least 85 per cent of the equity when we sell our energy property there.

No wonder oilpatch "real estate agents" from all over the world are knocking down our door to get in on the action up there.

Since the start of the oilsands boom in 1997, real estate agents in Fort McMurray have kept at least another $97 billion worth of Albertans' home equity.

Of course, this is not to argue that this $200 billion or so in uncollected resource rent should have been put into the annual provincial budget and spent. Instead, it should have been placed in the province's Heritage Savings Trust Fund or something similar where it could soon be generating $10 billion a year in sustainable budget support for generations to come.

But that money isn't in the bank; it went into the already deep pockets of the oilpatch/real estate agent. As a result, what we have today is reduced public services and a deficit.

Albertans should consider whether this is how they'd like their government to continue managing their natural wealth.

Regan Boychuk is a public policy research manager with the University of Alberta's Parkland Institute. His report on oilpatch profits can be found at parklandinstitute.ca.

Links to Media:

• Edmonton Journal, December 04, 2010 (A17)

Related research:

• Misplaced Generosity (Reports)

---

Comments

Comment on this entry

Please log in to comment. If you don't have Parkland Institute site login yet, register here (it's free and we don't share your email address with anyone).

Username

Password

Auto-login on future visits

Forgot your password?