Parkland Institute
Op-eds | April 09, 2012

Royalty reform long overdue

Public share of resource wealth has fallen since Lougheed era

Parkland Institute

The Wildrose Party's plan to bring back "Ralph Bucks" is the splashiest example from the provincial election campaign that the leading parties appear to be putting the cart before the horse.

Keen to announce plans to spend Alberta's resource wealth, they have avoided discussion on the integrity of the province's royalty system. Research conducted by the Parkland Institute appears to con-firm polls showing a majority of Albertans and 70 per cent of Edmontonians believe the public is being shortchanged in the oilpatch.

Since the highs experienced in the Peter Lougheed era, when Albertans received 40 per cent of all resource revenue, the public's share has plummeted to all-time lows - just nine per cent in 2011, according to the government's figures.

A more precise account of distribution can be found by looking at the "economic rent" or surplus profit left after costs and a standard profit are deducted from revenue. Since profits are accounted for, collecting less than 100 per cent of the rent is a recognized form of corporate subsidy. In the last decade, the Progressive Conservatives collected less than half the rent available in the conventional sector and only nine per cent in the oilsands, translating into multibilliondollar subsidies to wealthy oil corporations.

How has a distribution of revenue so wildly unfavourable to the public occurred? Clearly, one reason is the government's reliance on an out-of-date royalty system in the oilsands, which shifts the onus for the industry's long-term costs squarely onto the shoulders of Albertans. By charging a nominal royalty until a corporation has recouped its investment, the framework ensures the public picks up the tab through foregone payments. Since the framework was drafted by the oil majors and instituted by the Klein government 15 years ago, the public has missed out on more than $110 billion, had the PCs captured even half of the surplus profits.

With soaring profits once again being posted in the oilpatch and a budget-strapped provincial government pressured to slash spending or raise revenues, it is understandable that most Albertans feel they're not getting their fair share.

Unfortunately, in their preelection budget, the PCs signalled their intention to continue to discount the public's interest. While some argue the payoff in the oilsands is just over the horizon, the government's figures show it expects royalties to collect only 12 per cent of the bitumen revenue by 2014-15, with even lower figures in conventional oil and gas. This is a far cry from Lougheed's overall target of 35 per cent, or even Ralph Klein's 20-to-25 per cent target.

The main excuse for not raising royalty rates is fear the industry will flee the province with its investment dollars in tow. While some have tried to peg the recent downturn on Ed Stelmach's royalty review, evidence shows that honour belongs to the recession and its debilitating impact on oil and gas prices.

As owners of the bitumen in northern Alberta, the public has an incredible bargaining chip in the oilsands, but it is being squandered by the government. The oilsands is the single largest reserve available to the private companies, representing about half of the recoverable oil in the ground not held by OPEC. The oil majors have scrambled for more than a decade to replace depleted reserves, and this desperation has led them to look to precarious environments like deep offshore and the Arctic and invest in risky jurisdictions like Iraq and Kazakhstan.

But the oil majors aren't the only ones interested in Alberta's finite reserves. They are competing with stateowned enterprises from Norway and China, for example, seeking to lock up reserves for the long-term interests of their citizens.

With the province on the cusp of another boom, now is the ideal time for royalty reform. If some investment was deferred, Albertans might avoid the out-of-control conditions that arose during the last boom when the province's economy overheated. Not only that, but we'd earn more per barrel of oil and ensure the good times continue.

Despite Alberta's obvious competitive advantages and the wisdom of such long-term planing, most of the main political parties seem content with keeping the province's royalties in the international basement.

Channelling the spirit of Lougheed and capturing 35 per cent of the revenue from conventional sources and 25 per cent from oilsands would boost public coffers by $17 billion next year and $19 billion in both 2013 and 2014.

Reforming Alberta's royalties is therefore a $55-billion election issue. We cannot afford to let the politicians avoid this inconvenient truth.

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