“This is a sale of a depleting resource that’s owned by the people. Once a barrel of oil goes down the pipeline it’s gone forever. It’s like a farmer selling off his topsoil,” former Premier Peter Lougheed once said.

Let’s Review Oil Royalties and Start Acting Like Owners Again.

Alberta’s new NDP government has taken steps to fulfill one of their key election promises by appointing a panel to ensure Albertans are receiving their fair share from their natural resource wealth through the royalty rates paid by the oil industry to the Alberta government.

Rachel Notley Alberta NDP leader

Rachel Notley

The choice of Alberta Treasury Branches President Dave Mowat, energy economist Peter Tertzakian, former Alberta deputy minister of finance Annette Trimbee, and Mayor of Beaverlodge Leona Hanson to review Albertans royalties should calm any anxiety industry leaders may have had with this process. These are sensible choices for this important review.

Like the panel reviewing Alberta’s climate change strategy, the royalty review panel is stacked with knowledgable appointees who cannot be accused being partisan New Democrats. And while some industry leaders are still uncomfortable with this year’s election results, Mr. Tertzakian has some advice for conservative-connected business leaders.

Peter Tertzakian

Peter Tertzakian

“The industry needs to have more than just an open mind — I think you have to go with forward thinking and that this is an opportunity to get away from business as usual,” Mr. Tertzakian told a business reporting website after Rachel Notley‘s NDP was elected with a majority government on May 2015.

The appointment of Mr. Tertzakian received immediate praise online from two prominent conservative voices –  former Wildrose MLA Heather Forsyth and former Wildrose leader Danielle Smith.

The panel has an important task ahead of it and has a mandate to “optimize” returns to Albertans as owners of the resource, industry investment, diversification opportunities, such as value-added processing, and responsible development of Alberta’s resources.

Bill Hunter, who chaired the 2007 royalty review panel established by former Premier Ed Stelmach, wrote in his final report that “Albertans do not receive their fair share from energy development. Albertans own the resource. The onus is on their government to re-balance the royalty and tax system so that a fair share is collected.”

Marg McCuaig Boyd (photo by Connor Mah)

Marg McCuaig Boyd (photo by Connor Mah)

Nearly a decade after Mr. Hunter penned those words, the responsibility once again falls on Alberta’s government to ensure that Albertans are receiving their fair share from energy development.

It is up to the current panel to consult with Albertans and industry to determine what that proper balance will be.

Part of that balance will be timing, as Energy Minister Marg McCuaig-Boyd told reporters today that any changes to royalties will not be implemented until 2017. And like any other panel review, Ms. McCuaig-Boyd and Ms. Notley have the leeway to ignore any recommendations that might appear to be politically unpalatable or carry too much risk. This is why government’s like to employ these types of panels to review potentially controversial policy changes.

Politicians from the opposition benches have been fiercely critical of NDP plans to review royalties. The WildroseAlberta PartyLiberal and the Progressive Conservative opposition have described the review as “job killing.” A September 3 by-election in Calgary-Foothills has escalated the partisan rhetoric from the opposition, who see a by-election win as a way to discredit the new government’s agenda.

Dave Mowatt

Dave Mowat

But others, like Alberta Oil Magazine editor Max Fawcett, argue that now is the perfect time for a royalty review. Canadian Association of Petroleum Producers president Tim McMillan has said he does not want the government to delay the review, and even Mr. Stelmach has said the review should happen.

Comparisons can be made to a rookie PC government led by Peter Lougheed, which reviewed royalties during its first year in office, to the consternation of industry leaders who had grown accustomed to a comfortable relationship with the old Social Credit government.

“The oil companies, not unexpectedly, are howling – while the natural gas industry is quaking in its boots because the government also has made clear it is going to change its taxes in the fall,” the Ottawa Citizen reported on May 8, 1972.

Ed Stelmach

Ed Stelmach

“This is a sale of a depleting resource that’s owned by the people. Once a barrel of oil goes down the pipeline it’s gone forever. It’s like a farmer selling off his topsoil,” Mr. Lougheed once said while encouraging Albertans to think like owners.

As the owners of the resources, Albertans deserve to know whether we are getting our fair share. But the result of a royalty review is made more important if the government does something meaningful with the funds collected through the rent of our natural resources.

Alberta launched the Alberta Heritage Savings Trust Fund in 1976. Under Mr. Lougheed’s leadership, the Heritage Fund initially received 30% of government resource revenues and was worth $12.7 billion in 1986, when the PCs began a 17 year freeze on new deposits into the fund. The Heritage Fund is now worth only $17.4 billion. Despite an embarrassment of riches during most of its 44-years in power, the old conservative government proved to be poor financial managers once Mr. Lougheed retired.

In their 2015 election platform, the NDP campaigned on the promise that “100% of incremental royalty revenue, above the sums earned by Alberta under the current regime, will be invested into Alberta’s Heritage Fund.

The current downturn in the price of oil will certainly change some of the new government’s short-term plans when the budget is tabled in October 2015, but significant investment in the Heritage Fund when oil prices do rise again will pay off for Albertans in the long-term. And ensuring that the owners – Albertans – are receiving their fair share from energy development, as Mr. Hunter wrote in 2007, will be key to this long-term planning.

9 thoughts on “Let’s Review Oil Royalties and Start Acting Like Owners Again.

  1. Ffibs

    Even if Alberans received 90% royalties, forcing this toxic tar through natural gas pipelines across water ways in MB ON & QC that are no loner protected by environmental assessment (thanks to Harper) so that it can be exported for the enrichment of a few wealthy old Neanderthals is not worth the risk.

    Reply
  2. Tom Wall

    I want that Wildrose Party and Brian Jean to commit to never ever raising oil royalties. That way we will know for sure that they are not looking out for the best interest of Albertans. They are stooges of the foreign owned oil industry.

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  3. Dave

    Actually if Brian Jean and the Wildrose party committed to not raising royalties it would show that they are looking out for all Albertans, our jobs, prosperity, and economy. This would ensure a sure-fire victory for them in 2019. It would also show that the NDP are stooges owned by big labour unions who don’t care about anything other than themselves and their socialist agenda.

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  4. Brad

    Never thought I’d see a world where the NDP were standing up for Albertans and the Conservaties are siding with the foreign owned oil companies. Shameful. Can’t vote Wildrose until they start standing up for Alberta.

    Reply
  5. Sam Gunsch

    re: what might be the WRP/B. Jean/D. Fildebrandt target share of non-renewable resource revenue?

    What do they think is the owner’s fair share?
    In their Alberta, what are we citizens permitted to ask for?

    Would WRP be ok with the Lougheed average share of revenue from Albertan’s non-renewable resources?
    27%
    Or Redford level? 9.1%
    Or Klein level? 15.2 %
    Or Socred? 17.8%

    http://www.anielski.com/alberta-continues-to-have-a-revenue-problem/

    excerpt: ‘During Lougheed’s tenure (1971-1985) an average of 27.0% of the value of oil and gas was collected in royalties when oil averaged US$20.52 per barrel. The year 1977 was the peak in royalty collections reaching 37.7% of the value of oil and gas production at a time when oil was trading at US$14 per barrel. During Ralph Klein’s tenure (1992-2006) an average 15.2% of the value of production was collected in net royalties when oil prices averaged US$25.52 per barrel.

    excerpt: This week’s budget was disappointing because Prentice missed an important opportunity to open a new chapter in Alberta’s economic future by being as bold as Peter Lougheed was in the 1970s when he brought in a oil and gas royalty regime that collected a fair share of industry revenues while at the same time saving 30% of more of those revenues in Alberta’s Heritage Savings Fund.

    excerpt: During the Socred era (1962-1971) Alberta collected an average of 17.8% of the value of oil and gas produced when oil prices averaged $3.15 per barrel. During Lougheed’s tenure (1971-1985) an average of 27.0% of the value of oil and gas was collected in royalties when oil averaged US$20.52 per barrel. The year 1977 was the peak in royalty collections reaching 37.7% of the value of oil and gas production at a time when oil was trading at US$14 per barrel.

    During Ralph Klein’s tenure (1992-2006) an average 15.2% of the value of production was collected in net royalties when oil prices averaged US$25.52 per barrel.

    Under Premier Alison Redford the lowest royalty return on oil and gas produced in Alberta’s history was reached in 2012 with a mere 9.1% of the value of Alberta’s oil and gas sales collected. This was at a time when oil was trading at record highs of US$92 per barrel and the total value of oil and gas production was $83.6 billion. The numbers aren’t available yet for 2014 but they are likely to be at or below a 10% capture rate. Estimated net royalties collected by the Alberta Government for 2014 are forecast to be $9.6 billion collected with an estimated 2.6 million barrels per day (972.7 million barrels) of conventional and bitumen (oilsands) production.

    By contrast Norway in 2012 collected US$68 billion in royalties and other taxes or 72.4% of the total of Norway’s oil and gas sales of US$94.2 billion. The majority of these revenues were in turn invested in Norway’s Government Pension Fund that in 2014 was estimated at US$857 billion). In contrast Alberta’s Heritage Fund, which was founded by Lougheed in the late 1970s, many years before Norway’s fund, was worth only $17.4 billion in 2014.

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  6. Sam Gunsch

    Lougheed’s politics would be probably be attacked by WRP today.

    http://www.torontosun.com/2012/09/13/alberta-lucky-to-have-lougheed

    A year after taking office, Lougheed set his sights on the taxpayers’ share of Alberta’s energy revenues, picking a fight with the industry many insiders now consider unthinkable today.

    Public hearings were held, where industry officials railed at the notion of granting owners of the resource — Albertans — higher energy royalties.

    “I think of all the flak and abuse from all of the corporate suits — they were as totally wrong as they could possibly be,” says Warrack, adding Albertans soon received far more of the corporate profits than they’d been accustomed.

    “We essentially doubled it from 17% — when you achieve economic justice for the owners, they you have the capacity to do other things that cry out like the medical and mental health fields,” said Warrack.

    Those tumultuous energy royalty hearings, recalls Ghitter, were also something that’s since become alien to Albertans.

    “I don’t think there’s been a public hearing since … the oil industry continues to do very well,” he says.

    He, too, recalls the industry push-back.

    “They called him sheikh and red Tory, the last one I’d wear proudly as a badge,” says Ghitter.

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  7. Watson Smith

    I would suggest that the new royalty review team take a look at the past work of Dr. Andre Plourde (a member of the previous team) specifically looking at the risk the Government takes on when it comes to sliding royalty scales with price.

    I will remind anyone who cares to listen that Ed Stelmach and Company did not follow the last royalty review team’s direction and instead plowed forward with their own (clearly pre-designed plan) with less than a month’s notice after the review team took 18+ months to do the review.

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  8. Dave

    People just need to ask themselves if they would sell anything they own for less than full value. Your house? Would you sell it for a low price? Your vehicle? Would you take the first trade in offer from a dealer?

    If you want full value, then you should be supportive of the oil royalty review.

    Why please mostly foreign owned oil companies? Please Albertans. If you don’t get more revenue from oil you will be paying more yourself for the many services that your government provides. Is that what you want? Think about it.

    Reply

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