Pembina Institute

Klein Shortchanging Albertans and Putting Environment at Risk

By Amy Taylor

Published in Edmonton Journal (March 25, 2006).

Amy Taylor

Ralph Klein says he has planted the seeds of prosperity for future generations, but in a quest to liquidate the province's finite oil and gas resources, the provincial government is shortchanging Albertans and putting the environment at risk.

The people of Alberta own the province's oil and gas resources. The provincial government acts as manager of these resources. Sound resource management means getting the most revenue from the use of resources for today's Albertans; creating a nest egg with some of that revenue to compensate for lost resources for tomorrow's citizens; and limiting negative environmental impacts, which matter to citizens today and tomorrow. On all three fronts, the Ralph Klein government is failing.

The government is not maximizing revenues from oil and gas developments, not creating an adequate financial endowment for future generations, and not providing sufficient protection for the environment.

Alberta's Heritage Fund has languished at around $12-billion for years. Compare this with Norway's "Petroleum Fund," worth more than $200-billion, and Alaska's "Permanent Fund," at more than $30-billion. Instead of saving, the government of Alberta recently issued a onetime $400 cheque to each Albertan. But thanks to Alaska's long-term savings plan, each Alaskan citizen receives a dividend from the Permanent Fund every autumn. In 2005, the dividend cheque was $845.

At the same time, rather than maximizing revenue capture, the Alberta government is leaving windfall profits with multinational corporations. This, when oil and gas companies are earning record profits. The Pembina Institute study When the Government is the Landlord reveals that Alberta collected only 69 per cent of available oil and gas revenue between 1995 and 2002. Norway collected 88 per cent, Alaska 99 per cent and British Columbia 93 per cent during the same period.

Between 1995 and 2004, Alberta's oilsands production grew 133 per cent-while revenues from oilsands royalties shrunk by 30 per cent. Revenue per barrel of oil equivalent (BOE) from oilsands declined by over two-thirds, from $1.60 in 1995 to 50 cents in 2004.

The decline was the result of the generic royalty regime for oilsands projects. This regime imposes a meagre 1-per-cent royalty on gross project revenue until the developer has recovered all project costs plus a return on investment. Only then does the royalty increase, to 25 per cent of net revenue. From any perspective, this regime is generous. Even at the higher royalty rate, only 58 per cent of available revenue from Alberta's oilsands is expected to go to the citizens—less than is collected from conventional oil and natural gas developments in Alberta, and certainly less than the revenue capture rates in Alaska and Norway.

Not only are Alberta's low royalty rates leaving large fortunes in the hands of companies, but they are also accelerating the pace of oilsands development, which is resulting in major environmental impacts.

In northeastern Alberta, the population of woodland caribou in some ranges has declined by 50 per cent in the past 10 years. Government scientists predict that caribou will be exterminated from thousands of square kilometres of boreal forest if oilsands development follows planned trajectories over the next 30 years.

As conditions change, royalty rates for oil, natural gas and oilsands production should also change. It's been done before, in Alberta and elsewhere. The Lougheed government boosted royalties in the early 1970s and used some of the increased revenue to establish the Heritage Savings Trust Fund. Alaska is considering a profits tax that would allow the government to obtain greater revenues during times of high fuel prices (much like a system already in place in Norway).

It's time, once again, to review and increase oil, gas and oilsands royalties in Alberta.

Once Alberta begins to capture the maximum possible revenue from oil and gas developments, the government should funnel a portion of the funds into a dedicated long-term financial endowment. The Canada West Foundation recommends that the government save 50 per cent of non-renewable resource revenues. And former premier Peter Lougheed recently called on the Klein administration to dedicate 30 per cent of all oil and gas revenues to the Heritage Fund.

Alberta has only one chance to capture more revenue from the development of these precious resources, and invest it wisely for current and future generations. That chance is now.

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Amy Taylor is an economist and Director of Ecological Fiscal Reform at the Pembina Institute and author of the recent Genuine Progress Indicator update reports for Alberta. Her publications are available from www.pembina.org.

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