Shortchanging AlbertansThe Public's Share of Resource Revenues Is at an All-time Low

Op-ed - June 15, 2006 - By Amy Taylor

If your money manager was underperforming by 30 per cent in the hottest market in recent memory, you'd probably ask him or her some tough questions. You might even go so far as to find a new manager.

Well, guess what? According to its own numbers, the provincial government is underperforming at collecting oil and gas revenues for Albertans.
It's clearly time to ask our resource manger, Energy Minister Greg Melchin, some tough questions.

Alberta Energy's target is to collect 20 to 25 per cent of the profits from oil and gas developments in the province. But in 2004, the Alberta government managed to collect just 19 per cent of profits for its citizens.

Using another method (one preferred by former Premier Peter Lougheed and Andre Plourde, an economist with the University of Calgary), CanWest calculated that the discrepancy between Alberta's target and its performance is even more pronounced. CanWest estimates that the public's share of Alberta oil and gas revenues plunged to 15 per cent in 2004 from 22 per cent in 2001 - a decline of 30 per cent, and the lowest rate of return since oil was discovered in 1947.

Three words largely explain the rapid decline in the public's share of revenues: oilsands fever!

Ten years ago, the provincial government implemented the generic royalty regime to spur oilsands development. This sweetheart deal imposes a meager one 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, but to just 25 per cent of net revenue.

The result? Success, sort of. Under this regime, Alberta has seen massive capital investment and huge production increases from the oilsands - along with the environmental consequences of this latter-day gold rush.

Alberta's oilsands industry is the fastest-growing source of new greenhouse gas emissions in Canada. Exploiting this fossil resource will transform up to 149,000 square kilometres of Alberta's boreal forest into an industrialized landscape. That's an area the size of Florida.

Alberta collects much less royalty revenue from every barrel of oil produced in the oilsands than it does from either conventional oil or natural gas. And Alberta's revenue per barrel of oilsands oil dropped by 39 per cent between 1997 and 2005.

And here's the real rub: oilsands production is expected to triple over the next decade or so. This means that Albertans can expect their share of revenue to decline even further as the oilsands become a bigger and bigger piece of the oil and gas pie.

The generic royalty regime was established when the economics of oilsands developments were different; operating costs were higher and fuel prices were lower. The economic reality has changed, and the royalty regime needs to be updated accordingly.

This has been done before, in Alberta and elsewhere. The Lougheed government did it in the early 1970s. Recent changes to oil royalties in Venezuela were spurred by high fuel prices. The state of Montana increased oil and gas royalties in September 2005. And right now the state of Alaska is considering a profits-based tax designed to capture a greater share of oil revenue for its citizens when oil prices rise.

Alberta is already paying a heavy environmental price for mining this oil. Given the growing global interest and investment in oilsands, Albertans are entitled to both a fair return on our resources and leadership in environmental protection.

A recent poll by Probe Research Inc. found that 84 per cent of Albertans support a public review of the oilsands royalty regime, and that 63 per cent of Albertans feel they are not receiving maximum revenue from oilsands developments.

But when Energy Minister Melchin was confronted with the results of the CanWest investigation, his suggestion was to change the accounting system. "We need another benchmark," he said, adding that the current method of calculating the public's share has become "almost misinformed."
Melchin seems to think he can improve his grade by changing the grading system. And yes, you can move the goalposts when you don't like the score - but that does nothing to get Albertans fair compensation for the development of their resources.

What's needed is a bold new vision for Alberta, one that gets us a fair return for our resources and looks after our grandchildren's economic, environmental and energy needs.

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Amy Taylor is an economist and the director of ecological fiscal reform at the Pembina Institute. Her publications are available from www.pembina.org.

Contact:
Amy Taylor, amyt@pembina.org
Hm Office (403) 705-4954

Tags:  Economy

Amy Taylor
Amy Taylor

Amy was director of the Pembina Institute's public sector services group until 2010.


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