| An economic bust, a breakdown in infrastructure and a wave of layoffs in the oil fields may seem like an unlikely scenario in Alberta. However, at least one researcher says it’s exactly what will happen if the government doesn’t act now to start collecting more money from the oil industry.
"(Oil is) being completely undersold by our government," says Diana Gibson, research director for the Parkland Institute at the University of Alberta. "Right now is the time to capture revenues." Gibson recently authored a study on the system of royalties and taxes the government uses to collect some of the wealth generated by the oil patch. According to her, it’s not nearly enough, and far too much is being moved out of the province and into the hands of foreign companies. While the current boom is bringing money and jobs to the province, there’s no plan in place to contend with the aftermath of the boom or to maintain the infrastructure currently being built once the flow of oil money dries up.
The province is due for an economic downturn as oil prices ultimately fall and the industry shifts from conventional oil to tarsands projects, which cost more to develop and generate less revenue for the province, Gibson argues. Along with failing infrastructure, the oil patch would face a wave of unemployment as companies lay off employees when their projects near completion. Revenue has already started to drop off, falling by more than 15 per cent in the past few years, despite companies making record profits. The solution, she says, is to raise royalty rates and start saving most of the money to ease the pain of the ultimate comedown from the current boom. Alberta now collects less revenue from the oil industry than Texas and Alaska and isn’t keeping pace with other developed countries, says Gibson. "We consider the rates to be very low," she says. "We’ve given the oil away." Other researchers agree.
"The royalty regime for oilsands as it now stands is out of date," says Amy Taylor, a senior economist with the Pembina Institute. "We can get a better deal for Albertans, and it can be done without hurting the profits (of oil companies)."
Pembina released a report of its own last week, examining the current royalty regime for the oilsands and proposing three models that it believes would bring in more revenue, slow the breakneck pace of development and grant more environmental protection. At the moment, oilsands projects pay a one per cent royalty rate until they’ve paid off startup costs, after which the rate increases to 25 per cent of revenue after covering costs. The province created the lenient royalty rate 10 years ago to encourage investment and Taylor argues that it’s served its purpose. "The current regime has exceeded its goal of developing the oilsands," she says, noting that Alberta met its targets for the industry 16 years ahead of schedule. She believes that half of all revenue from the oilsands should be set aside for use after development falls off.
Against this backdrop, the Alberta government is holding a review of the existing royalty structure. Its first step is to form an arms-length panel of economists, academics and business executives to collect input from across the province and make recommendations.
Bill Hunter, former president of pulp company Al-Pac, is the chair of the Royalty Review Panel and says that he and his five fellow panelists are staying neutral until they’ve heard from all the interested parties, but he feels the review is timely. "It’s been 10 years since the last significant changes," he says.
On its stop in Calgary last week, the panel heard from a parade of oil executives and industry insiders who argued that the system should stay the way it is. Any changes to the royalty regime could cause companies to move their money elsewhere and negatively affect the entire economy, which is heavily dependent on the industry, says the Canadian Association of Petroleum Producers (CAPP), an industry group that presented to the panel.
"Alberta’s royalty regime continues to remain appropriate and fair," says Pierre Alvarez, CAPP president. As conventional oil runs out in Alberta, it becomes harder to tap than in other jurisdictions, while the oilsands are more costly to exploit than conventional wells, he argues. One international oil company, Apache Corporation, flew its head honcho in from Texas to warn the panel that his company may leave the province if the royalty rates go up, while one independent company has already pulled out.
Tom Hewitt joined his father’s company, Hewitt Oil, in 1971 and has spent the last three decades drilling discovery wells in Alberta. He describes himself as part of a dying breed of "independent oilmen" and says that his company has contributed to the province by being socially responsible, consulting with residents around their wells and investing in social programs. However, the depletion of conventional oil has made exploration difficult and he’s considering moving his company’s focus to Montana, fearing that a hike in royalties is in the works.
"Our concern is if the royalty structure changes," he told the panel. "We’re not sure what that change means." He believes royalties should be more lenient on exploratory wells to help companies like his.
However, not everyone is buying the argument that higher costs for the industry should translate into lower royalties. John Warnock, a political economist from Regina who wrote a report last year on Canada’s take from oil and gas, points to the history of the industry in Canada. Under the Alberta government of Peter Lougheed in the 1970s, for instance, the government collected all of a company’s excess profits and invested them in the Heritage Fund. Ralph Klein, however, lowered the royalty rates and drained the fund. Lougheed himself came out of retirement last year to call for higher royalty rates and slammed his successors for not having a plan to deal with the boom.
Compared to the rest of the world, Alberta’s oil is easily accessible and Canada is a desirable place to invest, Warnock argues. If oil companies are willing to deal with the state-owned companies in Venezuela and Arab nations, they would be able to stomach a return to the royalty rates of the Lougheed era, he says.
Gibson agrees, pointing to the hundreds of companies that are eager to invest in locales far less business-friendly than Alberta, where the search for oil is also more speculative. "We know where (Alberta’s oil) is and we know how to get it," she says. |
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