Energy: Share the wealth

Industry complaints and threats blunt hydrocarbon royalty increases in Alberta.

When Alberta’s six-member Royalty Review Panel recommended that the government modestly increase its share of hydrocarbon wealth by 20% last month, the oil and gas industry predictably went bananas. Taking a page from climate-change scaremongers and other doomsayers, multinational titans of the oilpatch threatened economic Armageddon. Or worse.

EnCana Corp., which posted the biggest annual profit in Canadian corporate history for 2006 at $6.4 billion, started off the temper tantrum. It warned that any tinkering with one of the lowest royalty regimes in North America might force the behemoth to pack up $1-billion worth of Alberta investments and move, well, to Wyoming and Texas — which, for the record, charge higher royalties than Alberta. Nexen, ConocoPhillips, Talisman Energy, Canadian Natural Resources and Petro-Canada followed suit with similar grumbling.

Then FirstEnergy Capital Corp., a Calgary-based investment firm, sent out a newsletter denouncing the province as some sort of “Albertastan” that could soon lose 30,000 jobs. One of the more over-the-top rants came from Deutsche Bank. It said that the Alberta royalty report, Our Fair Share, read as though it had been penned by “a visiting delegation of Venezuelans.” Even though Alberta’s share of economic rent from hydrocarbons had declined from 40% to 19% in the past 30 years, the bank called the proposed increase a ruse to compensate the Albertan in the street for “self-perceived under-taxation.”

Most business-minded folk, however, regarded the hysterical campaign as an extreme negotiating ploy. While the oilpatch wailed, royalty experts and members of the royalty panel — all solid business types — patiently explained that the recommendations would merely take Alberta from the bottom of the global rent pond to somewhere near the middle, or slightly behind Nigeria. Pedro van Meurs, a global expert on royalties and adviser to the blue-ribbon royalty panel, put all the huffing and puffing into perspective: “In my entire 34-year career as fiscal adviser to governments,I have never had an oil executive indicating to me that it was the right moment to increase royalties.”

Evan Chrapko, a millionaire technology entrepreneur and panel member, also found the Chicken Little rant hard to stomach. In response to wild claims about cancelled projects or lost jobs, Chrapko asked why “in a free country where risk-taking capitalism is supposedly the order of the day, is it up to the royalty system to single-handedly act as a magic wand against much bigger forces” such as rising labour costs? Then Alberta’s auditor general, Fred Dunn, weighed into the debate with some disturbing findings that supported the modest nature of the panel’s review. Dunn revealed, for example, that the province’s energy department knew three years ago that Alberta was not collecting its fair share of royalties, and that it could have collected an additional $1 billion “without stifling industry profitability.” In fact, some technical staff knew that Alberta had not been collecting its fair share since 2000 due to high energy prices. But “neither this information nor the reasons why changes have not taken place have been made public,” said Dunn.

The royalty panel, however, did explain why Albertans had been kept in the dark for so long. Its September report described the energy ministry’s mandate of “maximizing activity in the energy sector” while also “ensuring that Albertans receive their fair share” as “mission impossible.”

In the end, all the corporate complaining had an impact. When Premier Ed Stelmach announced his new royalty framework on Oct. 25, Albertans didn’t get their recommended fair share, but a compromise. Instead of a 20% increase, or $2 billion a year after 2006, the province will only increase its take by roughly $1.4 billion beginning in 2010. Initial oilsands royalties, which one former Alberta politician described as a “give it away” bargain at 1%, will climb to 9% as oil prices rise.

Surprisingly, the sun did not darken and the sky did not fall. In fact, some Canadian energy stocks went up in value.