Reactions to the Alberta Royalty Review
The release of Alberta’s royalty review panel recommendations in January was a hotly anticipated event that turned into a missed opportunity to set a new financial course in Alberta.
That was the reaction of some policy experts who were dismayed that Alberta’s first new government in 44 years decided to stick with a royalty scheme set by its predecessor.
“It’s a problem with the panel just listening to the industry and reacting to the low price, so it is disappointing,” says Jim Roy, a senior advisor to Alberta Energy from 1985–1992 and an advisor on the 1992 royalty review.
Roy thinks the review’s biggest failure was it didn’t create a mechanism to increase royalty rates in times of higher oil prices. The new government is still grappling with Alberta’s decades-old problem: How to make resource revenues work in times of both economic boom and bust?
“It is important for the formulas to be self-correcting so the government does get a proper share,” says Roy.
The five-month long review concluded that royalty rates are “generally appropriate.” Roy argues the economic argument does not make sense. The review recommends continuing the new well royalty regulation, which incentivizes the creation of new wells. Incentivizing production during a time of low oil prices only encourages greater production that will result in a flooded market and keep the price of oil low, says Roy.
The royalty review results are also politically tough for the NDP: the recommendations are the opposite of what New Democrats had long-argued in opposition and suggested in their election platform, where they stated that rates need to be higher to deliver a fair share to Albertans.
“The premier tried to say ‘mea culpa’ during the press conference. ‘I learned something I didn’t know beforehand,’” says Ian Urquhart, a University of Alberta political science professor.
But that statement won’t be enough for opposition parties.
“They’ll try to suggest that other ideas the New Democrats have may not be particularly well thought out,” says Urquhart.
Despite the about-face on the royalty position, the review did focus on value-added processing, an issue the New Democrats have long advocated for. That would include some form of subsidy to refining and upgrading to keep those processes in the province.
The review also recommended a more transparent and regular system to report royalty revenue and show Albertans how the system is working.
Finally, the review enhances the royalty framework for crude oil and natural gas, but here too, Roy says, is an area where the government is losing another resource opportunity.
The review will lower the 30 per cent royalty on propane and butane to five per cent. While the review determined keeping the rate low would allow a payout to occur more quickly, Roy says this could lead to a one billion dollar revenue loss per year.
“If royalty rates are appropriate when prices are low, then what does that mean for the way we finance our public services?”
Resource revenue makes up five per cent of Alberta’s budget, down from a high of 40 per cent 10 years ago. But as it now stands, there is no mechanism to build on that if and when oil prices recover. Alberta’s government still has an unanswered revenue question.
That’s the real problem, says Joel French, executive director of Public Interest Alberta. The review did not address how the government will shift the role resource revenue plays in provincial budgeting.
“If royalty rates are appropriate when prices are low then what does that mean for the way we finance our public services,” says French, who argues the government needs to engage in a meaningful conversation about taxation.
A deficit is inevitable in the spring budget, says Mel McMillan, a professor of public economics at the University of Alberta. He argues now is not the time to make drastic decisions on revenue initiatives. But if the government wants to maintain spending on services in future years, it must look at the question of revenue generation.
McMillan believes the carbon tax is the most likely candidate to make up some of Alberta’s revenue needs.
“They’ve maxed out corporate income taxes, beyond what I would have recommended….The obvious disparity between other provinces and Alberta is the sales tax.”
But the NDP has adamantly rejected implementing a sales tax in Alberta.
Roy says there is still opportunity for Albertans to demand their fair share of royalty revenues. For example, the panel does not include a formula for post-payout rate calculations on royalties, which happens after wells are built and a company has generated a profit that exceeds its capital expenses.
The post-payout rate on oilsands projects is currently 25 per cent. It’s possible, says Roy, for the government to create a high-end rate royalty collection of 80 per cent of the available economic rent.
The review also recommends a framework be created for regular royalty reviews, which McMillan says shouldn’t happen any time soon — but could open the door to future rate increases.
“You don’t want to be doing this in an ad-hoc and frequent fashion,” says McMillan. “You want to set a system that can be relied upon in the long-term.”
Albertans might hope those future review coincide with a higher price of oil.
Originally published for The News, a publication on Alberta politics and government.