Alberta’s government claims that its oil and natural gas royalty system maximizes benefits for the province, but research shows otherwise — C$55 billion in potential revenue may be lost over the next three years because of “overly generous” royalty cuts and the failure to meet even “modest targets” set by previous provincial administrations.

The University of Alberta’s Parkland Institute issued an update Monday to its 2010 report, “Misplaced Generosity: Extraordinary Profits in Alberta’s Oil and Gas Industry.” The Parkland Institute includes members from most of Alberta’s academic institutions, as well as other organizations involved in public policy research. The reports are peer reviewed to ensure integrity and accuracy.

The update reviewed the most recent data on profits in the oil and gas industry versus provincial share. Despite huge growth in the energy industry, the review found that the share of profits going to Albertans continues to shrink.

“We’ve gone from capturing close to 40% in 1979 to only 10% in 2009 and 13% in 2010,” said author David Campanella, public policy research manager for Parkland Institute. “That is all money that has gone directly from serving the public interest to serving the bottom lines of huge oil and gas corporations.”

The update is based on research by Regan Boychuk, who authored the 2010 report. Alberta has a “poor track record…in securing a fair share of the petroleum wealth for its citizens,” Campanella noted.

“In the petroleum sector as a whole (oil, natural gas and bitumen), the public’s share of revenue has been more or less declining since it peaked in 1979. During his decade-plus tenure as premier, Peter Lougheed attempted to ensure Albertans received maximum benefits from the oil and gas sector by setting a target for his government to capture 35% of the revenues from the industry…His government managed to meet or exceed that target for the five years between 1977 and 1981.”

Since 1981 “the public’s share of wealth produced from the province’s petroleum resources has fallen dramatically,” the report stated. “Somewhat surprisingly, the public’s share reached an all-time low in 2009, the year the new royalty rates were introduced by Premier [Ed] Stelmach, which reveals the extent to which the royalty review process was turned into a new round of subsidies for the oil companies” (see Daily GPI, June 26, 2009; March 5, 2009).

“Also in 2009, the provincial Conservative government did away with setting a target for revenue sharing altogether, perhaps due to their routine failure in meeting the target even after Premier Klein lowered it significantly,” Campanella wrote. “The government’s objectives in determining royalty rates are now limited to ensuring ‘competitiveness’ in relation to a group of particular jurisdictions, essentially guaranteeing bottom-of-the-barrel royalties.

“This represents a significant departure in that the government has abandoned even the pretense of prioritizing the public interest through rent maximization or even rent targets and is instead intervening heavily on behalf of corporate and investor interests for profit maximization.”

If Lougheed’s 35% target had prevailed and been met, Alberta would have collected an extra C$195 billion in revenue between 1971 and 2010, according to the Parkland Institute report. “Even by just capturing 25% of tar [oil]sands revenues, we would have received an extra C$33 billion since 2000,” according to Campanella.

The current provincial budget, he noted, seeks to capture between 9% and 12% of oil and gas revenues. Lougheed’s target of 35% for conventional oil and gas and 25% in the oilsands would yield an extra C$55 billion in revenues over the next three years.

Alberta’s oilsands are set to become the province’s main petroleum sector revenue generator. By 2013, the provincial government “expects the industry to account for more than 60% of income from nonrenewable resources,” Campanella noted.

“If the long-standing trend of low royalty rates in the tar sands industry and the oil and gas sector as a whole continues, Albertans can expect to forgo significant and increasing amounts of potential revenue. It will therefore be crucial to the future economic health of the province to ensure we have a royalty regime that returns a fair share of the revenue to the citizens of Alberta, the owners of the resource.

“Eventually, Albertans need to decide whether subsidizing private oil companies to extract their resources through heavily discounted royalty rates is the best use of public wealth.”

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