“Alberta’s natural resources belong to Albertans.” This was the key phrase in the recent recommendation by a blue ribbon panel to significantly boost provincial royalties on oil, natural gas and oilsands to collect an additional C$2 billion a year in government revenue. It was a recommendation that ignited an uproar on stock exchanges as irate investors cut C$13 billion off the total value of shares in companies with gas and oil production in the province.
To say it was a surprise is a gross understatement. Investors previously had been lulled by passive economic policies of former Premier Ralph Klein’s Conservative regime during 1993 through 2006.
The review panel — commissioned by Klein’s more activist replacement, Premier Ed Stelmach — recommended increasing annual provincial royalties by about 20% or C$2 billion per year with a series of changes (see NGI, Sept. 24). On gas, the chief current money earner, the ceiling on a sliding scale reflecting prices and well productivity would rise to 50% from 35%, generating about C$1 billion more in government collections if it went into effect immediately. In the long run, increases in royalties on growing oilsands production would generate even bigger jumps in the province’s “take” from the industry.
“Extremely punitive,” declared the headline on a research note to clients from the Peters & Co. investment house in Calgary. “Albertastan? Misguided Intentions and the Fair Share Option,” declared the equally alarmed circular sent out in reaction to the review panel report by FirstEnergy Capital Corp.
But the six-member royalty review panel was a blue-chip group, hand-picked for impeccable reputations and credentials in the upper echelons of Alberta business and government. It shouldn’t have been that much of a surprise to veteran Canada-watchers based on a prediction earlier this year that Canadian natural gas production has peaked and provincial revenues are expected to decline along with declining production (see NGI, April 23).
For those looking on from the United States, it is important to note that Canada is different. In Alberta 81% of the mineral rights belong to the provincial government. The report’s authors laid out their unanimous credo in plain language, saying “simple but very basic concepts were helpful to us.” There was much more to the landmark report than just an attempt to make the royalty system catch up to increased gas and oil prices since the last overhaul 15 years ago.
“When a government designs a tax system it must justify every dollar or fraction of a dollar it takes away from wage earners and business because that money belongs to the people who earned it,” the panel said. “Alberta’s natural resources belong to Albertans, and this is a different proposition.”
The group was referring to a division of assets established by the Canadian constitution and cherished by Albertans as a birthright heritage. This legacy has practical meaning, the review panel emphasized.
“The design of a royalty and tax system for energy resources must therefore justify every dollar that does not go to the owners. Alberta must be internationally competitive and developers must be rewarded for their risks and investments. Nonetheless, the fact remains that the resources do not belong to the developers; they belong to the people.”
This attitude is bred into the bones of older Albertans and younger ones, including migrants into the province, rapidly absorb it to the point where it becomes a rarely expressed second nature as a cultural value. How deep this vein runs showed in pronouncements last year by a revered former premier — Peter Lougheed, founder of the 36-year-old provincial Tory dynasty — that played a role in triggering the appointment of the review panel.
Lougheed’s comments prompted every candidate to replace the retiring Klein to pledge a royalty review if elected. Setting up the panel was Stelmach’s first action when he was sworn in as premier.
In the interests of helping distant observers understand the forces driving the current economic policy debate in Alberta, Canada’s primary natural gas-producing jurisdiction, here is an historical glimpse into its political soul.
Lougheed laid the foundations of the province’s current wealth in 1972 by driving a hard bargain with the petroleum industry. He introduced a royalty regime that more than doubled the crown or public share in the value of Alberta oil and gas production, vastly increasing the cash generated by the system. He had power to drive a hard bargain with the industry and did not hesitate. The action was foreshadowed by his Tories’ book-length 1971 reform election platform — “Now: New Directions for Alberta” — and remains one of the biggest, most popular moves they ever made.
“I grew up in the Depression atmosphere. It was obviously a factor,” Lougheed recalled.
The previous Social Credit (Socred) government negotiated a royalty rate of 16.6% with the industry, enshrined it in legislation and guaranteed not to change it retroactively on old low-cost production if energy prices rose. The Socred approach mirrored industry-standard contracts between oil firms and property owners in jurisdictions where private land titles include mineral rights, especially in the United States. But it doesn’t play well in a region where 81% of mineral rights belong to the provincial government.
After holding rare public hearings before the full legislature in the spring of 1972, the Tories scrapped the fixed fee. New legislation gave the cabinet power to make changes by regulation.
Royalty rates were promptly increased. Between 1971 and the 1979 peak of the energy boom years the government share in the total value of production, including mineral rights sales, nearly tripled to 39% from 15%. Provincial nonrenewable resource revenues soared on the era’s combination of energy price and royalty rate hikes, climbing 19-fold to $4.6 billion in 1976 from $237 million in 1971, show records kept by the Canadian Association of Petroleum Producers.
Just as it is today, the industry was outraged when the Tories set aside its old arrangements with the bygone Socred regime and imposed the tougher new resource deal. As chairman of the Independent Petroleum Association of Canada (an ancestor of CAPP), Edmonton oil entrepreneur Stan Milner warned that 50,000 jobs and massive investments could be lost.
“They were strong,” Lougheed said in recalling disputes with business leaders who included his brother Don, a senior Imperial Oil executive. “We knew their position. We knew we would argue that way from a commercial point of view if we were on the other side of the table.”
Milner was polite compared to irate celebrity oil barons in Calgary like transplanted Texan John Rudolph, who threatened to pack up drilling rigs and take them back to the U.S. rather than pay the new royalties.
“What I said to him (Rudolph) was, ‘What you don’t understand is you don’t own the resources,'” Lougheed recalled.
His duel with the industry was a case of standing up for rights that his generation regarded as cornerstones of Canadian Confederation. Led by Lougheed’s grandfather until his death in 1925, Alberta and Saskatchewan fought Ottawa for a quarter-century to obtain the resource ownership that was denied to them alone among the provinces when they were created in 1905.
“Think like an owner,” Lougheed said in describing how Albertans should behave with the province’s natural wealth.
When it comes to deciding how much to charge industry for rights to produce Alberta oil and gas, there is no mathematical, impartial formula. “It was a balance we struck.” The cabinet weighed targets for public revenue shares against educated guesses about royalty effects on industry investment and employment. “It was a judgment call,” Lougheed said.
“Our thinking was, ‘What is a fair return?’ We knew it would fluctuate over time. We thought it would be in a range of 25 to 30%,” the former premier recalled.
“The operative words were ‘fair’ and ‘return for the owner.’ The key in all this is the owner. This is a sale of a depleting resource that’s owned by the people. Once a barrel of oil goes down the pipeline it’s gone forever. It’s like a farmer selling off his topsoil.”
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