Oil Sands Truth: Shut Down the Tar Sands

The Globe on Raising Tar Sands Royalties

If Albertans want it all, oil sands must pay
October 2, 2007

Listening to the great Alberta royalty debate is like watching the Yankees play the Red Sox: It's hard to know which overprivileged group to root against. Should you boo the oil sands CEOs, who pay too little? Or jeer the provincial politicians, who spend too much?

Ed Stelmach, Alberta's rookie premier, got a bit defensive last week - "My message to everyone is let's just calm down" - but he surely knows the game of posturing that's being played here. If you want to suck an extra $2-billion out of someone's wallet, as his government's royalty review panel proposes, you can be damn sure they will shriek, wail, cry, bluster and whatever else is necessary to try to stop you.

But perhaps Mr. Stelmach should respond to the oil industry's threats - EnCana, for one, says it might chop $1-billion from its planned capital budget for Alberta if the changes go ahead - with a challenge. If you don't want to pay more, gentlemen, fine. But why don't you then tell the voters which government programs you'd like to cut, or which of their taxes you'd like to raise?

Alberta is the richest province, the one with no debt, no provincial sales tax, the lowest income taxes. The unemployment rate is barely 3 per cent, which is to say it's zero; anyone who can fog a mirror can get a job (but not an apartment). The boom has been going for so long that many Albertans assume these things are a divine right. And the newcomers from other provinces, 97,000 of them over the past couple of years, have never known the place to be anything other than absurdly prosperous. What most of them don't realize is that Shangri-la on the Bow River is not funded by oil.

It's natural gas that pays the bills. Gas royalties, at an estimated $6-billion this fiscal year, will contribute nearly as much to the treasury as personal income taxes. When gas prices are higher, the take is even bigger. Oil's contribution to provincial revenue is much smaller: about $1.1-billion from conventional crude, and another $1.8-billion from the oil sands and synthetic crude.

The last figure isn't larger because of the famous "1 plus 25" royalty regime, which gives oil sands producers a nearly free ride until they recover their massive upfront costs. Hence the review panel's most radical suggestion: Oil sands companies should pay more and many (though not all) gas projects ought to pay less.

A clever idea, that. The output from oil sands is expected to nearly triple, to three million barrels a day, by 2020. And natural gas? Growth is dead. Gas production is flat at roughly 13 billion cubic feet per day, which is roughly where it's been since the mid-1990s, and that level is becoming harder to sustain.

The most likely scenario is a long-term decline in gas output, meaning lower gas royalties. Two years ago the province reaped $8-billion in gas royalties; now that gas prices have fallen, it's $6-billion; with another modest decline in prices, two years from now it will be $4.6-billion, by government forecasts.

The number may be too conservative but the trajectory is right. The industry begs Mr. Stelmach not to kill the golden goose, but as far as he's concerned, it's already dying, so it's time to find a new one, in Fort McMurray. Are the panel's suggestions really so horrible? A report by Wood Mackenzie, an energy consulting firm, calculates that the royalty rate on oil sands would rise to 57 per cent, on par with that of Nigeria, India and South Africa. Does Alberta deserve no premium for being a democracy with a stable business environment, or for having roads and public hospitals that work?

Mr. Stelmach would have a pretty good case for raising the government's royalty share if not for the fact that, based on the record, it's likely to squander the extra $2-billion. Alberta has never quite known how to handle its oil riches, and Peter Lougheed had it right when he said recently that the Heritage Fund he set up in the mid-1970s should have at least $50-billion. The main reason it's got only $16-billion is the government's habit of siphoning money from it - first to cover deficits in the awful Don Getty years, then to pay for higher spending. Mr. Stelmach's Conservatives have raised spending on government programs by 10 per cent a year over five years.

But then, maybe the Tories are just responding to what they hear from voters. Albertans want prosperity, but they also want smooth, wide highways and good hospitals and quality schools. Oh, and they'd like it all without having to pay higher income taxes or sales taxes. And no deficits, please. The money to meet these demands has to come from somewhere, and in the long run, natural gas won't be able to fund them. No wonder the oil sands are such a target.


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