Alberta’s ‘Royalty’ report: the good and the bad

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Appeared in the Calgary Herald, February 4, 2016

On Friday, Jan. 29, the Government of Alberta released the long-anticipated report of the Royalty Review Advisory Panel. The review, a campaign promise by the NDP government, was the source of some anxiety in the province. As evidenced in a recent Fraser Institute bulletin, investor confidence in Alberta dropped sharply from 2014 to 2015, with potential investors expressing the most concern about political stability in the province, followed by concerns over the Alberta’s “fiscal terms,” which, in addition to tax regimes, would include the way royalties are treated. A similar fall had been observed following the 2007 Stelmach royalty review, which so rattled investors that it took years for confidence to rebound.

Thankfully, Alberta might dodge that bullet this time around. The panel concluded that Alberta’s existing royalty structure was both competitive with other oil-producing jurisdictions, and was delivering a “fair share” of resource revenues to the people of Alberta, who own its natural resources in common.

The panel also found ways to improve the royalty regime for oil and gas by simplifying the calculation process and removing outdated aspects of the regime that no longer reflect current technology and market conditions. They did their best to bolster investor confidence: there is a 10-year delay in royalty changes to existing projects, and the new regime is designed to match the revenues of the old regime, beginning in 2017.

So, kudos to the panel and the Notley government, for having the humility to acknowledge that the prior royalty scheme was pretty fair and that there really isn’t any spare cash to “grab” in the sector at this time.

While the review mercifully avoided punitive changes to the royalty regime, there is one suggestion in particular that is potentially problematic: the recommendation that the provincial government “seize opportunities to enhance value-added processing.” Admittedly, the report had to discuss this, as it was part of their original mandate by the government, and is part of the Notley government’s emphasis on diversifying the Alberta economy. Specifically, the panel recommends that the government “develop a value-added natural gas strategy for Alberta” and “examine opportunities to accelerate the development and commercialization of partial upgrading and alternative value-creation technologies for bitumen.” They’re also bullish on providing financial support to develop “partial upgrading” of bitumen in Alberta, allowing producers to ship less controversial product at higher volumes by eliminating the need for diluent. But outside of the upgrading, and coal power displacement with gas, the report is vague on just what opportunities are to be seized.

The province should avoid the temptation of politically appealing though dubious market interventions that economics and experience have shown to be troublesome, such as government subsidization of particular types of energy production and particular technologies. The $26 billion North West Upgrader fiasco is but one example of how the seemingly simple solution of state-driven diversification can go awry.

If the provincial government truly wants to seize new economic opportunities it should focus on broad reforms, rather than attempting to pick winners. There are several options available such as aggressively working to secure access to foreign markets for Alberta’s natural resources; regulatory streamlining; easing the movement of skilled labour; and improving Alberta’s tax competitiveness.

Though Albertans should breathe a sigh of relief, the provincial government still has a long way to go to ensuring the long-term health of the oil and gas industry, as well as the provincial economy.

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