GERRY RASMUSSEN

Petrostate

When an overdeveloped sense of prosperity causes an underdeveloped sense of democracy.

By Ian Urquhart

For years the boast “City of Champions” has greeted drivers entering Edmonton. With the Oilers now more likely to compete for the first overall NHL draft pick than the Stanley Cup, perhaps that sign should be discarded. One possible replacement might read “Welcome to the Capital of Petrostate Alberta.”

Petroleum is primarily responsible for Alberta’s enviable economic and financial situation. Alberta usually leads the nation in conventional indicators of economic well-being such as GDP growth. We are a debt-free province with no sales tax and low personal and corporate income taxes. But petroleum dependence can breed restrictions on political and economic freedoms. We see some alarming indications of this in Alberta, and citizens cannot shrug off responsibility. As the comic strip character Pogo said on a 1970 Earth Day poster, “We Have Met the Enemy and He Is Us.”

 

Thomas L. Friedman in “The First Law of Petropolitics,” a 2006 essay published in the US journal Foreign Policy, argues that there is an inverse relationship between oil dependence and democracy. “Petrostates” are “both dependent on oil production for the bulk of their exports or gross domestic product and have weak state institutions or outright authoritarian governments.” They are countries like Iran, Kazakhstan, Nigeria, Sudan and Venezuela. Nations with deep democratic roots such as the UK, Norway and the US are not petrostates.

Neither Canada nor Alberta warrant a mention in Friedman’s discussion. Perhaps we didn’t appear on his radar simply because Alberta is underappreciated as a leading supplier of petroleum to US consumers. With the homogenizing impact of NAFTA on Canada/US energy markets, perhaps Alberta is seen as merely part of the US republic—“Texas North,” if you like—and just another spigot to open to supply thirsty Americans.

Friedman’s omission might also be because Alberta’s democracy, imperfect as it may be, still elevates us to a much higher status than the likes of Iran, Nigeria or Venezuela—the states on which Friedman bases his argument. He uses think tank Freedom House’s world freedom rankings to determine which countries are petrostates. Nations scoring “1” are the most free; nations scoring “7” are the least free. In 2010 Freedom House gave Iran a pair of sixes on the political rights/civil liberties dimensions; Nigeria and Venezuela each received a five/four combination. Canada scored a pair of ones and shared this enviable ranking with the UK, Norway and the US.

To suggest, then, as Andrew Nikiforuk does in his stinging critique Tar Sands: Dirty Oil and the Future of a Continent, that North America is host to “authoritarian oil-based regimes” is absurd. It oversimplifies the reality we are living in here and impedes understanding. And it trivializes the repression that opponents of petrostate regimes around the world endure in their campaigns to promote political and economic freedoms. Would Edmonton’s Greenpeace activists prefer to protest against “Big Oil” in the Niger delta? Do they need to wear hoods the way democracy’s champions do in Tehran? Would defenders of free speech prefer to make their case in Caracas? Could they find a newspaper in Venezuela’s capital that would dare or be allowed to print their claims?

To suggest that Alberta is a petrostate invites ludicrous claims. I witnessed one several years ago at the University of Alberta when members of Wiebo Ludwig’s family came to lecture their audience about the hardships they were enduring at Hythe. I could sympathize with their difficulties, but it was hard to stomach their claim, made through a photograph on their lectern, that Ken Saro-Wiwa was their kin. Saro-Wiwa, Nigerian Nobel laureate, pacifist and martyr, was executed by the military government of Nigeria for his peaceful protests against what Big Oil was doing to his Ogoni people. His behaviour could not have been more different from Wiebo Ludwig’s. To imagine that Alberta is like Nigeria invites these unfortunate comparisons. More nuance is needed to understand oil’s impact on politics in Alberta.

The petrostate charge ignores both genuine and potential strengths of public life in Alberta. Those strengths may be gauged in part from Friedman’s discussion of what petrostates deny their citizens. Petrostates do not hold free and fair elections; petrostates despise and censor free speech; petrostates arbitrarily arrest citizens; petrostates unreasonably restrict who may run for office. None of these characteristics may reasonably be applied to life in Alberta.

Our courts can be used to temper government efforts to silence and discredit critics. For example, Dr. Kevin Timoney and Peter Lee threatened a lawsuit against Alberta Environment’s Dr. Preston McEachern for his suggestion that they used data selectively to make their case that oil sands operations pollute the Athabasca River. McEachern apologized.

Our mainstream media certainly exercise their right of free speech. Consider the coverage of Syncrude’s trial for its failure to take sufficient measures to prevent 1,600 ducks from landing, and dying, in its Aurora mine tailings pond. The Edmonton Journal could hardly be regarded as pandering to Syncrude. Robert White, Syncrude’s lead counsel, actually objected to the Journal’s coverage of the trial. In one of his letters to the editor he accused the Journal of adopting “the odious practice of American newspapers” of trying cases in the media. Traditional and new social media offer us important opportunities for social critique.

The fact a trial was held at all reflects one of the strengths of public life in Alberta. But it wasn’t our government that took the initiative. Pressure came from Greenpeace and the Sierra Club’s Jeh Custer, who forced the government’s prosecutorial hand. In spite of our high ranking as a free country, paranoia seems to animate how Alberta’s governing party runs our affairs. Dissent is a four-letter word; the Progressive Conservatives frown upon actions that might inform or facilitate dissent, such as more transparency in governing, easier access to public information and more opportunities for citizen participation in administrative affairs. Government secrecy is impossible to understand without seeing it as an effort to protect petroleum in Alberta.

 

Alberta’s Ministry of energy tells us that, as of January 2009, oil and gas exploration and development could be linked to 141,600 jobs in this province. Nearly 14 per cent of Albertans are employed directly by the energy industry or indirectly by its activities.

In 2008 roughly 30 per cent of the province’s total gross domestic product came from petroleum; oil and gas contributed nearly $87-billion that year to Alberta’s economy; 55 per cent of that sum came just from extraction activities. In 1993 mineral fuels represented 63.9 per cent of the value of Alberta’s exports; in 2008 that percentage stood at 72.5 per cent. Petroleum’s contribution to overall export growth over the 1993–2008 period was 74.4 per cent.

Our province’s lack of a sales tax, a badge of honour for many Albertans, has only been possible because non-renewable resource revenue has paid the bill for a significant percentage of our public services. Alberta’s revenue profile is unique among Canadian provinces in the importance of non-renewable resource revenue. The graph on the facing page illustrates Alberta’s dependence.

Do the owners of Alberta’s resources (that’s you and me, not corporations) have the information we need to evaluate just how well the government is stewarding these precious finite sources of revenue? Too often the answer is no. In 2007 Auditor General Fred Dunn estimated that the government “could collect an additional $1-billion or more per year [in royalties] without stifling industry profitability. However, neither this information nor the reasons why changes have not taken place have been made public.” Government, he concluded, was obligated to report more frequently to the public about royalties; citizens should not have to resort to freedom of information requests—the norm in Alberta—to see the Department of Energy’s technical reviews of the royalty system. “The principles of transparency and accountability dictate that the department should demonstrate its stewardship of Alberta’s royalty regimes and provide analysis to support that statement,” Dunn wrote. “This has not happened.”

Premier Stelmach established an independent Royalty Review Panel with the mandate to determine whether Albertans were receiving a fair share of the province’s petroleum bounty. The review process began with considerable democratic promise. Public hearings were conducted. The panel members were widely considered independent and expert. The panel’s experts concluded that royalties were too low. A “fair share” demanded an immediate royalty increase of 20 per cent. The panel recommended a 37 per cent increase by 2016. Most Albertans welcomed their message. Two-thirds of Albertans, a Leger Marketing  poll reported, wanted Stelmach to implement all of the panel’s recommendations.

The recommendations stunned the oilpatch, however. Anger and a sense of betrayal poured out of corporate boardrooms and onto the pages of the business press. Allusions to Hugo Chávez’s socialist Venezuela or authoritarian Central Asian republics were as popular in corporate Calgary as Smithbilt hats during Stampede week. Adopt the panel’s recommendations and Alberta would become “Albertastan,” “Caracas on the Bow” or the “Bolivarian Republic of Alberta.”

In spite of the wails of protest from oil companies, investment dealers told their clients that oil sands producers would not be materially affected by royalty changes. CIBC World Markets calculated that a hypothetical oil sands project at US$70 oil, which formerly would generate an internal rate of return (IRR) of 13.4 per cent and a net asset value (NAV) of $2.79 per barrel produced, would have generated, under the new royalty framework, an IRR of 13.1 per cent and a NAV of $2.57. So there seemed to be little substance to the hand-wringing comments of Gwyn Morgan, retired CEO of EnCana: “New project decisions in the oil sands will have to factor a much higher government take in a business already replete
with risk.”

André Plourde, a University of Alberta economics professor and one of the Royalty Review Panel’s independent experts, provided a far less dire analysis than Morgan’s on the impact of a new royalty framework. Plourde placed royalties in the context of other fiscal changes made by the federal and provincial governments since the 1997 royalty regime was established. Federal and provincial corporate income tax reductions increased industry’s share of divisible income by nearly 12 per cent from 1997 to 2007 (from 39.5 per cent in 1997 to 51.1 per cent in 2007). Under the government’s new royalty framework, the producers’ share would be 39.8 per cent—virtually identical to what it was in 1997. In other words, in spite of increased royalties, all would be as it was for Alberta’s oil sands sector.

Nonetheless, transparency and public consultation evaporated soon after the panel’s report landed on then-Finance Minister Lyle Oberg’s desk. The Alberta government greeted industry outrage with a placating offer—more consultations. This round would avoid the “mistake” of letting independent experts evaluate the merit of industry’s arguments. Deputy Premier Ron Stevens, a senior member of cabinet from Calgary, would meet face to face with industry representatives. Only the oilpatch was granted this access.

Industry pressed the advantage, meeting frequently with the deputy premier. Sixty industry representatives beat a path to Stevens’s door in the five weeks between his appointment and the release of the government’s decision on a new royalty framework. Stevens’s suitors included the presidents and/or chairmen of Conoco Phillips Canada, EnCana, Imperial Oil, Nexen, Petro-Canada, Synenco and Talisman—all companies with operations or land positions in the Athabasca oil sands area. Murphy Oil, Shell Canada and Suncor—other companies with interests there—sent senior managers. Pierre Alvarez, then president of the Canadian Association of Petroleum Producers, also lobbied the deputy premier. The Globe and Mail suggested that Deputy Premier Stevens should “publish a report on his discussions.” No such report, other than a list of industry representatives consulted, was ever produced.

Industry’s blitz on the government worked. Six of the panel’s 11 oil sands recommendations—most noteworthy, the oil sands severance tax the panel regarded “as an absolutely essential component of a ‘fair’ royalty system”—were rejected.

The way our government protects and privileges Alberta’s oilpatch also is evident in the approach of regulators who are supposed to make decisions in the public interest, not merely in the interests of the oil industry. Clearly this is not the case in the oil sands project approval process, where the Energy Resources Conservation Board (ERCB) is the lead provincial agency.

“Regulatory capture” is a phrase coined in the US to describe situations in which a government agency, created to regulate in the public interest on the issues under its jurisdiction, instead consistently favours industry’s perspective. Through its practices and rulings to date, the ERCB appears in every sense to be a “captured agency.” At least two aspects of the ERCB’s approach to its mandate—the range of values it considers relevant in its hearings and its view of who should be allowed to participate in those hearings—support this view.

With respect to public participation, the ERCB declares it “ensures that everyone affected by energy development has a fair chance to be heard.” This spring some people who live in Strathcona County would beg to differ. They found themselves living in the vicinity of an uninvited guest—Total Petroleum’s proposed bitumen upgrader. But in the ERCB’s opinion these citizens didn’t merit official standing at the hearing. They didn’t satisfy the regulator that they appeared to be “directly or adversely affected” by Total’s application. This restrictive interpretation of just who is directly affected by energy projects before the ERCB is a staple of the regulator’s critics. Keith Wilson, a lawyer representing local residents who opposed Total, told the ERCB that such restrictiveness “builds suspicion. It erodes confidence in the process, in your whole organization.”

The ERCB also fails substantively; it fails to consider the social and ecological effects of energy projects. Shaun Fluker, a University of Calgary law professor, argues that the Energy Resources Conservation Act obliges the ERCB to take a broad approach to its duty under section 3 of the Act to “give consideration to whether the project is in the public interest, having regard to the social and economic effects of the project and the effects of the project on the environment.” Fluker says the ERCB consistently embraces a “resource ethic”; it views its section 3 mandate narrowly. The regulator evaluates natural resources simply and exclusively through the lens of economic development, ignoring all other values.

In the past this may have been what Albertans wanted. But there are plenty of signs that Albertans today seek more than unfettered economic growth. The public interest, as reflected in our responses to polls about oil sands growth or the protection of grizzly bears and wilderness, demands much more than unfettered economic development.

According to David Whitson, a U of A political science professor, we trust regulatory agencies to uphold the public interest. Our confidence in regulators is eroded if “they interpret that interest too narrowly and they undermine that trust.”

Why are the bonds between the governing party, regulators and the petroleum industry so tight in Alberta? One likely contributor to Big Oil’s political influence rests in Alberta’s party and election financing regimes. Petroleum’s power rests, then, in their wallets—specifically, in the support they garner when they contribute to the governing party.

David Stewart and Anthony Sayers, two U of C political scientists, have produced a very thorough study of party finance in Alberta. What distinguishes Alberta’s regimes from others in Canada is laxity. There are no spending limits in provincial elections; union and corporate donations are allowed; contributors may donate up to $15,000 annually to each registered party; in a campaign they may donate up to $30,000. The Progressive Conservatives enjoy a huge funding advantage over all of the opposition parties. Stewart and Sayers conclude that “[it] is obviously corporate money that provides the PCs with the bulk of their funding edge.” During the 2004 provincial election campaign period, the PCs raised a whopping $2,094,533, and just over $630,000 of that amount came from corporations.

However, in the 2008 campaign, the party only raised $580,256. Corporate contributions sank to $386,175. This is where we clearly see the link between campaign contributions and petroleum’s influence in provincial politics. The oilpatch was furious over changes to the provincial royalty regime. Significant past oilpatch-connected donors to the PCs sat on their wallets during the 2008 campaign. Notables include Canadian Natural Resources, Devon Canada, June Warren Publishing, Nexen, Precision Drilling, Suncor and Talisman plus RBC Dominion Securities and other Calgary investment dealers.

Other energy companies showed their displeasure with the government by steering their contributions primarily to the Wildrose Alliance, the only party to defend the royalty status quo. The 2007 changes to the royalty framework mobilized more than two dozen petroleum-related companies to contribute to the Wildrose campaign. More than half the party’s corporate contributions came from these companies, and they delivered 40 per cent of the party’s campaign contribution total. Reaction against PC petroleum policy produced an unheard-of situation—energy sector contributions to the governing Conservatives in the 2008 campaign ($169,575) were less than those to the fledgling Wildrose Alliance ($207,750).

Soon after the 2008 election the Conservatives moved to curry favour with the petroleum sector. They initiated policies designed to win back contributions and dry up the most significant source of funding for the Wildrose Alliance. Royalties were reduced to promote the drilling of high-cost deep oil and gas wells. These departures from the 2007 royalty framework are expected to cost the provincial treasury $237-million a year in foregone royalties for five years, for a total of $1.185-billion. Royalties were reduced for conventional oil and natural gas in March of this year; in May the government reduced the royalties on wells depending on expensive technologies. Next on the agenda, according to CAPP, is addressing Alberta’s “regulatory competitiveness.” This doublespeak means further advantages for oil—and fewer for citizens.

Energy industry companies that sat on the sidelines in the 2008 election campaign—Canadian Natural Resources, Devon, First Energy Capital, Nexen, Peters & Co., Suncor and Talisman—were all back writing cheques to the Conservatives in 2009. They, along with other energy companies, donated approximately a quarter of a million dollars to the Conservatives in 2009. This is nearly four times the amount the Liberals and Wildrose Alliance raised from the petroleum industry in 2009—combined.

Why don’t Albertans challenge the anti-democratic behaviour of the Progressive Conservatives, Alberta’s governing party for 39 years? Does our attachment to the material benefits we derive from our petroleum economy make us look the other way?

If we cared about democracy in Alberta, we could call for reform to campaign and party financing. We could demand that regulatory agencies be accessible, transparent and inclusive. We could stand up and insist that industry’s insatiable appetite should not be satisfied at the expense of more important public values. If we object to becoming a petrostate then we must participate in public life here. Unless Pogo is right. #

Ian Urquhart is an associate professor at the University of Alberta who researches the international/national politics of petroleum.

 

 

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