Regan Boychuk Says Yes
The Polluter Pay Foundation cofounder and 2015 Royalty Review oil sands expert group member
Every self-respecting Albertan should respond to “Should Alberta increase oil royalties?” with an emphatic “Hell yeah!” How big is the profit pie in Alberta’s oil and gas industry, and what’s the appropriate-sized slice for the government? My answer is industry deserves its costs and a profit, and the remainder belongs to Albertans, the owners of the resource.
That all-important remainder is what’s called “resource rent.” Curiously, resource rent remains effectively unstudied by Alberta media, academia or environmental groups, with the idea of excess/unearned profit seeming completely alien even to supposed experts I’ve interviewed. When Jack Mintz, Canada’s leading tax expert, began working at the University of Calgary, his first report for the school’s Imperial-Oil-funded think tank pretended that royalties were taxes, even while conceding in passing that the oil and gas industry paid two-thirds less tax than other Alberta industries.
To clarify, it helps to go back to the first academic economist in the US, Wharton School of Business chair Simon Patten. In 1892 Patten offered principles for ideal taxation aimed at the “surplus of society,” so that taxation could be “burdenless.” Albertans are uniquely positioned to “burdenlessly” capture hundreds of billions in remaining surplus from Crown-owned resources.
How much is due to Albertans? The forgotten answer to that timeless question is excess profit or “resource rent”: revenue in excess of costs and a one-time 10 per cent return on those costs. Uniquely, Canadians don’t have to guess or take industry spinmeisters at their word about costs and profits. Industry is required by law to report its costs and revenues to Statistics Canada, and industry statistics are helpfully published annually by the Canadian Association of Petroleum Producers.
I first crunched the numbers for the Parkland Institute in 2010, showing the truly spectacular profits generated over the previous decade. Since then, many unprofitable oil and gas companies in Alberta have sunk into insolvency while the mostly foreign-owned oil sands enjoy colonial profits. Indeed, Alberta really has two different oilpatches: an old and unprofitable oil and gas sector, and a relatively young and wildly profitable bitumen sector. There are no oil and gas profits left to burdenlessly capture with royalties, but tens or hundreds of billions still pour out of the oil sands annually. That’s where our focus should be—to capture the last of Alberta’s remaining resource rent with higher bitumen royalties before the game ends.
It is still possible for Alberta to have a bright future: to clean up, make reparations and make the transition to zero-carbon responsibly. But only if we act like owners and raise Alberta’s pathetic bitumen royalties.
Ben Brunnen Says No
The senior fellow at the C.D. Howe Institute and partner at Garrison Strategy
Royalties are a significant component of provincial government revenues from the upstream oil and gas industry. They’re paid by companies to the Crown in exchange for the right to develop Alberta’s oil and gas resources. Our royalty system accounts for the value of the resource, the structure of the market and the competitiveness of the industry relative to other jurisdictions.
In 2015 then-premier Rachel Notley initiated a royalty review, guided by an expert panel, to optimize returns for Albertans and encourage investment. The panel concluded that “Albertans are receiving an appropriate share of profits on their resources relative to their comparable peers,” but it also found that the system needed to be updated to reflect market realities and build resiliency.
In response Alberta restructured its royalty system so that conventional/unconventional oil and gas companies pay royalties like oil sands companies, on a “revenue minus cost” basis. The concept encourages investment by enabling companies to recover their costs in a “pre-payout” phase and pay higher royalty rates post-payout—which increase with price. In effect, Albertans share in the upside, while companies minimize the initial investment risk.
Since the province’s royalty system is automatically responsive to changes in costs and price across all plays and products, there’s no need for more-frequent reviews. Consequently the question of raising, lowering or maintaining royalty rates is one of whether or not the system needs to be updated to reflect changes in the fundamentals of the industry or changes in comparable jurisdictions that have consequences for investment and Alberta government revenues.
A key indicator for assessing the adequacy of Alberta’s royalty system (and overall industry competitiveness) is the amount of investment in the province relative to other jurisdictions. Upstream investment has declined globally by nearly 17 per cent since 2015. While this is significant, investment is projected to increase by 24 per cent above 2015 levels by 2025 to meet future demand. Comparatively, in Canada, investment decreased by 30 per cent for conventional/unconventional oil and gas and by 48 per cent in oil sands since 2015. Clearly Alberta hasn’t been struggling with industry overinvestment since the introduction of the new royalty system. In fact, investment is declining while Alberta royalty revenues have increased substantially—with bitumen royalties reaching an all-time high in 2022, a result of more projects moving into payout.
Rather than raise royalty rates, our province would be better served to explore whether we are sufficiently competitive to attract investment. After all, any credible energy forecast predicts growth in oil and gas supply over the long term. The question now becomes how Canada can best position itself as the supplier of choice to meet this global demand.
Regan Boychuk responds to Ben Brunnen
Despite how the oilpatch sees things, industry are not the owners of Alberta’s oil and gas and bitumen; Albertans are. And as much as executives would like us to praise them endlessly for their “investments,” the truth is that the mostly foreign-owned industry invests less than nothing here. Instead, what actually happens is they borrow money using our oil and gas as collateral, then dig up our treasure, returning to Albertans only a tiny fraction of its value. That is why in 2022 the oil industry kept more than $150-billion of our natural wealth—after paying royalties and corporate taxes! The scope of the looting is truly immense.
Many countries collect 60 to 90 per cent (or more) of the value of their oil and gas resources. Barry Rodgers, former Alberta Energy director and co-author of studies of hundreds of jurisdictions, has concluded we have the lowest royalty rates on earth. Alberta was still collecting less than 5 per cent under the NDP government, which then lowered rates further in an illegitimate review.
I know the flaws of that 2015 review, because I served on its oil sands expert group. Mr. Brunnen knows too; he was the Canadian Association of Petroleum Producers’ VP for bitumen at the time. The NDP outsourced its royalty analysis to walking-conflict-of-interest Peter Tertzakian, an executive at Canada’s largest oil and gas investment bank. A fellow conflict of interest—the affable ATB Financial president Dave Mowat—chose Tertzakian. And then Mowat stacked the deck even further.
These energy investment bankers weren’t fact-checked by public-servant experts from Alberta Energy but by Blake Shaffer—a U of C grad student and former New York City energy trader. Mowat introduced Shaffer to the expert group as “Blake, the Certifier.” The 2016 royalty report misled the public starting with Fig. 1, which misleadingly included bitumen and didn’t adjust figures for decades of inflation. The numbers lacked proper context: the public’s declining share of total revenue, or our declining revenue per barrel. And it went downhill from there. But a ripoff was inevitable, because no legitimate case can be made for further lowering rock-bottom royalty rates.
Ed Stelmach’s 2007 royalty review was the only uncompromised review this province has ever conducted.
How is all of this even possible? It goes back to Ernest Manning, then a minister in William Aberhart’s government, who put our regulator above the law in 1938. His government’s Oil and Gas Resources Conservation Act gave the regulator no obligation to hold hearings or even give reasons for its decisions. American companies paid nothing for the trillions-worth of Alberta oil that Manning gave them the exclusive right to develop.
When Alberta slipped out of American control under Premier Peter Lougheed in 1971, industry enthusiasm for developing our bitumen waned. Alberta returned to American control under Premier Ralph Klein in 1992, who let a half-dozen bitumen executives write their own royalty regime and then adopted it in full in 1996, leading to the carbon-spewing gold rush ongoing since.
When Klein retired in 2006, every candidate to replace him as PC leader—even Ted Morton!—called for a royalty review, because everyone knew we were getting screwed.
Premier Ed Stelmach’s 2007 royalty review was the only uncompromised review this province has ever conducted. The key concern of a review should be to quantify the remaining resource rent so it can be collected for owners (Albertans). It should be done by experts with full access to data, free of political interference and with complete transparency. The 2007 review came as close as we might expect.
But the knowledgeable and decent Albertans who conducted that review were frustrated by how it was mis-represented. “The energy industry has succeeded in leaving the impression that the panel produced some kind of communist–Marxist document that was egregious and outrageous,” said panel member Evan Chrapko. “In fact, we were more pro free enterprise and conciliatory in the industry’s favour than much of the independent advice and international comparables indicated we needed to be.”
Industry backlash convinced Stelmach to retreat and call another review in 2009—this one illegitimate, with US consultants PricewaterhouseCoopers taking the lead. The public was excluded; royalties were lowered. Stelmach was soon forced out as premier. Such is the power of the oilpatch, fat on trillions in unearned profits, taken from us. It’s tempting to believe their power is so great nothing can be done, but Lougheed took that excuse away from us.
It’s not only possible to raise Alberta’s disgracefully low royalty rates but also essential we do so. In this zero-sum game, every royalty dollar we collect is one seized from companies liquidating our natural resource wealth. We must find the courage to act like owners.
Ben Brunnen responds to Regan Boychuk
Regan Boychuk’s position can be summarized as an argument for capturing “the last of Alberta’s remaining resource rent with higher bitumen royalties before the game ends.”
When considering whether to increase oil sands royalties, it is important to frame a response to this question in the context of the underlying realities of long-term global oil and gas demand.
The 2022 International Energy Agency Stated Policy Scenario (STEPS), which is based on current policies in place, forecasts that by 2050 hydrocarbons will comprise at least 62 per cent of the energy mix and that oil and natural gas supply is expected to increase by 8 per cent and 2.7 per cent, respectively. Clearly the world will be reliant on hydrocarbons for our energy consumption and other uses (e.g., asphalt, plastics etc.) for the foreseeable future.
Consequently, when thinking about royalty policy, there is no “game end” per se. Rather, Albertans will continue to retain the option as to whether and under what conditions they want to develop Alberta’s oil and gas resources.
When suggesting we apply “higher bitumen royalties before the game ends” Boychuk seems to be suggesting that Alberta increase royalties to the point where we gain additional rents and cease to expect to rely on the oil sands for future investment and economic prosperity. Because oil sands facilities generally have high upfront capital costs and low marginal costs per barrel, they can continue to produce bitumen in the face of higher costs and lower revenues. However, Alberta would see no new growth capital, and production would eventually decline and cease to exist under this approach.
Given the global outlook for oil and gas demand, this decline in local oil sands investment and production would not lead to a decline in global oil investment and production. On the contrary, S&P Global estimates that “annual upstream investment will need to increase from $499-billion in 2022 to $640-billion in 2030 to ensure adequate supplies… a cumulative $4.9-trillion will be needed between 2023 and 2030 to meet market needs and prevent a supply shortfall, even if demand growth slows toward a plateau.”
So the question becomes: Why would Alberta want to increase royalties to the point where we discourage investment? Put another way, wouldn’t Albertans want to position themselves as the supplier of choice in the face of this growing need for investment and production, and as a leader in environment, social and governance (ESG) performance? After all, through the Pathways Alliance, Canadian oil sands companies have committed to net-zero emissions by 2050, and according to S&P Global have reduced their emissions intensity by 23 per cent since 2009 and, in 2022, held total emissions flat for the first time since 2009—despite an increase in production. According to BMO, Canada ranks as a leading ESG performer among all major oil- producing countries.
Royalties should thus be evaluated in the context of wanting to encourage responsible development while maximizing the benefits to Albertans.
Why would Alberta want to increase royalties to the point where we discourage investment?
Recall that the 2015 Alberta royalty panel report, under then-premier Rachel Notley, found that “Albertans are receiving an appropriate share of profits on their resources relative to their comparable peers.”
I would even go so far as to suggest that the conditions for encouraging investment in the oil sands may not be sufficiently favourable. The last significant greenfield oil sands project to receive a final investment decision was Suncor’s Fort Hills mine in 2014. Since then, oil sands companies have largely focused on deploying capital toward small-scale brownfield expansions, debottlenecking facilities and finding ways to reduce costs.
The challenging financial conditions for oil sands companies are best illustrated through their return on capital employed (ROCE), which is a key financial performance benchmark for any industry. Despite recent periods of higher profits, oil sands are long-cycle projects whose economics need to sustain a competitive ROCE over time. According to BMO, oil sands company ROCE has averaged 5.7 per cent since 2008. For the Canadian economy as a whole the number is closer to 6.7 per cent.
Rather than thinking about increasing royalty rates, Albertans should be discussing how we can best encourage responsible development of our resources over the long term, including by re-evaluating the overall attractiveness of Alberta’s and Canada’s oil sands investment climate.
