Monday, October 15, 2007

Alberta's Unfair Royalty Regime

I want to start with one of the main issues I have with the report. It failed to take the cost required to harvest energy into its assessment of determining a fair tax share for the government. Even going so far as to state “costs are not an argument for or against a particular finding of a fair royalty level” p.37 What????

Costs are very relevant. It is very indicative of the overall character of the “ivory tower” report when it refers to “costs” so flippantly, and without meaningful regard. “Cost” is the most important aspect of trying to run a business. “Costs” is the money paid to Albertans directly in wages when recouping the energy from the ground. “Costs” is the money paid to Alberta firms for the equipment required to recoup energy. In some of the countries Alberta is compared to, rig workers make less in a month than Albertans do in a day. How can we compare the two regimes? It assumes that the only potential gainers from resources are multinational corporations and governments. Alberta is different. We have shunned this archaic model. Instead Albertans earn the money themselves from exhuming the energy. Albertans are some of the best paid workers in the world (this includes rig workers, engineers, truckers, tradesmen, hotel attendants, nurses, teachers... etc.) This is exactly what is meant by the Alberta advantage. The money flows to the people. We consequently have one of the highest living standards in the world, and this was never taken into account anywhere in the report. In fact it was only referred to disparagingly through its reference to “costs”.

Alberta has some of the most stringent environmental standards in the world. These costs were just glossed over.

Alberta’s deep basin gas is expensive and difficult to harvest. The deep basin pool runs alongside the Rocky Mountains. The drilling is exceptionally complex and expensive. The formations are hard and time consuming to drill. The difficult drilling translates into crooked holes, which adds to completion and production costs. The deep basin is consistently yielding smaller and smaller returns and finds each year. The higher costs and declining productivity puts Alberta at a disadvantage in the conventional oil and gas market. Our marker was compared to other jurisdictions which have lower associated costs and higher productivities.

The biased report also failed to mention that Alberta has increased its revenue from royalty taxes 6.5 billion in 2001/2 to 12.5 billion in 06/07. Less drilling means less tax money, regardless of what the rate.

In the same period of time the personal and corporate taxes collected by the Alberta government have also increased from 4.6 billion to 7.5 billion.


At 9:24 AM, Anonymous Anonymous said...

angryroughneck: I appreciate your comments related to costs. But a very relevent question is why are costs increasing? The reason: the pace of development in the oil and gas sector and cost overuns resulting from project management that cannot keep pace.
The fact that the royalties will slow down the oil sector is absurd on two grounds. First, every major industry analyst has pointed to increased costs being the major factor in slowing down developments, these costs being labour, overruns, materials. The fact that the oil sector is taking a breather is an opportune time for the government to collect more royalties because oil will not be here forever and investment in other sectors needs to take place. Oil companies are the lowest investors in research and development in the province so the government needs to re-allocate dollars to ensure that Alberta will have a prosperous future.
Also, we need to remember that the royalty recommendations will mean more money for Albertans and less money for the Feds.
The current royalty scheme was put in place to help develop the resource. Goal accomplished. The new royatly scheme is being put in place to slow the pace of development and to provide more monies for the future of Alberta. If this goal can be reached, then I think we will all agree that this will be better for all us. If this is at the sacrifice of some of CNRL's CEO's 859 million dollar net worth... so be it!

At 2:54 PM, Blogger angryroughneck said...

Good comment, but the rig count has been around to 35% for the last 6 months precisely why you say-- service costs are very high because of the heightened demand, but ultimately costs are costs-- whether they are taxes or labor, so increasing a tax rate will have the same effect of high labor costs on the industry. Right. But the difference being instead of this extra money going to the service providers it will now go to the provincial government.

My other problem is that I resent any increase government wealth because it changes their mandate. suddenly they have more pet projects and moral crusades when their pockets are lined and I don't believe that this is the proper function of government.

At 2:54 PM, Blogger angryroughneck said...

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