Principled Leader are Hard to Find

Populism tramples principle in Alberta
GWYN MORGAN
From Monday's Globe and Mail


Experience has taught me that populist politics are seldom principled. It's not that populists don't want to do what's right and best; it's just that if a choice has to be made as to which has priority, what is popular wins.
Ralph Klein was very popular, but he was not a populist. When he took on the job of premier, Alberta was suffering the after effects of Trudeau's national energy program followed by a prolonged slump in energy prices. Inheriting a big deficit, he slashed spending on everything from hospitals to schools, an unpopular but necessary move. Investment in the relatively embryonic oil sands was virtually at a standstill. The Klein government implemented a royalty regime that provided for recovery of investment before significant royalties kicked in. Mr. Klein understood a key truth - you can't tax what doesn't happen, and lower tax rates almost always result in more revenue.

If you poll almost any society with questions like "should the rich pay more?" or "should industry pay more?" you can count on a majority of yes answers. If you precede that poll by a government commissioned report alleging that "the people" have not been getting their "fair share," the number of yes responses will be even greater. Then, if the chairman and some members of that review commission actively campaign for full adoption of their report, the populist pressures intensify.
In a choice between polls and principle, the populist's choice is predictable. Enter the populist Premier Ed Stelmach. What principles have been violated by Mr. Stelmach's royalty decision?

The first one is reneging on the terms under which the province sold conventional oil and gas lease rights to industry. Assessing the amount to bid for new leases is a complex matter starting with the reality that the odds of finding commercial resources on any one lease are low.

Once the technical analysis is completed, risk-adjusted forecasts of costs and production are made, using a range of pricing scenarios. The final step is to apply provincial royalty rates to determine the producer's share. During my three decades of working to build what became Alberta's largest natural gas producer, royalty rates were the lone factor that we counted on in our investment analyses.
Royalty terms were vital in determining how much to bid for a resource lease from the province, creating what we believed was a long-term commitment on both sides. An analogy would be buying the right to lease an office for 25 years. The bigger the annual lease payments, the less you're prepared to pay up front. And you would count on the deal not changing even if new lease rates went up.
The second matter of principle Mr. Stelmach's government has violated is reneging on oil sands royalty commitments under which capital has already been invested. Except in the case of Syncrude and Suncor, the money was invested without a contract binding the government to honour the terms.

Nonetheless, investors rightly see this unilateral change as a clear case of doing what is popular rather than what is right. And in terms of doing what is best, the damage to Alberta's reputation certainly illustrates the wrong choice.
Does an owner have both the moral and legal right to unilaterally change the terms under which he is prepared to lease his property? The answer is clearly yes ... for new leases. Industry can then decide whether to buy new leases or develop new projects having consideration for the new royalty rates. Had Alberta raised royalties that would apply to leases not yet sold or for oil sands projects not yet commenced, then the rare combination of what is popular may have aligned with what is right and best.

So what will the fallout be?
Alberta's current annual royalty revenue is about $8.5-billion. Sale of leases added $2.5-billion over the past fiscal year and the province's share of income taxes is about $1.5-billion, for a total take of $12.5-billion. The province calculates that it will receive an additional $1.4-billion by 2010 as a result of the higher royalty rates. But that assumes no change either in what the industry bids for land sales and no reduction in production resulting from reduced drilling. Consistent with the fact that you can't tax what doesn't happen, Alberta's coffers could end up with no gain at all, or even a net reduction.

Industry is still in shock, but the computer models used to compare before and after investment feasibility are grinding away. Companies with investment opportunities outside Alberta will be looking at them a lot closer. The natural gas drilling and development service sector was already suffering, so expect an even worse downturn. New project decisions in the oil sands will have to factor a much higher government take into a business already replete with risk.
Mr. Stelmach states: "I'm confident we've made the right decisions for today and for Alberta's future."

As for me, I continue to believe that populist politics are seldom principled.