2 Comments

Royalty Review Was Much Ado About Nothing

Royalty Review Panel Members, Source: Calgary Herald

Royalty Review Panel Members, Source: Calgary Herald

The good news: The NDP’s eight-month long royalty review changed pretty much nothing.

The bad news: The NDP put Alberta’s oil and gas industry through a eight-month royalty review that created massive uncertainty for investors, and likely cost jobs.

For the last two decades, the NDP have matter-of-factly declared that oil and gas companies were robbing Albertans blind by not paying their fair share of royalties. Royalties being a complicated series of regulations, it was easy for the NDP to promise that if they only raised royalty rates, Alberta could spend until the cows came home.

That was a nice sound bite in an election platform; that is, until the NDP got elected. The NDP launched their royalty review panel in June, continuing to declare that it would net them even more revenue, despite our energy sector facing one of its biggest declines in decades. NDP rhetoric made clear that in their world view, the energy sector was a bottomless money pit of money that government need only dip its net into a little deeper.

Ed Stelmach tried that in 2007 and triggered a massive capital flight to other jurisdictions, but that lesson of history didn’t matter to some.

To allay the fears of investors, the NDP smartly included on their review panel several respected industry experts like Dave Mowat and Peter Tertzakian. The inclusion of these experts went some way to calm the investment community, but it also made it less likely that a hard-core ideological royalty regime would be imposed.

Investors have nonetheless moved investment away from Alberta. While low oil prices have had a depressing effect on oil well drilling globally, the royalty review – coupled with a massive new carbon tax – have driven already limited capital investment to other, more stable and competitive jurisdictions like Saskatchewan.

The announcement of the royalty review’s conclusions on Jan. 29 came as a huge relief to industry. The government would make a few tinkering changes, but overall, the status quo would prevail.

For investors, oilfield workers, ancillary industries and every Albertan who lives a better life with a strong energy industry, this came as good news.

The royalty review was akin to a mechanic popping the hood of the car and spending a few hours talking about the need for a new engine, only to fill the washer fluid and say ‘you’re good to go’.

In this case, the car inspection cost Alberta taxpayers $3 million and months of economic uncertainty.

The NDP had however been relying on billions of dollars in new revenues to flow from higher royalties, with Finance Minister Joe Ceci promising increases as recently as his October 2015 budget speech.

The NDP’s budget predicts a 16 per cent increase in revenues to balance the budget in 2019, but in the last three years of that budget, provides zero details on how it will achieve that.

It’s fair to assume that the NDP had been banking on its royalty review to bail them out. Without the revenue bonanza that they believed was coming, how will they now close that budget hole?

In October, the projected consolidated deficit stood at $9.1 billion, using oil price assumptions that were far too optimistic, even then. Since October oil prices have continued to decline, compounding the problem.

The NDP inherited a $6.1 billion deficit from the former government and no one blames them for the price of oil, but their plans to continue increasing spending without any realistic source of revenue to pay for it is their responsibility.

Alberta’s largest job creator has been subjected to an eight-month royalty review that in the end found that they were in fact paying their fair share after being demonized. The review only caused huge investor uncertainty for eight months, cost good paying jobs, and poked another massive, multi-billion dollar hole in the NDP’s budget plans.

Still, Albertans should be grateful that smart individuals on the royalty review panel stood their ground and ensured that the final report was based on evidence, and not ideology. It could have been worse.

SociBook del.icio.us Digg Facebook Google Yahoo Buzz StumbleUpon