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Oil Royalties

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  • carfreecrawford
    Ron Dawson asked me to post this: Hi JHC, considering what has happened recently in the US in regards to Enron this story might also be of interest for the
    Message 1 of 1 , Jan 30, 2002
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      Ron Dawson asked me to post this:

      Hi JHC, considering what has happened recently in the US in regards
      to Enron this story might also be of interest for the carfree cities
      list. Dawson



      Treated like royalty Is Alberta selling the public farm to US-based
      Big Oil?

      Oil and gas profits help power the world's economies, just as oil and
      gas royalties fuel many a government. The size of these royalties
      (just how much of the cream is milk debate) can also stir up a fair
      bit of controversy.

      The citizens of Newfoundland and the UK, for example, have repeatedly
      asked if they are getting a fair share of their offshore oil assets.
      No one appears to have a credible answer to that question, but
      multinationals generally rate both jurisdictions among the world's
      most profit-friendly. Meanwhile, the US Justice Department has no
      doubts about what is fair after it caught Shell, Chevron and other
      big firms shortchanging taxpayers on oil and gas royalties from
      federal and Indian lands last year. Showing a flair for innovation,
      companies falsified prices, used phony bills of sale and deliberately
      misclassified high-quality oil as poor crude in order to cheat the
      public out of US$100 million in revenue a year. Big Oil, it seems,
      has some trouble doing elementary royalty math.

      But in addition to US-scale controversies, there is also a lot of
      murkiness in good ol' Alberta. Last fiscal year it became the source
      of much national envy when it collected more than $9 billion in
      royalties. The bulk came from natural gas ($7.2 billion), while oil
      kicked in another $1.5 billion and the oil sands $712 million. Given
      record-breaking corporate profits for that period, did Albertan
      taxpayers, the owners of this precious resource, get a fair return?

      The answer is both yes and no, depending on whom you talk to. But
      there is no doubt that the Alberta government could have earned much
      more if it had made some savvier decisions. For starters, the
      province offers some of the lowest royalty rates in Western Canada. A
      1999 study by its own energy branch clearly showed that Saskatchewan
      and BC charged more rent for their hydrocarbons than Ralph Klein. The
      one exception was natural gas. While Alberta collects between 15% and
      30% for new gas finds, BC actively advertises a 9% to 12% rate—on the
      Internet, no less. (BC taxpayers have yet to ask if this redirection
      of wealth to companies largely based in Alberta is in the public

      Alberta not only undercharges its neighbors on oil rent, but even
      outdoes Texas as well. Last year, Houston-based Oil and Gas Investor
      reported that the royalty take on an Alberta gas well producing
      300,000 cubic feet per day is approximately 35% versus 27% in Texas.
      But an Alberta tax credit rebate, as well as the so-called Gas Cost
      Allowance (a shadowy program that allows producers to subtract the
      cost of processing from the net royalty payable), rapidly changes the
      economics so that "the net Alberta Crown royalty payable [is] less
      than paid in Texas," according to Oil and Gas Investor. This might
      explain why so many US firms are investing in Alberta's oilfields;
      the province lets Houston-based companies take home a greater share
      of the profits.

      Three years ago, the Parkland Institute, a very liberal-leaning think
      tank at the University of Alberta, compared Alberta's royalty regime
      with those in Alaska and Norway. The comparisons were imperfect
      (offshore oil is a much more lucrative endeavor than, say, a Peace
      River gas well). But the report raised some interesting questions
      nonetheless. Due largely to royalty reductions made by Alberta's
      Tories, Alaska and Norway earned rents almost two to three times
      higher per barrel of oil from 1992 to 1997. "It was surprising how
      different we are all," notes Jim Stouffer, Alaska's Royalty
      Accounting Supervisor. "Alberta is at the low end of the stick."

      In addition, both Alaska and Norway have socked a lot of their
      revenue away in permanent funds in order to strategically generate
      revenue for future generations. Alaska's fund, which receives 27% of
      all royalties, is now worth US$25 billion. Norway boasts a similar
      pot of petroleum gold. In contrast, Alberta, which froze royalty
      contributions in 1986, possesses a Heritage Fund whose value hasn't
      really changed in the past decade and is still a measly $11.8
      billion. "It's really a difference in lifestyle choices," explains
      Mark Anielski, a resource economist with the Pembina Institute, an
      Alberta-based think tank. "Alberta has chosen to live for today,
      while Alaska and Norway have elected to save for tomorrow."

      The Parkland study made another valid observation. A logical thinker
      might forecast that royalties from the oil sands, one of the world's
      largest oil banks, would increasingly make up the bulk of Alberta's
      revenues. But thanks to the province's new Generic Royalty Regime
      that is hardly the case. In 1997, the Alberta government decided that
      the oil sands were such a high-cost venture that it reduced royalties
      to 1% of sales revenue until companies write off 100% of their
      capital costs. So it has chosen to forego a decent royalty rate
      (something higher than 12.5%) for a long, long time. The idea, say
      officials, was to "accelerate the development of the oil sands while
      ensuring a fair return to the resource owners—Albertans."

      The new regime has undeniably accelerated investment (try a hefty $30
      billion worth). "The Americans obviously know a sweet deal when they
      see one," notes Anielski. "But was it necessary for the government to
      grease the wheels so generously for an investment corporations would
      have made anyway?" Economics, being economics, can't really answer
      such a political question. But at some point Albertans are bound to
      notice that their share of the petroleum pie is shrinking.
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