Learning from the past: fallout from the 2007 Royalty Review Panel

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Appeared in the Calgary Herald

In a historic election on May 5, Albertans rebuked the Progressive Conservative Party, which had governed the province for 44 years, and handed the reins of power over to the New Democratic Party, headed by Premier-elect Rachel Notley.

The NDP’s platform (quickly expunged from their website after the election) pledged to: “Establish a Resource Owners’ Rights Commission to report to the new premier and the Legislature within six months on measures to promote greater processing of Alberta’s energy resources, and to ensure a full and fair return to the people of Alberta for their energy resources.” And now, the premier has made good on that promise, appointing ATB Financial chief Dave Mowat to head the Royalty Review.

This won’t be Alberta’s first Royalty Review. It would behoove us to see what we might learn from previous endeavors, notably, the Royalty Review conducted in 2007 under Premier Ed Stelmach and published in a document entitled “Our Fair Share,” which was issued by then-finance minister Dr. Lyle Oberg in September 2007. In that report, the Royalty Review Panel (RRP) concluded that indeed, Albertans were not receiving their fair share of revenues from Alberta’s oil and gas resources, suggesting the need for significant increases in royalty rates. By coincidence, the Stelmach Royalty Review coincided with the first years of the Fraser Institute’s Annual Survey of oil and gas executives, which ranks jurisdictions around the world on their overall policy framework surrounding oil and gas development. Executives are asked to assess the policy environment of jurisdictions with regard to whether those policies would attract investment, or deter it. One of the factors assessed are the jurisdictions “Fiscal terms” including licenses, lease payments, royalties, other production taxes and gross revenue charges (but not corporate and personal income taxes, capital gains taxes, or sales taxes).

The findings of the survey in the years immediately surrounding the Stelmach Royalty Review, particularly pertaining to the question on the perceived attractiveness of fiscal terms are revealing. Survey responses indicating that Alberta’s fiscal terms would deter investment rose from just 12 per cent in 2007, to 54 per cent by 2008, and to 70 per cent by 2009. Expressed deterrence declined beginning in 2010, when announcements were made about reversing many of the increased royalties but it would take until 2013 to return to the low rates that preceded the review.

And real-world spending tracked with our survey: according to the Canadian Association of Petroleum Producers, from 2006 to 2008, exploration and development spending dropped in Alberta—but increased in British Columbia and Saskatchewan. Clearly the drop was not only about weak oil prices at the time.

Alberta’s ranking among its peers for its perceived policy environment also took a beating. In 2007, Alberta led all other Canadian jurisdictions in the perceived attractiveness of its fiscal regime. They fell to sixth place in 2008, and by 2009 Alberta’s ranking for fiscal terms that encourage investment fell to the lowest out of all Canadian jurisdictions. By 2011, after restoring royalties to their pre-review levels, the industry’s perception changed quickly. Alberta’s ranking according to the fiscal terms factor shot back up to fifth place with regard to its attractiveness to investment among the 10 Canadian jurisdictions included in the survey.

In its Royalty Review, the Notley government would do well to review data showing the impact of the Stelmach governments 2007 review process on the perceptions of senior executives in the oil and gas industry with regard to Alberta’s attractiveness for investment. The 2007 Royalty Review and successive changes were immediately reflected in declining perceptions of investment attractiveness of the province in Fraser Institute’s annual Global Petroleum Survey. A more general lesson that can be learned both from the petroleum survey and the institute’s annual Survey of Mining Companies is that when governments inject uncertainty into markets, perceptions of investment attractiveness in that jurisdiction suffers.

Given its dependence on petroleum revenues, and the current low point in crude oil prices, Alberta cannot afford a strong injection of uncertainty at this time, any more than it could in 2007. But should it proceed with its Royalty Review, the Notley government can limit uncertainty by ensuring that the review process is highly transparent, with clearly defined dates, clearly defined and delimited goals, and clearly defined public and private consultation with all stakeholders from the outset.

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