Kudos to Alberta’s royalty review panel—but broad economic reforms still needed

Last Friday the Government of Alberta released the long-awaited Royalty Review Advisory Panel report on the province’s royalty regime for oil and gas production. The review, a campaign promise by the now NDP government, was the source of some regulatory uncertainty in the province, as we showed in a recent bulletin. A similar fall in investor confidence had been observed in the 2007 Stelmach royalty review, and lingered on due to the increase in royalty rates.

Thankfully, Alberta might dodge that bullet this time. The panel concluded that Alberta’s existing royalty structure was both competitive with other oil-producing jurisdictions, and was delivering a “fair share” of resource revenues to the people of Alberta, who own its natural resources in common.

The panel also recommended simplifying the calculation process and removing outdated aspects of the regime that no longer reflect current technology and market conditions. They also did their best to bolster investor confidence: there’s a 10-year delay in royalty changes to existing projects, and the new regime is designed to match the revenues of the old regime, beginning in 2017.

So, kudos to the panel and the Notley government, for humbly admitting that the prior royalty scheme was pretty fair; admitting there isn’t any spare cash to “grab” in the sector at this time; maintaining existing rates and grandfathering existing projects; making competitiveness a key metric; and getting the review over with. The panel should also be commended for creating a royalty regime that will be self-adjusting, and hopefully put further anxiety-inducing royalty reviews behind us.

While the panel’s report fortunately avoided punitive changes to the royalty regime, it is by no means perfect: there are a few suggestions in the report that are potentially cause for concern. The most worrisome is recommendation #4, which calls upon the government of Alberta to “Seize opportunities to enhance value-added processing.” Admittedly, the report had to discuss this, as it was part of their original mandate by the government, and is part of the Notley government’s emphasis on diversifying the Alberta economy. Of course, Alberta history hasn’t been kind to the notion of state-driven diversification.

If the provincial government is serious about seizing new economic opportunities, it would be better off undertaking broad economic reforms rather than narrowly targeting favoured industries. Such reforms could include easing the movement of skilled labour; improving Alberta’s tax competitiveness; and dropping the gloves on getting access to Canada’s coastlines for Alberta resources.

The province should avoid seizing on politically popular though economically dubious market interventions such as subsidizing particular types of energy production or technologies. One can hope, as they work this part of the equation out, that they heed the sage advice of Trevor Tombe, an economist with the University of Calgary, who gently suggests “for the love of God, hire an economist.”