Has the Alberta Advantage shifted to Saskatchewan?

The release earlier this month of The Fraser Institute’s global petroleum survey provides yet another example of the erosion of the “Alberta Advantage” with survey respondents giving low marks to Alberta and instead citing the advantages of Saskatchewan.

The survey of upstream petroleum industry companies was designed to measure and compare the extent to which factors such as the fiscal regime, political stability, labour availability, and the cost of regulatory compliance constitute barriers to investment. It ranked jurisdictions according to the percentages of the negative responses received to16 survey questions.

In what may have been a shock to Alberta’s upstream oil and gas industry, the survey results indicated that many within the industry felt that Alberta had more barriers to investment than Saskatchewan, which still had an NDP government at the time.

This is all the more remarkable given that the survey was undertaken during the spring and early summer of 2007, well before the Alberta Royalty Review Panel recommended that royalties on conventional oil and natural gas production be increased or the decision by Premier Ed Stelmach’s government to partially implement the report’s recommendations.

A review of survey responses indicates that this was not the result of “outlier” responses to a few of the survey questions or a statistical aberration. Alberta received a smaller percentage of negative responses to the survey questions than Saskatchewan in half of the cases, including the two questions that asked how fiscal terms (i.e. royalties) pertaining to the upstream industry and the general taxation regime were affecting investment decisions. However, Saskatchewan outperformed Alberta in each of a number of composite indexes that were developed from responses to particular groups of questions.

Investor preference for Saskatchewan versus Alberta is underscored by the two provinces’ rankings according to the “Commercial Environment Index” that was developed from responses to the survey questions dealing with factors such as fiscal terms, taxation, and labour mobility. This index reflects the extent to which commercial factors, i.e. those directly impacting cash flow, are barriers to investment. The results indicated that petroleum industry investors generally favour both Saskatchewan and British Columbia over Alberta, something which ran against the grain of conventional wisdom in Alberta before the Stelmach government pulled the plug on the Alberta Advantage to a certain extent when it announced its response to the ARRP’s recommendations on October 25, 2007.

Saskatchewan also fared better than Alberta in a ranking based on a Regulatory Climate Index that was constructed from responses to questions pertaining to the cost of compliance with government regulations, regulatory uncertainty, environmental regulations, local processing requirements, trade regulation, and labour regulations and employment agreements. Essentially, survey respondents saw Saskatchewan’s regulatory framework as constituting a lower barrier to investment. This was mainly because the cost of compliance was deemed to be greater in Alberta and environmental regulations pertaining to the upstream industry were seen as too complex. The concern with regard to the cost of regulatory compliance in Alberta is not surprising given the widespread unhappiness over the time that an apparently under-funded and understaffed Alberta Energy and Utilities Board has been taking to respond to many applications for exploration and production drilling approvals. Nevertheless, the fact that upstream investors indicated fewer problems with regard to regulatory processes and costs in Saskatchewan under an NDP government than in Alberta indicates that the Alberta Advantage has indeed been tarnished.

Combining the results to the 11 questions underlying the Regulatory Climate Index and the Commercial Environment Index to yield a “Business Environment Index” produced the same result. Investors do not see Alberta as being as attractive a place to do business as Saskatchewan because of frustration and uncertainty in relation to the provincial regulatory regime, labour availability issues, and other factors.

The ranking of jurisdictions based on the responses to all 16 of survey questions, including questions in relation to political stability, security, accuracy of the geopolitical database, and native land claims, again showed that investors preferred Saskatchewan over Alberta.

The fact that all of the measures indicated that Alberta poses greater barriers to petroleum investment than Saskatchewan will come as a shock to many, especially given the fact that the survey was undertaken months in advance of the October 25th royalty announcement.

With the changes in Alberta royalties on conventional oil and gas production that have been announced by the Stelmach government it will not be surprising to see that the Saskatchewan-Alberta ranking differentials widen when the results of The Fraser Institute’s 2008 Survey become available.

When it comes to the Alberta Advantage, the Government of Alberta appears to have shot itself in the foot.