Learning the lessons of past royalty reviews

With resource royalties which are dramatically lower than they were under former premier Ralph Klein¹ (see chart below) contributing to an ongoing string of provincial budget deficits, Alberta's new NDP government has appointed its promised royalty review panel, which will conclude its work by the end of the year.

Unfortunately, the NDP’s panel is half the size and has less time to deliberate than former premier Ed Stelmach's much-maligned effort in 2007, making it all the more urgent for Albertans to appreciate the lessons of past royalty reviews.

Before the dawn of Alberta's Progressive Conservative dynasty (1971–2015), political economist and industry consultant Michael Tanzer highlighted "the modus operandi of the major oil companies – their penchant for manipulating figures, framing debates, creating myths, and threatening capital flight if favourable concessions were not forthcoming from the local governments."²

Historian Erik Lizée confirmed as much in his study of Alberta's 1972 royalty review, when our province's political and economic elites "exploited misconceptions, framed debates, and manipulated others to advance their interests ... prevent[ing] Alberta citizens from participating in meaningful debates over the development of their resources." Then, as now, the industry’s response to public scrutiny was to "threaten economic decline if a 'stable investment climate' was not maintained, raise the spectre of capital outflow, and make statements about the 'morality' of breaking contracts."³

Indeed, Stelmach's 2007 review panel "found editorials dating back to the 1940's warning of the dire consequences of almost every major [royalty] change, using the same language as the warnings given to this Panel."⁴

But historian David Finch reminds us, "This oppositional stance is just a negotiating tactic industry uses against an owner who always has the power – and the right – to collect an increased share." Finch adds that royalty rates had often increased following reviews – at least until the 1980s and premier Klein, whose "alliance with industry emboldened oil companies in their sense of entitlement to a publicly owned resource."⁵

"This oppositional stance is just a negotiating tactic industry uses against an owner who always has the power – and the right – to collect an increased share."

As I demonstrated using the industry’s own statistics in my 2010 Parkland Institute study, Misplaced Generosity, that alliance generated truly spectacular profits⁶ – including throughout the 2007 review, when the oilpatch's oppositional stance and emboldened entitlement had it pleading poverty regardless of reality.⁷

That alliance also helped insulate government and industry from the scrutiny of ordinary Albertans. As profits escalated along with energy prices, Klein pretended to have completed an internal royalty review in 2003/04, but Auditor General Fred Dunn said the government couldn’t sufficiently back up the claim.⁸

Asked about another supposed review years later, Klein quipped: "I don't know if it was completed or not, nor do I give a tinker's damn whether it was completed or not. I've always been satisfied that our royalty regime is proper and right. We do get our pound of flesh."⁹

When the oilpatch's greatest ally left office, all six candidates in the race to replace Klein as PC leader said they felt the public mood about royalties and supported a public review, even at the risk of annoying potential corporate contributors.¹⁰

The result was Stelmach's 2007 review, which has been ceaselessly misrepresented ever since.

"The energy industry has succeeded in leaving the impression that the panel produced some kind of communist-Marxist document that was egregious and outrageous," said review panel member Evan Chrapko. "In fact, we were more pro free enterprise and conciliatory in the industry's favour than much of the independent advice and international comparables indicated we needed to be."¹¹

Fellow panel member professor Kenneth McKenzie wrote, "Alberta's fiscal terms have been favourable to the industry for some time; the recommendations would allow us to catch up. ... The new regime would remain very competitive internationally."¹²

According to British energy consultancy Wood Mackenzie, the 2007 panel's unimplemented recommendations would still have left Alberta as one of the cheaper places to do business in the world.¹³

But instead of enduring the recommended increases, the most powerful industry in the world pushed back and squeezed a string of royalty cuts and subsidies from PC governments, bringing Albertans' royalties back down below the levels during the Klein era.¹⁴

Combined with the recent fall in oil prices, those royalty cuts have gutted provincial revenue, and played no small part in the demise of the PC dynasty last May.

What's more, "Come the 2015/16 fiscal year," reports University of Calgary economist Sarah Dobson, "the situation becomes even bleaker ... [with] a potential decline in crude oil and bitumen royalty revenues of 42 to 74 per cent."¹⁵

There have been changes in the energy industry since the last reviews, but not to its modus operandi. 

Albertans would do well to get informed, get involved, and help hold the industry and government to account for their stewardship of trillions in public wealth.

Ater all, they don't call our resources non-renewable for nothing.

 

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