Alberta's oil and gas royalty system too lax, says former panel member

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An assessment of the royalties paid by oil and gas companies in Alberta is long overdue.

It's been eight years since the Alberta Royalty Review Panel (ARRP) did the last extensive, transparent analysis of royalties. I sat on that panel, which included industry veterans and public finance experts.

We spent months hearing from Albertans, including CEOs and other energy sector executives. 

In our final report, we unanimously recommended that Premier Ed Stelmach should increase royalties because our rates were at bargain-basement levels compared to other producer jurisdictions — net exporters of hydrocarbons.

Our analysis was done on an apples-to-apples basis looking at the full "government take," such as bonus bids, land fees, corporate income tax levels, municipal tax effects, etc.

In the end, we suggested a restrained increase — sensitive to oil and gas price levels — as a compromise.

What happened next was unexpected  

Our then-premier and his energy minister were pulled into numerous private meetings with energy CEOs and lobbyists and given a "talking to." 

The government backed down, resulting in a Frankenstein-like compromise on a compromise.

Yes, royalties were raised slightly despite wild threats from industry players about shutting down or moving away but all the industry huffers and puffers stayed put — which came as no surprise to anyone familiar with industry realities. And they went on to post some of their highest profits ever.

When oil prices later collapsed, the ultra-secret "Competitiveness Review" by Stelmach's own caucus and the industry in 2010 resulted in subsidy-level royalties all over again, which remained in place even while oil soared well above $100 per barrel.

But that was then, this is now. Premier Rachel Notley has tapped banker Dave Mowat to lead another review of our rates. 

We shouldn't wait for review panels

Whatever you think about royalties, continual monitoring should become standard practice in this province.

We all need a clear ongoing comparison on how Alberta's total government take compares to other energy producing or exporting jurisdictions. Just as drilling rig owners, trucking companies and restaurants continually monitor their pricing against their competition, capitalist-minded Albertans should be doing the same for pricing our global-calibre assets.

Of equal importance, I strongly believe the auditor general should be adequately resourced to comprehensively review the overall royalty collection system.

Former auditor general Fred Dunn said the same thing in 2007 but was ignored by the people in power at that time. That same year, 10 per cent of the page count of our panel's final report was about "accountability." It too was ignored.  

Current royalty system not good enough 

Royalty calculations and remittances are practically operating under an honour system.- Evan Chrapko

Many basic questions the ARRP posed to government in 2007 could not be answered. Dave Mowat's new panel will have the same issue this year.

Why? Because the energy and finance ministries are not properly staffed to monitor Alberta's multi-billion-dollar royalty regime. Royalty calculations and remittances are practically operating under an honour system. 

The government lacks enough skilled professionals in this area — the ones who are there are amazing, but simply swamped. Furthermore, the energy ministry resources are disproportionately allocated to designing programs, at industry's request, to lower royalties. 

In fact, successive energy ministers, after decades, had not even commissioned a model to analyze the macro- and micro-economics of the government take, which the ARRP thus needed to do for itself.

For something this vital to Alberta's future, the government should implement and exercise comprehensive audit rights as well as insist on a culture of transparency by the industry players, with stiff penalties for any transgressions. 

This control and enforcement should, at least, be as potent as the corporate tax section of Canada Revenue Agency. It is dereliction of a government's duty as the agent of its citizens to accept the oft-repeated assertion from oil and gas executives regarding both royalty structuring and compliance that "it's complicated, trust us."

Is there room to raise royalties in 2015? 

My experience and judgment tells me that Alberta has the most room to raise rates of nearly every single producer jurisdiction in the world. This is especially true given the level of subsidization and special concessions given to the hydrocarbon energy industry — in bad times and good times.

Remember 2013 when energy prices went high again? The International Monetary Fund estimated that "public finance help" for the hydrocarbon energy industry in Canada that one single year, alone, totalled $34 billion.

However, the first order of business must be an impartial, long-overdue review of Alberta's royalty system. Albertans and their elected officials deserve to know where we've ended up, compared to the government take being charged by competitor energy-exporting jurisdictions — 44 years after former premier Peter Lougheed first raised royalties by a very substantial amount.

From this point forward, we need to stay on top of Alberta's competitiveness on the global stage by publicly and openly reviewing "the facts on the ground" year-in and year-out, just like Norway does, and just as the oil and gas companies do themselves.

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