Alaska has been lauded for ensuring that its citizens get their money’s worth from their oil and natural gas riches, while jurisdictions in western and northern Canada have been lambasted for selling their resources too cheaply.
The findings come in a study released Aug. 17 by the Pembina Institute for Appropriate Development, an Alberta-based think-tank titled When the Government is the Landlord.
The authors also said the Canadian governments were “making poor use of the revenues they do generate, using them to fund current expenditures rather than making long-term investments.”
They said such a policy “creates a fragile situation whereby the funding of core government services is vulnerable to uncontrollable and volatile shifts” in commodity prices.
In a news release accompanying the report, the institute said “big machinery, shiny logos and business suits often overshadow the fact that provincial oil and gas reserves (in Canada) are public – not corporate – resources.”
It accused the Canadian jurisdictions of undercharging companies for the development of the resources, failing to set aside revenues for the future and allowing negative environmental impacts of industry activities to steadily rise.
The governments are “not providing maximum compensation to the citizens of these regions for the development of oil and gas resources,” said lead author Amy Taylor.
Covering the period from 1995 to 2002, the report said Norway collected C$14.10 per barrel of oil equivalent and Alaska C$11.70, overshadowing the Canadian take of C$5.40 in British Columbia, C$4.70 in Saskatchewan, C$4.30 in Alberta, C$2.50 in the Yukon and C$2.20 in the Northwest Territories (although some of the differences were attributed to regional differences in production costs and value of the resources).
But even allowing for those differences, the institute said the bulk of Canadian regions lagged behind in the portion of available revenue they collect.
Alaska recovers 99%, B.C. 93%, Norway 88%
Alaska was estimated to recover 99 percent, British Columbia 93 percent, Norway 88 percent, Alberta, the Northwest Territories and the Yukon 69 percent and Saskatchewan 63 percent.
Despite the low returns, development and environmental impacts are on the rise, the study found.
For example, in British Columbia it said the number of well completions increased by more than 50 percent and the amount of land disturbed by pipelines rose 271 percent. Toxic emissions were also up: Nitrous oxides by 78 percent, sulfur dioxide by 20 percent and greenhouse gases by 47 percent.
Government and industry leaders in Canada were quick to retaliate.
Comparing apples with bananas?
Saskatchewan Industry and Resources Minister Eric Cline said the report oversimplified the complexity of developing oil and gas projects, while his Alberta counterpart Murray Smith said the Pembina Institute was dead wrong.
Cline challenged any suggestion that his government could just “jack up its rates and still have activity in the oil patch.”
He said Saskatchewan does not compete with Norway, “we compete with other Canadian provinces” – a sentiment echoed by Greg Stringham, vice-president of the Canadian Association of Petroleum Producers, who noted that the average well in Western Canada yields only 30 bpd, compared with 6,000 bpd in Norway and 600 bpd in Alaska.
Cline also said the idea of channeling energy revenues into a “rainy day” fund is out of the question, given Saskatchewan’s economic plight after years of drought.
Smith said Alberta has found the right balance that ensures Albertans get their “fair share of rent and royalties,” while competing for world capital.
Smith noted that the province’s price-sensitive royalty model and the surge in commodity prices has seen royalties from the past four previous match those for the previous 10 years.
He said the royalty calculation for Alberta is based on widely-dispersed oil and gas deposits, unlike the concentrated pools in Norway.
Stacking Alberta up against Norway is “like trying to compare an apple and a banana,” he said.
Taylor said the Pembina Institute was not suggesting that Canadian governments should obtain 100 percent of the available “economic rent,” but was not convinced that 69 percent in Alberta was adequate.
The report called on governments to impose special taxes on oil and gas companies to build a fund to pay for any environmental damage.
“They could be taxes levied on sulfur dioxide emissions or greenhouse gas emissions or waste or water consumption,” the report said.
The institute also recommended Canadian governments change the mix and level of royalties, taxes and tax credits to obtain maximum compensation for the development of oil and gas.
In addition, jurisdictions were urged to quickly establish non-renewable permanent resource savings funds and build the value of those funds as resources are depleted.
The study said such funds were especially important in the Northwest Territories and the Yukon, which are facing rapid development of their resources in areas that are particularly susceptible to boom and bust economic cycles.
It suggested that in excess of C$90 million was lost in the NWT because of inadequate resource royalties between the Canadian government and the producing companies.
“We’ve had a lot of concern over whether there is a fair return for the resources that are being extracted here, particularly in anticipation of the Mackenzie Valley pipeline,” said Kevin O’Reilly of the Canadian Arctic Resources Committee, which contributed to the report and plans to work more closely with the NWT government and aboriginal groups to find “ways of trying to capture those revenues.”
Taylor said that although lower royalty rates are “somewhat justified” due to higher production costs in the NWT and Yukon, much of the NWT development is occurring close to the Alberta and B.C. borders where production costs are similar, while the Yukon was paying a significant cost in environmental damage and lower revenues from gas projects.
Lewis Rifkind, of the Yukon Conservation Society, said that even though the Yukon government has full authority over oil and gas development “it has not yet established tax and royalty regimes to maximize economic returns” to it citizens.
