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Report: NWT under-charging on royalties in run-up to Mac hearings
A resource raid by multi-nationals has resulted in petroleum and mining firms plundering the Northwest Territories for “hyper-profits,” said a report by the Canadian Arctic Resources Committee that sets the stage for public hearings on the Mackenzie Gas Project that are expected to stretch over the next 18 months.
The findings come in the midst of delicate negotiations between Imperial Oil, the Mackenzie project’s lead partner, and the Canadian government over a range of fiscal options to support the C$7.5 billion Arctic gas development.
Imperial is pressing for lower royalties over the initial years of the project’s operating life until the partners have recovered their capital investment, drawing a parallel with the Alberta oil sands, where companies pay a 1 percent royalty on gross revenues until their investment costs have been covered, then 25 percent. Report: government forfeiting C$540 million In one of its most controversial findings, the committee report accuses the Canadian government — which collects the royalties from Northwest Territories’ resource development — of potentially forfeiting more than C$540 million in oil and gas royalties between 1998 and 2004.
The study report calculated the average royalty rate for the NWT is 5.4 percent, because Canada charges royalties on what companies earn after expenses, compared with the current Alberta rate of 30 percent, which is based on production volumes.
The committee, a citizens’ organization formed 30 years ago in response to the first attempt to build a gas pipeline from the Mackenzie Delta, said that given the “dramatic increases in energy prices the value of these resources continues to multiply.”
“Northerners can choose to remain a dependent resource colony where multi-national corporate capital continues to reap hyper-profits at the expense of social infrastructure and the environment ... or northerners can choose to secure their self-determination by capturing a fair return from the bounty of the earth,” the study concluded. Handley asks for platform positions Release of the study coincides with a demand by NWT Premier Joe Handley for the leaders of three major political parties to disclose their platform positions on issues affecting the region during the current federal election campaign.
In a letter to Prime Minister Paul Martin (Liberal), Stephen Harper (Conservative) and Jack Layton (New Democratic Party), Handley tried where he failed in the June 2004 campaign to get response on four questions — their stance on the Mackenzie pipeline, resource revenue sharing, building a highway to the Arctic Ocean and the challenge of funding the NWT according to its population.
He set a Jan. 9 deadline for answers, two weeks before the vote takes place.
In 2004 he got a detailed reply from Layton, a brief reply from Harper and nothing from Martin, but, based on discussions with the candidates, he is optimistic “they’re going to take this (request) seriously.”
The NWT has been trying for years to negotiate a transfer of control over resources from the Canadian government, allowing royalties to be channeled directly to the NWT rather than through the federal government. NWT challenges conclusions The resources committee’s conclusions were quickly challenged by NWT Industry, Tourism and Investment Minister Brendan Bell, who said Alberta’s royalty rate was interpreted inaccurately.
He said the 30 percent rate applies to only 15 percent of wells and argued the NWT regime is reasonable, given the costs of accessing frontier resources compared with using existing infrastructure in Alberta.
Given the difficulties of getting equipment into remote areas, he said the NWT royalties are “very competitive and comparable with other jurisdictions.”
Committee Chairman Chuck Birchall told CanWest News Services the study is designed to stimulate debate before the Mackenzie proponents “get what they need before we get what we need.”
He said it is “unconscionable” that the Mackenzie proponents are negotiating C$1.2 billion in fiscal concessions from the Canadian government, communities along the pipeline right of way have been promised only C$500 million over 10 years, the Aboriginal Pipeline Group has been promised loan guarantees to support its bid for a one-third equity stake in the pipeline and the NWT government “has got nothing.”
“What we deserve is a fair royalty resource sharing deal,” Birchall said.
In addition, Handley has stirred anger within northern organizations by delivering a “letter of comfort” assuring Imperial it was not the NWT government’s intention to “introduce or support any new, targeted tax or royalty changes ... that would negatively impact project economics.” Report prepared by Petr Cizek The committee report, prepared by Petr Cizek of Cizek Environmental Services based in Yellowknife, the NWT capital, was based on public data covering the value and volume of petroleum and mineral extraction over the 1998-2004 period.
It said public disclosure and discussion is “urgent,” given reports that the Mackenzie proponents are trying to obtain guarantees from the Canadian and NWT governments to retain or reduce existing royalty rates.
The study said Ottawa collected C$120 million in oil and gas royalties at an average royalty rate of 5.4 percent from 1998 to 2004, whereas the Alberta rate of 30 percent would have generated C$660 million.
The total value of non-renewable resource extraction in the NWT rose almost 10-fold from C$282.3 million in 1998 to C$2.7 billion in 2004, with combined royalties reaching C$159 million in 2004 at an effective rate of 5.9 percent of total production.
Although profits from most mines and petroleum operations in the NWT remain confidential, the study estimated that in 2004 the Norman Wells oilfield in the Central Mackenzie Valley made a net profit of 87 percent and Rio Tinto reported an EBITDA (earnings before interest, tax, depreciation, impairments and amortization) rate of return of 75.2 percent and an after-tax rate of return of 34.5 percent on the Diavik diamond mine, the report said.
If royalties continue to be collected at the effective 2004 royalty rate of 4.9 percent, the Mackenzie pipeline capacity would have to be increased from the hoped-for start-up of 1.2 billion cubic feet per day to 2.5 bcf to 3.9 bcf per day for royalty revenues to reach the NWT government forecast of C$550 million in 201l, the report said, claiming that the NWT “continues to over-estimate potential revenues from royalties in its fiscal reviews,” despite independent studies.
It said that if royalties were collected at the Alberta “ad valorem” rate of 30 percent royalties alone could cover the entire C$1 billion NWT government budget if the pipeline carried only the 800 million cubic feet per day expected to come from the three anchor fields on the Mackenzie Delta.
—Gary Park
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