Tom Nicholls: The taxman cometh

The energy industry is strongly opposed to proposed increases to oil and gas royalties in Alberta, Canada. Will its voice be heard? The Canadian oil patch has been rattled by a government-appointed commission that says Albertans are not getting their fair share of revenues from oil and gas production in the province. The Alberta Royalty Review Panel says they should get substantially more: the overall state take, at a federal and provincial level, should be upped by 20%, it says. This would generate an extra C$2 billion ($1.97 billion) in revenues for the state, compensating Albertans more appropriately without putting off oil and gas investors. Our Fair Share, the panel’s report, says: “Albertans do not receive their fair share from energy development. The royalty rates and formulas have not kept pace with changes in the resource base and world energy markets.” Oil companies – predictably, you might argue – don’t agree. They say the proposed increases would put investors off, killing off some projects, especially in the high-cost oil-sands sector. Ultimately, claims the Canadian Association of Petroleum Producers (CAPP), this would undermine investment and harm the oil-dependent local economy and long-term job prospects. Oil sands operations are neither cheap nor small. Suncor’s oil sand is mined using shovels with buckets that hold 100 tonnes, loading huge 240 to 380 tonne trucks. Nonetheless, the arguments in favour of adjustments to the royalty scheme are compelling. Times have changed: oil prices are much higher now than they were in the late 1990s, the last time royalities were updated. And the soaring social costs associated with the rapid pace of development in Canada’s oil patch – establishing the infrastructure and basic services needed to support exponential growth in the local workforce, for example – must be paid for. And many countries have changed investment terms in favour of the state in response to sustained high oil prices – in some countries, this has involved tweaking the percentages, and, in others, wholesale nationalisation. On this basis, it is no surprise that Alberta should seek to do the same, especially given that royalty reviews have been held regularly in Alberta in the past. But does the report going too far? Perhaps. CAPP says it is prepared for some change in royalties, but that the proposed increases are Draconian. It says the review fails to strike a balance between ensuring a reasonable return for Alberta and maintaining an attractive investment environment. Conventional oil and gas production, which tends to involve small, high-cost discoveries with low rates of early production, would suffer under the proposed changes, it claims. And the review process has not properly taken account of the economic headache facing oil companies when tackling multi-billion dollar oil-sands projects. For example, the costs for a typical oil sands project are $10-11 billion, not the $5-6 billion figure given by the panel, says CAPP. Adverse currency movements have also not taken been into account, it says. Spread across 80,000 square kilometres in the Athabasca, Cold Lake and Peace River areas of Alberta, the oil sands could contain up to 2.5 trillion barrels of oil. That’s enough to meet domestic needs for 475 years, says Canada. And it means the oil sands hold more oil than all of the countries of the Middle East put together. The big difference with the Middle East is that Canada’s oil sands involve expensive, energy-intensive mining operations and produce bitumen, which is less valuable than crude. Costs in the oil sands, therefore, are scarcely comparable with costs in the conventional-oil industry. Backing up CAPP’s argument, Wood Mackenzie, a consultancy specialising in energy, suggests the proposed royalty increases might damage investment, increasing “the already high, economic break-even price of these projects, significantly raising the level of risk on what are huge initial capital outlays”. Alberta premier Ed Stelmach is expected to decide how much of the report’s recommendations to implement by the middle of October. There is considerable public pressure to increase royalties. However, Alberta’s oil lobby also has significant political influence because of the oil and gas sector’s large contribution to the economy. And the government will be loathe to jeopardize the future of an industry that accounts, directly and indirectly, for about half the province’s GDP. The likely outcome, therefore, is a more modest increase than the panel recommends.