More room to manoeuvre
Royalty report allows Stelmach chance to fine-tune new terms
Calgary Herald
Thursday, September 20, 2007
Premier Ed Stelmach's government cannot ignore the royalty review it asked for, but neither should it adopt it paragraph by paragraph, as review-panel chairman Bill Hunter demanded last week, saying it should not be "cherry-picked."
The report is a radical document, here and there recommending arbitrary measures over market solutions, that old contracts not be grandfathered, and treating consultation with industry as a barely necessary inconvenience.
Yet, strangely that all works to Stelmach's advantage.
For, change is in the offing, and the energy industry, especially that part of it working in the oil sands, knows it. The 1997 agreement that coaxed today's extraction complexes into existence, has more than done its job. It makes sense to rewrite the rules so that future projects yield a higher return to the taxpayers.
The problem for any Alberta government would be the howls emanating from the industry.
Enter Hunter, with "Our Fair Share." By presenting such an extreme solution, it gives Stelmach room to come back with less onerous terms, that would still extend the province's total take -- even if not by the $2 billion that Hunter says would have come its way, had his principles been applied to 2006 production at 2006 prices.
Where Stelmach can easily give is in dropping such recommendations of the Hunter panel, as that old contracts not be grandfathered.
Alberta's energy industry has been built on trust, and the expectation that a deal made with government, would stay made. Yet, this report effectively proposes the province unilaterally terminate contracts entered into in good faith between former governments and investors, and arbitrarily establish new ones.
It was a surprising, even offensive, recommendation. One wonders how rich last year's $2.1 billion bonus bids would have been, had the Hunter review's proposals governed the market.
Nor is it conducive to investment that consultation with industry be for appearances sake only. Speaking of a new regimen to establish a market price for bitumen, for example, the report first dismisses market forces as "unlikely to resolve this issue in the best interests of Albertans," then continues, "Consultation for this purpose, as a point of clarification, would not entail or imply negotiation nor is it intended to introduce any sense of veto power or consent requirement on the part of the oilsands industry."
Stelmach should be able to give that away with little fuss, as well. Then, he may start to pick cherries.
While high oil prices do not translate directly into surplus profits -- exporters lose on the Canadian dollar's galloping value much of what they make on oil's galloping price denominated in US dollars -- industry has this ace: An insatiable market, just across the border, in a tense world, with the ability to pay. A government that acknowledges its higher costs, and defers to Alberta's tradition of honest dealing, can reach a satisfactory arrangement with industry.
Above all, Stelmach is as entitled as the Hunter panel -- as leader of an elected government, more so, perhaps -- to decide what is, in fact, fair.
It is an unfortunate hole in the Our Fair Share report, that nowhere does it define "fair."
What is fair? An agreed rate of return on investment, or revenue? A 50-50 split between Alberta and the producer? Two thirds-one third, as Hunter suggests for oilsands and natural gas? To the extent the report answers the question, it infers that Alberta should be in the middle of a pack that includes countries with vastly differing geologies and recovery costs, and not a few political systems.
To that point, it is hardly an argument for Alberta being shortchanged, that it squeezes less from producers than Angola, or Venezuela. Fair, then, becomes what Hunter thinks is fair.
And, that's fair enough, as long as everybody knows there's no objective standard in use here, and that Hunter appears at home with arbitrary dictums.
He presents his report as a whole prescription for Alberta's royalty future, but it would be better treated as the opening bid in a process to recalibrate the province's royalty structure.
Stelmach and his cabinet must examine it carefully. Then, they must decide what they think is fair to both Albertans and the industry, and act accordingly. But make no mistake, there is no question industry will pay more: The question is: What is really fair?
© The Calgary Herald 2007
