Royalty panel acted on half-information

Focus on gov't side of equation didn't do justice to business, economic half

Lorne Gunter, The Edmonton Journal

When "Red Ed" Clark helped Liberal Energy Minister Marc Lalonde draft the national energy program back in 1980, he based much of that horrendous scheme on his doctoral thesis on government intervention in the economy of Tanzania, which he insisted had been a roaring success. He argued Canada could make itself immune from world oil and gas prices through government regulation of markets the way Tanzania had cloistered itself away from the forces of world trade.

Of course, Clark was only looking at one-half of the Tanzanian equation. He had relied mostly on official Tanzanian government claims for his sunny assessment of their experiment in socialist land reform and government planning.

Basing energy policy on only half information can lead to devastating outcomes.

It's the same with Alberta's royalty review panel, which last month recommended raising taxes on oil, natural gas and oilsands production by 20 per cent or more in order that Albertans might get their "fair share" of resource income. Increasingly, it looks as though the panelists -- like Clark and the Liberals in the early '80s -- based their recommendations on only half the picture.

The panel appears to have fully examined the royalty regimes in other jurisdictions, but not the costs of exploration, extraction and processing in Alberta vis-a-vis other oil- and gas- producing regions. Nor did they fully consider the economic outcomes in these higher-tax regimes.

They looked carefully at the tax and government side of the equation, just as the authors of the NEP had, but not as thoroughly at the business and economic half.

Even on the tax side they made some false comparisons, such as when they showed Texas royalties are higher than in Alberta without mentioning that in Texas most of the subsurface resources are owned by individual landholders rather than by the state government, so royalties don't pertain in much of Texas's patch.

Throughout their report, and in statements since by panelists, the royalty commissioners complained that energy companies had not been very forthcoming with information on costs of operation. The implication has been that if the panel's recommendations for higher taxes have been seen as unfair by oil and gas companies, the companies have no one to blame but themselves.

But for the past two weeks I have received all manner of information on oil and gas production costs in Alberta: investment banker analysis, academic studies, oil company annual reports and, yes, even testimony given before the royalty panel last spring.

None of this material has been an after-the-fact attempt to justify the energy sector's outrage at the panel's higher-tax recommendations. Indeed, nearly all of it was publicly available material published before the panel wrote up its report.

Among the most interesting assessments was one from Calgary historian David Finch, author of Pumped: Everyone's Guide to the Oil Patch. Like the panel, he too noted that large swaths of earlier internal government royalty reviews had been censored -- blacked out in the versions released to the public. Economic analysis were missing and conclusions from experts covered over.

But unlike the panelists, Finch did not let these darkened patches deter him. Where the edited bits were academic studies, he went to the professors who had written them, asked for whole versions and mostly got them. Similarly, when the expunged sections of government reports were investigations by accounting or investment firms, Finch got the original source documents merely by asking.

His conclusion is that Alberta's oil and gas resources cost much more to produce than those in many other jurisdictions, so a straight royalty-to-royalty comparison may or may not be helpful.

Similarly, last week Deutsche Bank Securities (DBS) in New York issued an analysis of the royalty report that said panelists had failed to take into account the low margins of return in Alberta's oilsands relative to other oilpatches in the world. "Even at $75 a barrel, Alberta's oilsands contain some of the least valuable reserves on the planet." Indeed, they are one-fifth as profitable per barrel as those in Saudi Arabia, and just 91st out of 105 major reserves in the world.

If the Alberta government tries to squeeze the oilsands at the same rate as Norway (2.5 times as profitable) squeezes its producers, or Venezuela (3 times) or Russia (3.5 times), billions in investment could easily be shelved until the provincial government regains its senses.

The telling point of the DBS study is that it was based entirely on publicly available filings made with security regulators by Alberta oil and gas companies and their counterparts around the world. If a couple of analysts at an investment bank in New York could find the information, so could the royalty panel. Or they could have hired a couple of New York analysts.

Before the provincial government buys into the panel's notion that Albertans are being short-changed, it needs to have the other half of the equation.

lgunter@shaw.ca