Seeking royalty balance

Yes, it does cost more to get oil out of the ground here, but let's be reasonable about returns

By ALAN CAPLAN

It goes without saying that Alberta's government would enjoy having an extra couple of billion dollars a year in the kitty.

So when the Alberta Royalty Review Panel said that the people of the province deserve $2 billion more from them, fiscal guns were pointed at the province's energy explorers and producers.

Predictably, the energy industry pointed out it's not such a good idea to lop off a high percentage of bottom-line revenues by increasing top-line royalties.

Business is simply a process of maximizing revenue and minimizing costs. To do otherwise ensures the demise of the business. And energy is a business.

Alberta isn't Saudi Arabia where if you stub your toe in the sand, there's a good chance the resulting depression will ooze oil.

Ours is a cold hard climate with tough conditions hindering the search for economical conventional oil sources. It's a tough, high-cost business.

And the millions of barrels of unconventional oil stuck to the sands of the north isn't so much an oil project as it is a mining operation with huge technological, mining and transporting costs.

And costs for energy producers are increasing as it becomes more difficult to find the necessary labour.

Witness the number of companies that sold out in the last year or so, well before they knew any extra royalty revenue might be taken from them.

Alternative energy sources are being developed apace. Most are far more expensive than even the tar sands.

Wind, solar, hydrogen, pick any one of them and look for the subsidies that allow them to be market-priced similarly to oil.

The situation for natural gas is not completely different. Prices have been at consistent lows for some time.

But, like oil (and perhaps, even because of it), production and exploration costs increased. Margins thinned considerably.

So, faced with massively subsidized competition and increasing costs, some energy giants ran their numbers and came to the conclusion that they'd have to curtail their top-line revenue spending on exploration and development to offset the proposed royalty hit.

They said so publicly and for that, were labelled "belligerent" or "greedy". They're accused of bluffing. Don't count on it.

A number of exploration rigs have already picked up their bits and tools and headed out of Alberta. That may be normal seasonal movement, but I suspect it's more the precursor a bigger exodus.

There's probably room for a higher royalty, and the panel's recommendations may be just the catalyst to get everyone into negotiation mode. I think even the energy industry is prepared for that.

But announcing its recommendations as the final and only solution, and noting that higher royalties are favoured by opinion polls, leaves one to wonder if there was a preconceived agenda at the start. I'm not saying; I'm just saying.

Premier Ed Stelmach was right to step back and examine the panel's work before pronouncing it the New Deal.

Even the panel admitted in the report that this is a complex conundrum that would be poorly understood even by a "thoughtful person who expended a reasonable effort".

Another question or two nags at my addled brain. With more than $8 billion in projected surplus revenue this year, why haven't personal and corporate income taxes been cut?

Has the Conservative government moved so far to the left to presume it can spend our money better than we can?

We need to preserve the Alberta Advantage and we can't do that by killing our golden goose or frying its eggs.