Where you stand depends on where you sit

Michael J. Tims on Alberta's Royalty Review: Where you stand depends on where you sit.

My late mother never professed to know much about business or economics, but she knew something about human nature when she used to repeat an old quote to me: “Where you stand depends on where you sit”. Simply put, she meant that how each of us feels about many issues in life is very much a function of our experiences, our occupations, our values, our upbringing and other factors.

Those who are taken aback by the current vociferous debate in Alberta, a place heretofore considered a veritable paradise on many counts, can see that at least a “fair share” of the current strong feelings, on both sides, very much arises from where people sit.

One would have to be living in a cave more remote than Bin Laden’s to have missed the fact that there is strong disagreement over the data used in the recent report of the Alberta Royalty Review Panel. Clearly, differing assumptions of capital costs, operating costs, and actual returns being earned will lead to widely varying conclusions about what is “fair” or “equitable”. In addition, oil and gas companies, investors and knowledgeable analysts have spoken out to forecast the consequences of different courses of government policy action. Rather than repeat those points, however, let’s try to take the discussion up a level.

The oil and gas industry was shocked to learn, from the opinion polls and some of the public comment, that a fairly large percentage of the Alberta population doesn’t particularly like it, and feels that it should pay more into public coffers. The oil and gas industry had previously assumed that it was self-evident to everyone that this industry was and is a very important driver of many of the things that people love about Alberta: a budget surplus; the public debt paid off; low income taxes; no sales taxes; very low unemployment rates; a Heritage Fund; strong contributions to charitable, educational and community organizations; and numerous other benefits. The provincial budget arithmetic, where close to $1 of revenue out of every $3 comes from non-renewable resources, before considering corporate and personal taxes arising directly or indirectly from the energy sector, further underlines the reasons why the oil and gas industry could have had the impression that its role was both clear and appreciated.

As a result, it is completely explainable why the oil and gas industry has reacted to the new royalty proposals, and to some of the criticisms leveled at it, similarly to Julius Caesar, upon seeing Brutus and others pulling knives from under their cloaks; or to the Revolutionary Army, when it learned of Benedict Arnold’s plot to go over to the British side. The reason for this reaction is simple: Those in the oil and gas industry, and those who actually see that they rely on it for their livelihoods, see positives from oil and gas activity that vastly outweigh any negatives.

What has become clear is that not everyone feels that way.

I sometimes refer to those whose livelihoods are very linked to the oil and gas industry as being “indexed to the boom”. This group includes many engineers, oilfield services people, lawyers, accountants, building contractors, investment people and others. Yet for those outside the “indexed group”, which could include teachers, health care professionals, public servants, those in agriculture and those in technology, among others -- disadvantages may weigh more heavily on their minds. Strong economic growth brings with it higher housing prices, higher restaurant costs, more expensive office space, higher salary and wage costs, a shortage of parking, other pressures on personal lifestyles, and various other intrusions---- as oil and gas wells are drilled, large projects are pursued and downtown office buildings are built.

The hard part for the Alberta government on this point is that there is no right or wrong answer to what people think and feel. In addition, care must be taken, in a political realm, to not allow anyone to attempt to exploit different visions and perceptions to create needless divisions.

In a world with no easy answers, I would encourage Alberta’s government to build a base for a policy decision in three ways:

--- First, look to what markets can tell you. It is fact, rather than opinion, that the Canadian oil and gas sector has generated lower investment returns than its U.S. and global counterparts over the past five years, suggesting that returns in this sector were already better elsewhere. It is also fact, rather than opinion, that drilling activity in western Canada was already down by 30% in 2007, and that only 338 of more than 800 available rigs are being used at present. All of these indicators suggest that the market thinks that “excess returns” in Alberta are quite hard to find, even before any new measures are implemented.

--- Second, review the basic concepts of game theory and decision sciences. In particular, focus on the notion that the return that might look to be acceptable after an outcome is known may be very different than the potential payoff that is required before a risk, with unknown potential problems, is ever taken in the first place.

--- Last, listen for the voices of reason and for those who at least recognize that there is more than one point of view.Somewhere, in all of this, lies a solution that will keep Alberta the terrific place that it has been; and that we all wish it to remain.

Michael J. Tims was born in Calgary and is a fourth generation Albertan. Mr. Tims is Chairman of the investment firm, Peters & Co. Limited, and he is deeply involved with a number of not-for-profit organizations, including the United Way.