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Tuesday, June 30, 2009

Canada West Foundation dismisses New Royalty Framework impact on energy sector

Paul Hinman - 2 In April 2008, the Western Standard reported on the first of many attempts by the Alberta government to undue the harm to the energy sector caused by the New Royalty Framework. In a post titled “Unintended consequences: Alberta slow to learn basic economic lessons,” I wrote:

In a press release today from the Alberta government on new royalty programs for high cost oil and gas development, the term “unintended consequences” was thrown around liberally.

In economics, an unintended consequence is typically defined as a negative outcome that is not intended and normally unforeseen. The slowdown in Alberta’s oil patch as a result of the New Royalty Framework announced in October 2007 is being called an unintended consequence, and the Alberta government is now scrambling to undue the harm it has done.

To its credit, the government announced today that it is creating new tax programs in response to declining investments in high cost oil and gas development projects. The tax reductions are expected to leave $237 million more annually in the hands of oil and gas investors. That’s great. What’s not great is that Alberta Energy Minister Mel Knight is essentially admitting that he was surprised by an oil and gas industry slowdown resulting from the higher taxes announced last year.

Knight is not the only one pleading ignorance these days to the well-established relationship between high taxes and decreased economic activity, something most common-sense fiscal conservatives take for granted. Jacques Marcil, senior economist with the Canada West Foundation, wrote in a recent report on the state of Alberta’s economy that “who knew” the new tax scheme would kill jobs and investment?:

In the middle of 2008, the one significant issue in this area was the introduction of a new royalty regime on natural resources. Following a study it commissioned, the government decided to hike the royalty rates to provide Albertans with a “fair share” of the exploitation of their natural resources. The industry viewed this initiative as a job and investment killer. With hindsight about energy prices, the government’s timing could have been better, but who knew then? In any case, the global recession turned out to be the industry’s biggest foe, not necessarily the new royalty regime.

The comment “who knew” is strange coming from an economist whose job it is to make economic forecasts. It is especially strange given the well-documented economic truism that “taxes kill jobs,” a favourite conservative campaign message. In fact, most free market political observers and pundits saw this slowdown coming the moment the new taxes were recklessly proposed by Alberta premier Stelmach. No other outcome was possible, with or without a global recession.

Also, the comment by Marcel that “the global recession turned out to be the industry’s biggest foe, not necessarily the new royalty regime” is equally hard to reconcile with the facts. With oil prices at US$70 and once crippling labour costs now under control, Alberta’s energy economy should be robust. What’s wrong? Blaine Maller, President of Calgary-based White North Energy, helps explains the situation for Marcil, Knight and others:

The latest tweak to the royalty and drilling incentive program is simply an extension of the 1 year program for one more year. Nothing else has changed and the New Royalty Framework (NRF) has not been rolled back in any way, shape or form.


Many companies have already moved their focus to BC and Saskatchewan and internationally, many will totally leave here now and the rush will be on in those provinces; they are more competitive jurisdictions and we don’t need a long drawn out chin wag with the government as CAPP and SEPAC continue to do and accomplish nothing. The government has totally misunderstood the entire industry and how it operates with respect to risk and reward, the costs, the compliance, the regulations and environmental costs, the demands of the capital markets, the potential profits and potential liabilities for the companies involved. And the service sector get’s crushed in the process.

They do not understand the damage they have done to their own reputations as credible, reliable, stable Ministers of the Crown. They have no more credibility in the eyes of a growing number of influential people from all sectors of the economy.

So when the Premier says wait for gas prices to increase and things will improve rig activity wise, he is wrong again. Ten (10%) of the rig fleet is working. Oil is already very economic to drill and produce in other provinces at US$70. Why has activity not picked up in Alberta on the oil side? Because their cash flow has been severely reduced by the royalty increases on oil. The returns are greater and the costs per barrel are less in BC and Saskatchewan and the red tape is significantly less. There is only so much money to go around in these days of reduced budgets and major restrictions on access to capital so they have to get the best return possible for the investors. And that is anywhere but Alberta.

While the Canada West Foundation report seems to dismiss the serious impact of the New Royalty Framework (NRF) on oil and gas activity, the Calgary Economic Development (CED) State of the Economy report for the first half of 2009 released on June 22nd fails to even mention the NRF. The report acknowledges that Calgary’s energy sector drives the rest of the economy, but blames the recession on the global reduction in demand for energy, never mentioning the radical new changes to the tax framework for the sector.

The only organization less willing to accept the negative impact of the NRF than the Alberta Tories, Canada West Foundation and Calgary Economic Development is the Alberta NDP. In response to the Stelmach government’s decision on June 25th to again extend drilling incentives, NDP MLA Rachel Notley said:

“Minister Knight has just tacked $1.5 billion onto next year’s deficit, and he can’t justify it,” Notley said. “This government continues to dole out cash to the oil and gas industry, but it’s done nothing to help out-of-work Albertans get back on their feet.”

Allowing energy entrepreneurs to keep and invest more of their income can only be described as “doling out cash” by people who believe Alberta’s energy sector properly belongs in government hands, a position not far removed from Tory policy these days.

Paul Hinman, Wildrose Alliance leader, is the only provincial politician to consistently oppose the new tax scheme.

(Picture: Paul Hinman)

Posted by Matthew Johnston

Posted by westernstandard on June 30, 2009 | Permalink


Matthew, I loved hearing Klein say he had no plan. I have heard nothing from Stelmach that I love. I am starting to wonder if even Dinning would have been a better choice.

Posted by: TM | 2009-06-30 11:36:03 AM

Paul Hinman, Wildrose Alliance leader, is the only provincial politician to consistently oppose the new tax scheme.
Posted by Matthew Johnston

Not so. Bruce Hutton also opposes it.

Posted by: The Stig | 2009-06-30 12:08:30 PM

Yeah, but nobody cares about Bruce Hutton, he destroyed the SPA

Posted by: BitterBeerFace | 2009-06-30 7:20:10 PM

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