Gateway Gazette

Oil Industry Doesn’t Have a Leg to Stand on When it Comes to a Royalty Review

The oil industry will find it hard to sustain the argument that it is fair that the government derives a mere 55 cents on a $55 barrel of oil sands oil and a maximum of 9 per cent when it reaches anything higher than $120

By Doreen Barrie, Political Scientist, University of Calgary

CALGARY, AB/ Troy Media/ – Is an Alberta royalty review really that outrageous? Some of the commentary on the newly-elected NDP government is cautiously optimistic about Rachel Notley’s relationship with the oil industry. However, many pundits have warned that undertaking a review of royalties in the present economic climate would be a major error.

No doubt the industry would prefer business-as-usual with a more sympathetic government in power. Yet the Lougheed Conservatives and Social Credit led by Aberhart and Manning exercised a great deal of control over their most important resource. Social Credit’s policy on natural gas and Lougheed’s policies on royalties and government investment are examples that demonstrate that the industry has weathered much worse than anything a contemporary NDP government will likely throw at them.

Massive intervention in the natural gas industry was undertaken by the Social Credit government, starting in the 1930s. The orgy of waste in “Hell’s Half Acre” (Turner Valley) produced a very protective attitude towards natural gas when the Alberta government was granted ownership of its resources. Albertans had watched helplessly as vast quantities of gas (sometimes 600 million cubic feet a day) were flared by small, independent companies. There was no market for it because Royalite (later an Imperial Oil subsidiary) had an exclusive contract to supply Calgary’s gas utility.

This led Aberhart’s government, in 1938, to establish the Oil and Gas Conservation Board (later the Energy Resources Conservation Board) to regulate the industry. The next step, taken by Ernest Manning, was to establish a crown corporation, Alberta Gas Trunk Lines, as a single gas gathering system in the province. Through its monopoly over gas gathering within provincial boundaries and its distribution at the provincial border to companies like Trans-Canada, the Alberta government was able to guard against possible federal intrusion into the industry. However, private pipeline companies were shut out.

Natural gas was seen as a potential catalyst to industrial development, doing for Alberta what hydro-electric power had done for Quebec and Ontario. The “Alberta First” policy was adopted and enforced by the Conservation Board to ensure sufficient supply. The Board authorized the removal of gas from Alberta only if there were proven reserves for the use of Albertans for 30 years.

Not long after the Progressive Conservative victory in 1971, OPEC began to flex its muscles and quadrupled the price of oil. It was Peter Lougheed’s finest hour as he adopted a strong provincial rights stance, taking on the oil industry and the federal government. He was determined to see Albertans benefit from this lucrative but depleting resource. To that end, he eliminated the ceiling on oil royalties established by the Social Credit government and by 1975 the bulk of revenue from a barrel of oil accrued to the province. In addition, the government set up the Alberta Energy Company in which it held a 50 per cent share and through which it invested in such ventures as Syncrude.

It is worth noting that Social Credit’s assertion of the provincial interest in natural gas was strongly supported by Albertans, as were the Conservative actions in the 1970s. Nevertheless, these moves were not exactly in the best interests of the oil and gas industry.

While it is unlikely that the Notley government will even contemplate such drastic measures, to regard a royalty review with trepidation when the industry recovered from much worse in the past is an overreaction. The oil industry will find it hard to sustain the argument that it is fair that the government derives a mere 55 cents on a $55 barrel of oil sands oil and a maximum of 9 per cent when it reaches anything higher than $120.

The prospect of digging into the royalty issue at a time when the industry is suffering may seem like kicking someone who is already down. However, any change deemed necessary need not take effect until there is an improvement in oil prices. By setting rates so low, this province has foregone billions of dollars which could have avoided the deficit.

If the NDP government consults stakeholders, including the general public, during a royalty review, it will likely find that they would like to see the oil industry pay its fair share. The industry should acknowledge that the price of operating in a safe and stable democracy is worth more than pennies a barrel in royalties.

Doreen Barrie is a Political Scientist at the University of Calgary. She is the author of The Other Alberta: Decoding a Political Enigma.

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