August 22nd, 2019

Royalties and the push for expansion

By Letter to the Editor on March 13, 2019.

The royalties oil companies pay government earn zero attention in mainstream media. It is one of the most compelling reasons why oil corporations are desperate to continue to expand a dying industry despite the gloomy economic forecasts.

The breakdown: Because the Government of Alberta owns the oil under the ground, they charge for the rights to extract these resources. But, the companies can reduce the rates they pay if É (drumroll) they commit to “capital expansion projects.”

The royalty rates are reduced as long as that project continues to expand and builds out its infrastructure. Royalties are anywhere from one to nine per cent when paying out capital costs, but then they jump to 25 to 40 per cent when costs have been recovered. So stopping expansion means paying some profit to government.

This regime, that clearly rewards expansion, was put in place decades ago during a time oilsands were trying to prove themselves as a viable producer. As a high-cost producer in a world awash in cheap oil, the oilsands are not as profitable unless they can credibly make an argument for continual expansion.

In sum, the Alberta royalty system encourages continued expansion despite analysis showing there is no need for additional pipelines to service existing production. The desperate demands for new pipeline infrastructure are driven by the need to continue expansion, at taxpayer cost. Oil corporations want government to continue subsidizing while privatizing profits. Jack Mintz and Jason Kenney even suggest removing corporate taxes!

Building Kinder Morgan is less about creating jobs or getting Canadian crude to new markets than about maximizing the profitability by exploiting a loophole that maintains almost criminally low royalty rates on a publicly owned good. Oil and gas pay less than the interest on our government loans, while making over $80 billion per year profit. The government takes $4 billion, while giving it back for incentives to business. Saudis demand 50 per cent royalty, and refine their own oil.

So, why not increase the royalty instead of borrowing money to maintain government services?

Don Ryane


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8 Responses to “Royalties and the push for expansion”

  1. Socrates says:

    Mr. Ryane is absolutely right,….except that his rational is partial and short-sighted. When the oil companies expand they spend their capital in Canada on labour and equipment. The additional exports provide additional income to Canada and to Alberta. This is called growth. If the growth is too much, then the market will decide as the exports will slow down due to lack of demand. As things stand now Governments and environmentalists are interfering with free market forces. That is why we must get rid of them both, but we must first differentiate between real honest environmentalists and paid traitors – posing as environmentalists. We must also differentiate and educate our delusional environmentalists.

    Growth provides money to the whole market, Taxes provide money to Governments to spend on buying our votes and helping their cronies. What is better?

  2. biff says:

    d.r has is fully correct. the world is awash in cheaply produced oil – the usa is now the world’s leading producer. after sitting on its reserves for decades, to help assure it would have the resources necessary in a time of prolonged strife, it has come to realise that these reserves now have an economic shelf life. the move is afoot to move away from fossil fuel based energy. this means the usa hardly needs canadian oil; nor does europe; nor does asia…what foreign land needs canadian oil? expansion of canadian oil reserves – other than to serve canada – is, consequently, nonsense. indeed, it only serves to relieve oil cos from paying a fair share to albertans. god knows what “expansion” truly means. i suspect that for every 10 cents spent on “expansion”, a company saves a buck on tax and royalty payments.

  3. Resolute says:

    Look back on what happened to Alberta’s royalty when Stelmach bowed to the socialists’ calls to take our fair share. Industry did the hard math and voted with its feet. Royalties and land sale revenues plummeted. The only players left are the huge foreign and/or foreign-looking multinationals. Few little Canuck Juniors any more – no sense to it. Greed has consequences and history confirms that governments cannot take away the incentives for private industry to risk money without reaping the consequence. And Alberta would have Norway-level Heritage funds if our federal govt did not steal $20-30B a year in Equalization to buy Quebec votes.

  4. biff says:

    res – it is unfortunate that you are utterly subservient to such an awful perspective.

  5. Fedup Conservative says:

    Resolute is apparently another one of these seniors who still believes the Ralph Klein lie that Alberta is broke because we have to send billions to Ottawa and Quebec in the form of equalization payments.

    The Alberta government has never paid a penny into equalization
    The fact is the Klein and Stelmach governments forgave, didn’t collect the royalties at the proper Lougheed levels, and Klein slashed taxes to benefit their rich friends and Albertans got screwed out of their wealth, and Jason Kenney is promising to make it even worse and many ignorant seniors are hell-bent on letting him do it.

  6. snowman says:

    FC you sure have a hate on for seniors how did they become major voters for PC govts take a good look at poll results seniors never get major benefits from any Govt maybe 60cent increase we must become
    like the exempt group who collect carbon tax dollars from Notley and Phillips but are tax exempt, why don’t you direct you special hate towards the real free loaders $41m from carbon tax.

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