Analysis: Oil sands royalty fix proves elusive

Performance measures needed to gauge regime's effectiveness

October 10, 2011

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Illustration by Jeff Kulak

“The oil sands have come of age.” Those were the words of Alberta Minister of Finance and Enterprise Lloyd Snelgrove this summer as he told reporters that Alberta had posted a deficit of $3.4 billion in 2010-2011 – $1.3 billion lower than what the government originally estimated.

When it comes to the financial impact the oil sands sector is having on the province’s balance sheet, Snelgrove is correct. The business of bitumen has come a long way from its days as an industrial curiosity that few observers thought would be successful. With current production at 1.6 million barrels per day and forecasts predicting that number to rise to three million by 2020, the oil sands are increasingly doing the heavy lifting when it comes to Canadian crude oil production.

The resource is already the Alberta’s top breadwinner. In fiscal 2010-11, synthetic crude and bitumen royalties totaled $3.72 billion, or 38 per cent more than the $1.42 billion in royalties derived from natural gas – the province’s traditional cash cow.

But while the numbers sound very good, this spring’s Auditor General’s report revealed that the way the Alberta government collects royalties from oil sands development has not come of age at all. In fact, it is still in an awkward pubescent stage. The report concluded that the province’s Department of Energy has not developed performance measures for its oil sands regime – something the Auditor General’s office asked the government to do in 2007. “The clear objective is there, but if you don’t have measures and targets, then there is no way that a government can be fully accountable to Albertans that it is achieving what it set out to achieve,” says Alberta Auditor General Merwyn Saher.

It’s no secret that royalties are one of the chief ways Albertans benefit from the development of the oil and gas resources they own. The revenue derived from royalties helps pay for the education and health care systems, roads and bridges and a host of other programs and services.

Dr. André Plourde, a former University of Alberta economics professor who is now the Dean of the University of Carleton’s Faculty of Public Affairs, was a member of the 2007 Alberta Royalty Review Panel. Its recommendations were widely panned by the industry. But he remains aghast that the provincial government has not developed a way to measure the effectiveness of its oil sands royalty regime. “This is a world-class resource and we are not treating it that way,” Plourde says. “Alberta needs a world-class royalty assessment and operations system.”

As Saher points out in the 2011 report, the government’s objectives for its conventional oil, natural gas and oil sands royalty regimes is clear. The Department of Energy’s 2010-13 business plan states that its first goal is that Alberta has a “competitive and effective royalty system, incenting development and maximizing benefits.”

Ironically, Alberta received a passing grade in this year’s Auditor General’s report for developing performance measures for its conventional oil and natural gas regimes. So why hasn’t it been able to do the same for its oil sands regime? The oversight could be the result of the resource itself. “It’s a unique resource to Alberta,” Saher says. “The Department of Energy is finding it difficult to arrive at an appropriate measure to determine whether the investment goal that it seeks is in fact being achieved at the right level.”

What the department has done, which was also noted in the report, is change its organizational structure in the technical review area to bring its personnel and resources for conventional oil, natural gas and oil sands into a single unit and under the same management. This allows for better planning and use of its resources while it is monitoring the royalty system. The department says it’s still working on developing those elusive performance measures for its oil sands royalty regime. But it isn’t giving a timeframe on when those measures will be put in place. Plourde isn’t holding his breath. “They’ve been saying that forever.”

Plourde adds that coming up with a system that measures whether the province’s oil sands royalty regime is achieving its objectives requires more than simply shuffling deck chairs within the bureaucracy. He says the Alberta government must focus on monitoring the big oil sands projects that bring in the majority of royalty revenues and understand how those projects work in order to develop an effective measuring system. He’s concerned that the province still isn’t focusing on the right projects or devoting enough resources to this important task.

Plourde thinks it’s high time the job got done. The resource won’t last forever. The longer the provincial government waits to develop performance measures for oil sands royalties, the more time passes before Albertans can determine whether the current royalty system in place is maximizing the benefits from oil sands development. “The government seems to be treating the industry as if it’s not sure it’s grown up yet,” Plourde says. “In the 1990s it was an infant industry. But now it’s an established resource. If we are going to double production in the next 10-15 years, we’ve got to get serious about this.”

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