Energy Ink

Why now is the perfect time for a royalty review

Sure, a royalty review conducted by an NDP government with oil at $40 per barrel might sound like a recipe for disaster. But just imagine what it would look like if crude was trading above $100

August 25, 2015

Subscribe Email This Post Print This Post Bookmark and Share

With WTI trading below $40 a barrel the calls from some quarters for the Alberta government to postpone its promised royalty review continue to grow louder. Some of my colleagues in the media have been more than happy to give voice to those calls and their belief that the industry simply can’t sustain any more additional costs. Higher royalties, they say, will simply add insult to injury for the sector, adding to both the ongoing drop in corporate profits and the job losses that are its natural consequence. But it seems, so far, that the Premier is ignoring that argument – and that’s a good thing from where I sit.

The view that the forthcoming royalty review will deliver higher costs is a classic case of begging the question (a phrase whose debasement I continue to mourn). After all, there is no guarantee that Dave Mowat and the rest of his panel will recommend higher costs. They may instead recommend different costs, or a different way of calculating and implementing them. Maybe that means a scaled royalty structure in which higher prices beget larger royalties, and where the profits – and the pain, in times like the present – are shared more equally between the resource holder and the companies who do the important work of developing it. Maybe it means that much-rumored “grand bargain” in which more stringent environmental regulations are paired with a more forgiving royalty structure. And maybe it means a royalty structure that’s actually based, to some degree, on the emissions associated with the resource in question. I have no idea. And that’s the point: neither does anybody else, if they’re being honest. Sure, they can speculate, and sure, they can assume. But until we see the final terms, we’re all just blowing smoke.

Here’s some smoke that I’ve been blowing of late: I think that if we’re going to have a royalty review, now is actually the perfect time for it. Let’s assume, for a moment, that all of the stereotypes about the NDP are true, and that they’re feckless spendthrifts who just want to punish job creators in order to create more jobs for unions, bureaucrats and the professionally lazy. Given that, and given that they’ve been duly elected by the people of Alberta for a four-year term, wouldn’t you rather have them reviewing the province’s oil and gas royalties when prices are low instead of when prices are high? After all, if oil was trading where it was a year ago, it seems far more likely – to me, anyways – that they’d be more susceptible to their worst impulses, and that they’d be able to craft a more compelling argument for why royalties had to go way, way up. If the energy sector was minting profits and delivering blow-out quarter after blow-out quarter, how hard would it be for the NDP to take a harder line on royalties? And while the energy sector was able to convince the government to back off from the terms of its punitive review in 2008, would it really be able to convince this one? I’m not sure, but I’d suggest that the odds wouldn’t be in their favor.

In a perfect world, most people working in the energy sector would probably choose not to have a royalty review take place. I get that. But we don’t live in a perfect world, as the balance in your online brokerage account can almost certainly attest to. Given that, and given that we have an NDP government until at least 2019 barring some sort of armed uprising (which is a very bad idea, for those who are considering it) I think it stands to reason that now is the best possible time to have a royalty review. It lowers the chances that the government will act rashly and seek to extract as much as it can from the energy sector, and raises the odds that it will work collaboratively with it in order to maximize everyone’s take. Heck, it might even produce a royalty regime that’s better for industry than the one we currently have, and more effectively aligns the interests of the private sector with those of the public purse. Stranger things have happened, after all – you know, like an NDP government in Alberta.

More posts by Max Fawcett

Follow @AlbertaOilMag

  Follow us on Twitter


2 Responses to “Why now is the perfect time for a royalty review”

  1. Mike says:

    But if they do a royalty review, and don’t raise the royalties, then wouldn’t they be essentially saying that the PCs were right and a review wasn’t necessary to begin with. It could also be implied that the current royalty structure is actually sufficient.

    Politically, this seems like bad optics for the NDP. It will make the PCs look better in hindsight and make the NDP look clueless and careless with their policies.

    I suspect that they will have to raise the royalties in some aspect in order to save face.

  2. Bryan Becker says:

    Gosh, there seems to be an outbreak of level-headedness here in Alberta. Quick! Pinch Me! I must be dreaming.