A royalty miscalculation by Alberta’s governing Progressive Conservatives robbed the province of $13.5 billion, according to a University of Alberta study.
Alberta introduced new royalty formulas in 2009, expecting to collect an additional $2 billion per year in royalties, but, instead of collecting an additional $10 billion over the following five years, total royalties collected went down by $13.5 billion, the report by the University’s Parkland Institute shows.
Billions Forgone: The Decline in Alberta Oil and Gas Royalties authored by Jim Roy, the former Senior Advisor for Royalty Policy for Alberta Energy from 1985 to 1993, blames the PC’s miscalculations during the royalty review for the the loss.
The findings are expected to further erode re-election chances for Premier Jim Prentice, who has ironically attracted the #mathishard hashtag on social media for his comment during the party leaders debate where told NDP leader Rachel Notley that “I know math is difficult.”
“Some say it was bad luck; the government points to the price and claims that nobody can control it,” Roy wrote in the report. “However, the average annual value of production was $83 billion in the five years before 2009 and $82 billion in the five years after; this is not an overall drop in price.”
“The big change was in gas royalties, which dropped by just over $5 billion per year following the 2009 change,” Roy points out. “Gas went from providing two-thirds of total royalties to providing only one-sixth of total royalties.”
The big difference, according to the report, is how the rate of production affected royalties.
“In 2002, Alberta collected 15% royalty on a well with average production and 23% royalty on a well with twice-average production,” Roy notes. “In 2012, a well with average production paid 5% and a well with twice-average production also paid 5%. Wells with the highest production paid the same rate in both years (27%), but there were not enough high-producing wells to make much difference.”
“Another way of expressing the difference is to note that the previous formula started collecting above-minimum royalties when revenue exceeded $5,000 per month, whereas the new formula does not collect above-minimum royalties until revenue exceeds $20,000 per month,” Roy wrote.
Notley, whose victory has been deemed “inevitable” by opinion pollsters, has vowed to correct the costly error by carrying out a cautious royalty review while keeping in mind the need to maintain Alberta’s competitive edge.
“We’re acutely aware of the pressure that low oil prices have put on the oilpatch, and the Alberta budget,” Notley said. “We’re committed to ensuring that Albertans are getting value for our resources. That means we understand that competitiveness matters.”
Prentice has ruled out fixing the mistake calling a royalty review “the worst thing we could do right now.”
Wildrose leader Brian Jean shared Prentice’s sentiment saying a royalty review would make Alberta look like a “banana republic” in the eyes of stock market and businesses.
