Royalties and upgrading: Two words that politicians dare not utter

In the Harry Potter stories, characters are too afraid to utter the name of the villain, Voldemort.

Something similar appears to be happening in the Alberta election when it comes to two key issues related to the oil sands: upgrading and royalties.

Albertans clearly want to talk about these issues, but for some reason, most of our politicians seem unable or unwilling to speak.

Consider the results of two recent polls:

A Leger Marketing poll shows that about 60 per cent of Albertans don’t think they’re getting fair value for the sale of our province’s collectively-owned energy resources. A ThinkHQ poll shows an even greater majority (81 per cent) would support some kind of government intervention to encourage upgrading and discourage raw bitumen exports.

Despite the clear weight of public opinion, only one of the five parties contesting the race (the NDP) says it would even consider increasing royalty rates. Most are also silent on the subject of upgrading.

Why the remarkable disconnect between what voters want and what parties are willing to offer? The answer can be summed up in two words: power and fear.

Everyone knows that oil and gas is Alberta’s most powerful industry – and they have aggressively used that power to get a sweetheart deal for themselves.

They’ve also used their power to make sure that it’s industry – not ordinary Albertans or their elected representatives – who decide how and when to develop our province’s resources.

It was the industry, for example, that actually wrote the oilsands royalty regime that Ralph Klein implemented in mid-90s – a regime which, in most important respects, is still in place today.

How sweet is the deal? Oil companies pay a token royalty of as little as one per cent on gross revenues until all of a project’s costs are paid off. Even after pay-out, royalties are dramatically lower than rates in other jurisdictions.

No other industry in Canada enjoys this kind of special treatment. It means developers get their main input – bitumen – virtually free.

To put it another way, it means that ordinary Albertans (who own the bitumen) are actually paying for the construction of all those oilsands facilities (in the form of foregone revenues).

In a similar way, the energy industry has been successful in discouraging government from implementing policies aimed a increasing value-added production – even though such measures were instrumental in creating Alberta’s successful petrochemical industry in the 70s and 80s.

To defend the status quo they’ve created, the industry and its defenders employ several fear-based arguments. For example, they say that ultra-low royalties are needed to attract investment to a high-cost sector like the oilsands. This argument may have carried some weight when the oilsands were a marginal industry and oil was trading at $15 a barrel, as it was when the current royalty regime was introduced in 1997. But should we continue the giveaways when oil is trading at $100 a barrel and the industry is making profits of $32 billion a year, as it did in 2010?

The industry also argues that their prescription of low royalties, limited government oversight and quick project approvals (a strategy recently embraced with gusto by the Harper government) means “jobs, jobs, jobs” as far as the eye can see.

But this strategy has several obvious downsides. For example, it means that more and more potential jobs in upgrading will be sent down the pipeline to place like Texas and China. It also means that the province doesn’t get the revenue it needs for things like high-quality health care and education and care for seniors and the kids of working parents.

Ever wonder why Alberta, Canada’s wealthiest province, is running multi-billion deficits and saying it can’t afford to maintain middle-of-the-road spending on vital public services? Or why the Heritage Fund is worth less on a per capita basis today than when it was established 35 years ago?

That’s what happens when you sell your most important assets for a song. So why won’t Alberta politicians speak out and demand a better deal on royalties and jobs?

The problem is that they are taking their cue from Ed Stelmach when they should be looking for inspiration in bolder (and much more successful) former Conservative premiers like Peter Lougheed and Newfoundland’s Danny Williams.

Unlike Stelmach – who didn’t fight back when a recession-induced slowdown in investment was used by industry as proof that royalties should never be raised– Lougheed and Williams both understood that you have to bargain the best possible deal with energy companies, not simply cater to their every whim.

As Lougheed famously said, Albertans need to think like owners. Owners know that sometimes they need to accept less. But they also know that, when conditions improve, they can and should demand more. Anything less would amount to being played for a sucker.

These are the keys to breaking the spell that has rendered most of our politicians mute: they need to remember that Albertans, not oil companies, are the owners of their resources and they have to find the will to bargain hard on behalf of the people they represent.

Gil McGowan is president of the Alberta Federation of Labour, representing 145,000 unionized Alberta workers.

Edmonton Journal, Wed Apr 4 2012
Byline: Gil McGowan