In Alberta, the times, they are a changin’. One change coming down the pipeline could majorly impact investment in the province: the looming royalty review.

The new NDP government is reviewing the rates of royalties the government receives from oil and gas revenues in the province.

The NDP has called for a ‘Resource Owners Rights Commission’ to review the rates and ensure Albertans are receiving their ‘fair share’ of resource revenues from oil and gas companies in the province.

So what happened the last time the Alberta government conducted a royalty review?

Let’s start with a little background information. In Alberta, private oil and gas companies, domestic and foreign, are permitted to develop our oil and gas resources on Crown (government-owned) land. To do this, they must pay a royalty to the government – a tax on their revenues.

In 2007, Premier Ed Stelmach proposed a royalty review. The resulting government report titled ‘Our Fair Share’ declared that Albertans weren’t getting, well, their fair share, and so new royalty formulas were developed, and a royalty hike was announced.

Almost overnight, oil and gas money started pumping out of Alberta and into Saskatchewan. Saskatchewan’s land sales (crown leases to drill for oil) went from $169 million in revenue in 2006/07 to $928 million in 2008/09 – a dramatic change.

Meanwhile in Alberta, royalty revenues and land bonuses dropped. Land sales plummeted from $2.2 billion in 2005/06 to under $600 million in 2007/08 and under $900 million in 2008/09.

The five-fold increase for our neighbour to the east, and our own steep decline, meant in 2008/09 Alberta collected less money in auctioned land leases to oil and gas firms than Saskatchewan did.

Alberta’s royalty changes were eventually reversed after the government did another review – this time, it was a competitiveness review. The government had to introduce new drilling incentives to bring in more investment. In 2010/11, the province collected $2.6 billion. 

In 2008, world oil prices dropped with the recession, and many argue that was the cause of Alberta’s dwindling revenues, and was what forced the government’s hand on reversing the royalty changes. However, it’s curious that Saskatchewan’s land sales dramatically increased despite world oil prices dropping. Surely the recession did not stop at the Alberta-Saskatchewan border…

As noted in the Financial Post:

In fact, Stelmach’s royalty increases did “sabotage” producer spending in Alberta, as TD Securities Inc. puts in a June 22 report, causing oil companies to move activity to Saskatchewan and B.C. because their terms were more favourable at a time of depressed gas prices. Like Alberta, those provinces were also impacted by the global downturn, but didn’t experience the investment pullback.

Others have said that because the royalties started to drop before the rate changes were implemented, it means the changes didn’t cause the negative impact on investment.

It’s true that the changes weren’t implemented until January 1, 2009, yet we saw a drop in revenues as early as 2007. The ‘Our Fair Share’ report was released on September 17, 2007, and the government accepted the recommendations on October 25, 2007. Though the changes wouldn’t be official until January 2009, the impact of those changes started immediately. It’s not as though oil companies shut down their existing projects and left the province, but they did start moving their investment elsewhere.

The looming royalty changes, combined with a recession-spurred drop in world oil prices proved a toxic cocktail for Alberta’s revenues.

Contrast that scenario with today’s Alberta. Looming royalty changes and a drop in world oil prices…

Today, carbon taxes have doubled. Business taxes have risen from 10% to 12% -- a 20% increase. Income taxes have risen. The minimum wage has been hiked to the highest in the country.

To maintain our Alberta Advantage we must always be mindful of what makes this province the best in which to invest.

Many Albertans may still contend that a royalty review is necessary to get our ‘fair share’ of resource revenues in the province. And many will pose the question not as ‘should we do a review?’ but rather ‘when should an inevitable review be done?’

But if history truly does repeat itself, and if it’s more revenue we’re after, then a royalty review may not be the ticket at this time.