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Nobody should be surprised by the Alberta government's U-turn on energy royalties.

 

The Conservatives have been driving along with their turn-indicator light blinking for the past six months. We knew they were getting ready to turn the wheel; we just didn't know how hard.

So, did Premier Ed Stelmach just pull off a smooth lane change? Or should he be charged with reckless driving?

It all depends on your perspective, on whether you think the government was right to raise royalty rates in the first place a few years ago -- or should have been hit over the head with a tire iron at the time for meddling with Alberta's economic engine.

I happen to think a bit of both. Here's why. Call it a tale of two government-sponsored reports.

One, written by academics and business experts, reached this conclusion after holding public hearings in 2007: "Albertans do not receive their fair share from energy development."

The second, written by government and energy executives behind closed doors, was released last week and pretty much reached this conclusion: Alberta energy companies do not receive their fair share from energy development.

The 2007 report -- with the blunt and self-explanatory title Our Fair Share -- not only led the Alberta government to hike royalty rates, but also heralded a new transparency in provincial politics, where Stelmach kept a promise to make the report public soon after he received it.

Last week's report -- with the fuzzy and self-congratulatory title, Energizing Investment: A Framework to Improve Alberta's Natural Gas and Conventional Oil Competitiveness -- has led the government to reverse itself, reduce royalty rates and reinforce a return to closed-door politics.

The 2007 report took a long-term view of oil and gas resources, saying that while Albertans deserve a fair share of royalties today, future generations shouldn't be cheated -- even if that means slowing the pace of development somewhat.

The new report takes a much shorter-term view, focusing on immediate results to kick-start more drilling activity and concludes: "The hard truth is that Alberta has lost competitive ground."

It might be a "hard truth" for the government, but it's hard to swallow for the authors of the 2007 report. They argue the government should not have backed down to industry pressure to lower rates.

"If we produce it, get all the revenues and then spend it right away, we're not transforming this asset into a financial asset to kind of ensure that we've got revenue flows down the road," said Andre Plourde, energy economist at the University of Alberta and one of the Our Fair Share authors. He has called the government's actions on royalties "shameful."

Shameful, perhaps -- but also understandable politically. Stelmach bowed to pressure from energy companies not because he's weak, but because he was unlucky.

He announced the new royalty framework in 2007 right before the 2008 economic collapse that drove down the prices of oil and gas. Adding to the government's misery, it had tied royalties on a sliding scale to the price of oil and gas.

So, not only did the province's economy suffer by the recession, but the province also took in less money under the new royalty rates than under the old system.

Coincidentally, drilling activity increased in Saskatchewan thanks to new technology used to exploit the old Bakken oilfield, and B.C. introduced low royalty rates to attract investment to its gas deposits. Our neighbours seemed to be doing better than us. Natural gas prices were hammered even further by big discoveries of shale gas deposits in the U.S.

It was one sucker punch after another for Stelmach, who might have withstood the pummelling if the Wildrose Alliance hadn't come along and elected as its leader the articulate, telegenic, Calgary-based and energy-industry-friendly Danielle Smith.

Stelmach is also betting that those who question why he backed down on conventional oil and gas rates will realize he didn't touch the recently increased royalties on the oilsands, the largest-growing source of government revenue.

The government argues that while it might be taking in less money under its new rates than under the Our Fair Share regime, it will still be taking a bigger cut than it took under Ralph Klein.

Whether that's a big enough cut will be up to Albertans to decide in the next election, when they'll have a better idea of the province's financial picture.

Perhaps by then they'll also figure out if the one behind the wheel is indeed Stelmach, and not the energy industry.

Source: The Leader Post

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