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Are Alberta’s oil and gas companies getting more than their fair share?

Provincial spending on drilling incentives is more than double the cost to taxpayers

Mar 1, 2011

by Max Fawcett

The success of the federal infrastructure stimulus program might be open to debate, but the Government of Alberta’s drilling stimulus program is clearly a hit with producers in the province. Premier Ed Stelmach’s last budget featured an unexpected expenditure of $1.6 billion on programs designed to encourage drilling in the province, a marked increase from the $732 million they were forecast to cost taxpayers.< The government’s not about to turn off the taps, either. Going forward, it intends to make a temporary incentive program that encouraged the drilling of new oil and gas wells through the application of phased-in royalties (only five per cent during the first year, compared to the previous rate of 16 per cent) a permanent fixture in Alberta’s regulatory environment. The scale of these corporate enticements is significant. For example, the $1.6 billion that was spent in 2010 and the $1.1 billion from 2009 would almost be enough to cover the province’s projected deficit of $3.4 billion (although the combined subsidies do not, as an editorial in Saturday’s Edmonton Journal suggested, add up to $3.7 billion.) Still, mathematical discrepancies aside, it’s still a considerable sum of money, and it raises the question of whether the government of Alberta needs to be subsidizing the oil and gas industry at a time when oil prices appear set to stay around $100-per-barrel for the foreseeable future.

It’s a question that deserves a hearing in the race for the leadership of the PC Party that will define politics in Alberta this summer (and imagine that: summer!). Given his willingness to discuss difficult subjects – witness his decision last fall to float a trial balloon on the possibility of a sales tax in Alberta – it stands to reason Battle-River Wainwright MLA Doug Griffiths might be the most likely person to raise it. That isn’t to suggest that he’ll be in favour of an aggressive readjustment of royalty rates; in 2007, he blogged that what was needed wasn’t a “fair share” – he referred to that term as “ridiculous” – but instead the “right share”. It remains to be seen whether the passage of time and the existence of a gaping recession have changed his views on the subject at all.

Whatever his opinion on the matter, though, it’s unlikely that he’ll keep it to himself. That could prove to be a prudent strategy for the race’s clear underdog, if the last leadership race is any indication. After all, the prospect of a royalty review went from a non-issue (an Alberta Venture survey at the time indicated that every last one of the prospective candidates rejected the idea that a royalty review was a necessity) to a defining question during the span of just a few months. Will history repeat itself in 2011? And if it does, will another it lead to another unexpected leader of the Progressive Conservative Association of Alberta?

Update: I spoke with Doug Griffiths on Wednesday afternoon, and he dismissed the idea that he would raise the question of a royalty review in the ongoing PC leadership race. “The last thing I would want,” he said, “is to create any kind of fear within the industry. Quite frankly, to Albertans what we get in royalties is second to whether or not they’re employed.”

The real issue, he told me, is healthcare, and how the province intends to address the funding crunch that the Baby Boomers will create for the system. “We’re like three and a half million people speeding towards a cliff, and nobody wants to talk about the cliff. They’re all fiddling with the radio.” Stay tuned.

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