The Oil and Gas Industry in Saskatchewan: Selling the Family Silver
Selling the Family Silver: Oil and Gas Royalties
Corporate Profits, and the Disregarded Public
by John W. Warnock
Edmonton: The Parkland Institute, University of Alberta; Regina:
Canadian Centre for Policy Alternatives-Saskatchewan,
November 16, 2006.
This study was published right before the Parkland Institute's 10th Annual Fall Conference, November 17 - 19, 2006, at the University of Alberta in Edmonton. For an overview of the conference, "Power for the People: Determining Our Energy Future," see the link below. The full report, and the executive summary, are available at both of the web sites:
The Parkland Institute: http://parklandinstitute.ca/search/results/c0d6ec41d41805a8ffb661eaa2da041f/; The Canadian Centre for Policy Alternatives: https://www.policyalternatives.ca/newsroom/news-releases/selling-family-silver-oil-and-gas-royalties-corporate-profits-and-disregarded
The world of oil and gas is split between industrialized consumer countries and their oil corporations, and less developed producer countries, many of which are former colonies. Canada is somewhat unique, as a relatively wealthy country in a close relationship of dependency with the United States, which consumes the majority of our production, and whose oil companies dominate our industry.
This paper explores the development of the sector, globally and in Canada, and the resulting modern geopolitics of oil. It discusses the environmental costs, and the fiscal and royalty structures that capture (and fail to capture) economic rents for the public that owns the resource. It examines the issues in more depth with a case study of Saskatchewan. With this context and background, it sets out the need for a new policy direction – one that puts the interests of our populations ahead of service to corporate profits and the military and consumer demands of the United States.
The geopolitics of oil
Four periods characterize the geopolitical development of the industry. In the first period, up to the mid-1970s, private sector “Independent Oil Companies” (IOCs) with vertical integration dominated the industry, working closely with their western imperial governments to secure their access to oil reserves. In the second period, former colonies pursuing national development programs strengthened OPEC and created publicly-owned “National Oil Companies” (NOCs). In the third period, from about 1980 to 2000, IOCs and their governments used debt crises to force privatization of NOCs, while reducing royalties in home countries.
The current period is one of growth in the importance of NOCs. While IOCs dominate the sales of petroleum products, NOCs dominate production. China and India have become major importers, and the global influence of their NOCs is rising quickly. Russia’s NOCs and IOCs are also becoming more important. Venezuela’s NOC has been re-energized, and has helped develop regional ties in the sector. NOCs have begun operating in other countries, and there is a growing reluctance among producing nations to sign agreements with IOCs. NOCs now control 77 percent of the 1.1 trillion barrels of global proven oil reserves.
The conflict today between IOCs and NOCs reflects the conflict between consuming states (mainly imperial powers) and producing states (mainly less developed countries). The OICs are vertically integrated, and have thus been able to effect transfer pricing. As they move oil from production through to processing and sales, they set the prices for transfers internally, at non-market rates. Thus they are able to move profits to low-tax jurisdictions, and costs to relatively high-tax jurisdictions. They also exercise market power, and through barriers to market entry, their oligopoly has kept prices high. The IOCs have undergone major consolidation in recent years, 1997s top 20 IOCs becoming just seven by end of 2003.
Economic rent and fiscal regimes
Economic rent is the financial surplus created by the exploitation of natural resources, over and above the costs of exploitation (which include “normal” profits). In the oil and gas industry today, there is a very large rent, and IOCs and their investors expect to accumulate most of it.
The democratic theory of rent suggests that governments should maximize their collection of rent to the benefit of their publics, who own the resources. The liberal theory of rent suggests that public resources should be privatized and employed to make profits, and that rents should remain in private hands either entirely, or enough to ensure investment in the industry.
Economic rent is most easily captured for the public interest when resources are developed through state-owned enterprises. The success of such enterprises depends on the degree of democracy achieved by that jurisdiction, but those in advanced democracies are well-run and provide greater returns to the public than private corporations. Joint ventures between NOCs and IOCs also enable governments to extract reasonable rents for the public. During the last few years of large oil price increases, income to OPEC countries increased 46.4 percent, while almost all windfall profits in Canada and the US went to private corporations.
In the oil and gas industry, rents are extracted by a number of different methods, including fees for prospecting, bonus bids for exploration, discovery and production, and royalties or production fees (based on volume of production or value). Today there are limited areas where large pools of oil and gas can be found, and competition for access is keen. Thus governments are increasingly seeking a percentage of the oil and gas produced, via production sharing agreements. In some countries, governments take equity positions; such joint ventures mean that government provides capital, and shares in the risks and the profits.
The private industry dislikes production royalties and bonuses, and prefers a system based solely on taxing profits, thus enabling it to employ transfer pricing. In order to curtail tax avoidance, some countries have had to introduce a minimum tax, a progressive profits tax (PPT, akin to progressive individual income tax), a resource rent tax (RRT, a tax on cash flow), or an excess profits tax. Nonetheless, through generous depreciation allowances, tax holidays, investment tax credits, resource allowances and other tax incentives, energy corporation taxable incomes are often a very small percentage of gross revenues.
Offshore tax havens enable even greater tax avoidance. An illustration of the problem comes from energy giant Enron, which had hundreds of subsidiaries registered offshore in havens with zero corporate taxes. A web of respectable auditing firms, law firms and banks helped it avoid taxes with paper transactions such as:
• selling oil to a subsidiary in a tax haven for a very high price and re-exporting it at the market price
• shifting capital to an offshore subsidiary and they borrowing it back at a high interest rate
• transferring the ownership of patents and services to the offshore company and then paying large royalties for their use
• buying inputs from offshore companies at highly inflated prices
Such tax avoidance practices are common in business circles, and by 2003, 58 percent of US corporate profits were taken in offshore tax havens. In Russia, similar schemes and firms were used to avoid oil company taxes of around $9 billion per year.
Canadian oil industry
Global developments have had their impact on the Canadian industry, which has always been dominated by foreign-owned corporate giants. A few large Canadian firms have emerged, such as En- Cana, Petro-Canada and Suncor, but industry analysts note that the majority of their stock is now owned by citizens of the United States.
Prior to the discovery of Alberta’s Leduc Field in 1947, almost all the oil consumed in Canada was imported. The large refineries were all owned and controlled by foreign-owned majors, and they had a lobby group, the Canadian Petroleum Association (CPA). As Alberta’s industry developed, Canada emerged with two markets: Western Canada and parts of the US and the Eastern Canadian market.
The Canadian corporations formed their own lobby group, the Independent Canadian Petroleum Association (ICPA), and lobbied Ottawa to require eastern markets to accept more expensive Alberta oil. The Conservative government agreed, though caving in somewhat to lobbying by the CPA and the majors. The result was the National Oil Policy of 1961, which decreed markets east of the Ottawa River would continue to be served by the majors. Alberta’s more expensive oil would be sold at all points west of the Ottawa River. Essentially, Ontario residents would support the growth of Alberta oil corporations.
In 1975, the Federal government created Petro- Canada, and in 1980 established the National Energy Program. The aim was to increase public and broader Canadian ownership of the industry. The oil corporations, the business press, the Reagan administration, and Alberta’s Conservative government were all strongly opposed. Eventually these reforms were all undone, with the privatization of Petro-Canada and the development of continental trade deals.
The Canada-U.S. Free Trade Agreement in 1987 surprised many, including provincial premiers, by its inclusion of a continental free trade agreement in energy. The Agreement ceded Canada’s sovereignty dramatically. The federal government was prohibited from reducing Canada’s exports, even in times of energy shortages (the “proportional sharing clause”), prohibited from controlling transfer pricing, and prohibited from setting export prices and taxes, among other things. These prohibitions were strengthened in the subsequent North American Free Trade Agreement (NAFTA).
World oil prices have risen dramatically in the last few years, more than doubling to over $70 per barrel at times. These price increases are entirely unrelated to production costs; in 2003 Canadian production costs, including royalties, averaged $5.57 per barrel. Even with higher costs and relatively lower oil prices in the tar sands, prices are still well in excess of costs.
Because of the cuts to royalties and taxes as well as the move away from national or public ownership in Canada, the private oil industry has enjoyed windfall profits, as have the gas companies. According to the US Energy Information Administration, Canadian royalties, are among the lowest in the world at an average $0.23 per barrel. The result of high prices and low royalties and taxes has been a very high return on equity, rising to 22.4 percent in 2005 and making the oil and gas industry the most profitable sector in Canada.
The oil industry in Saskatchewan
Most oil extracted in Canada comes from the Western Canadian Sedimentary Basin (WCSB). This basin is considered “mature,” as the extraction of conventional light and medium oil has been declining for a number of years. The extraction of light crude in Saskatchewan peaked in 1997, while medium extraction peaked in 1998. Heavy oil is now the majority of oil extracted in Saskatchewan. At the same time, recent drilling in Saskatchewan has focused more on extracting from existing pools rather than finding new sources.
The majority of Saskatchewan’s oil production – 73 percent - is exported to the US. And although the industry contributes 6 percent of the province’s GDP, that proportion is falling, and it only contributes 0.5 percent of provincial employment. While the value of Saskatchewan oil sales has gone from $3.6 billion to over $30 billion, royalties have slipped from over 56 percent to less than 16 percent. Prior to 1985, Saskatchewan was in a period of increasing royalties. During this time, Saskatchewan’s royalties were higher than Alberta’s and yet there was no capital flight from Saskatchewan. However, since 1986 royalties in Saskatchewan have dropped along with Alberta’s. And a plethora of newly-created categories of oil has enabled further reductions in the overall level of royalties collected. These changes have resulted from regular negotiations between government and industry, and this process has always excluded the public and any public input.
The natural gas industry
Conventional natural gas production peaked in the United States around 1973, and despite development of Coal Bed Methane (CBM), the volume of reserves has steadily declined. US reserves in 2003 were 40 percent lower than in 1990, and CBM reserves amount to 18tcf, less than one year of annual consumption. To fill the growing gap, imports from Canada were increased, but despite increased drilling in both the US and Canada, North American gas production has been flat since 1997. Canada’s production peaked in 2001, and average production rates for new wells have dropped by two-thirds since the early 1990s.
The US Energy Information Agency characterizes the American situation as a “natural gas crisis”. And despite the massive price increases in the past few years, the Canadian Energy Research Institute predicts that Canadian natural gas prices will triple in the next 13 years. In the Western Canada Sedimentary Basin (WCSB), reserves of natural gas peaked in 1984 and have been declining since. And Natural Resources Canada projected that Saskatchewan will peak in 2005 and drop by 70 percent in the following 15 years – an alarming prospect given the province’s dependence on gas for home heating. Although environmentally damaging CBM will help prolong production in Canada, it will not make up for the decline in conventional sources. As imports from Canada fall off after 2010, US imports of liquefied natural gas (LNG) are expected to rise. LNG “trains” rely upon liquefying natural gas, transporting it, and regasifying it, and the costs are significantly higher than for regular natural gas. Developing the infrastructure – the liquefying and regasifying plants, transport ships and pipelines, is expensive and risky.
Meanwhile, the industry is doing quite well with higher prices despite short term fluctuations. The US Department of Energy date confirms that the bulk of the economic rent from natural gas extraction is going to the owners of oil and gas corporations. In the WCSB, conventional natural gas production is allowing the industry to capture 27 percent to 53 percent of the market price as rents. Royalties in Saskatchewan are quite low on a global scale, averaging less than 14 percent of sales in recent years, while many countries get 50 percent or more.
In the last 20 years, Canadian governments have gone along with the policy demands of the major and super-major IOCs. They have reduced royalties, increased exports, avoided addressing global warming and other environmental costs of fossil fuel consumption, and ceded control over the resource.
A better government policy would put the public interest ahead of corporate profits. It would place a high priority on securing energy supply for future generations. It would maximize returns to the general public on the sale of the resources. It would address greenhouse gas emissions and the social, economic and environmental costs of global warming. It would develop alternative energy sources. It would recognize that fuelling America’s addiction to fossil fuels is wrong, and that exports to the US cannot continue to rise.
The Saskatchewan example illustrates that there are many policies a government willing to protect the public interest could implement. These policies are not radical, and in some cases have been employed with success in the past. The following are a few suggestions.
• Create a provincial energy conservation board to cover these industries. All sales would be made to this agency, allowing public control over sales, prices, profits, resource rents and a level of proven reserves to be held for future generations.
• Raise royalties up to the level that they were during the Saskatchewan government of Allan Blakeney, which was around 50 percent of sales - a common rate around the world today.
• Implement an excess profits tax, as several countries have done recently.
• Merge SaskEnergy with SaskPower and give it control over natural gas development and distribution within the province. The priority would be to conserve natural gas for present and future generations.
• Re-establish the Heritage Funds, allocating at least 50 percent of the royalties from the depletion of oil and gas to them, and invest in renewable energy development.
• Re-create SaskOil as a Crown corporation with the goal of gaining ownership and control over the remaining provincial oil reserves. Require all future developments to include the right of SaskOil to 50 percent ownership.
The Future of Oil and Gas in Saskatchewan
by John W. Warnock
November 17, 2008
The Johnson-Shoyama Graduate School of Public Policy at the University of Regina hosted a mini-symposium on Saskatchewan energy policy last Friday. However, the afternoon meeting only considered oil and gas policy.
Appropriately, the first speaker was Pierre Alvarez, former president of the Canadian Association of Petroleum Producers (CAPP), the industry lobby group. Alvarez cited the newly-released report by the International Energy Agency (IEA) which emphasized that if current production and consumption trends are to continue, we will need a massive new injection of capital in the industry. The IEA estimates this at $26 trillion between now and 2030.
Continental energy integration
Canada is to continue as the most important source of U.S. imports of oil and gas. This explains the new pipelines being constructed to ship bitumen from the Athabaska tar sands (and perhaps Saskatchewan) to Chicago and Louisiana for refining, Alvarez argued.
North American energy security has been improved due to the development of new technologies which make possible the economical extraction of natural gas and oil from coal and shale deposits. Horizontal wells and fracturing have revived the natural gas industries in Alberta, British Columbia, Wyoming, Montana, Colorado and Texas. The new drilling techniques have also enabled the exploitation of the Bakken play in Saskatchewan and the Northern United States, reviving the light oil industry.
A member of the audience argued that Canada has no sovereignty in this area because of the North American Free Trade Agreement (NAFTA) which requires Canada to ship oil and gas south even when it is against the public interest. This policy has blocked the development of a national energy policy which would allow western Canadian oil to replace the supply of oil eastern Canada now imports. Alvarez was vehement in his rejection of any national energy policy. He further argued that “shipping Canada’s oil and bitumen to Chicago and Louisiana is simply a matter of economics. The distance is shorter than shipping to eastern Canada.” No one questioned whether this was actually true.
The need for low royalties and taxes
Alvarez stressed that the key to this essential development is government financial incentives and regulatory frameworks which assist the industry to grow. To no one's surprise, he strongly attacked the decision of the Conservative government in Alberta to raise the royalties on the oil and gas industry. Praise was heaped on recent governments in Saskatchewan who lowered royalties and taxes on the industry.
In response to a question on what is a fair return to investors in the oil and gas industry, Alvarez stated that the historic rate of 12% “will not come close” if the industry is to attract sufficient investment. He denounced the Alberta government’s new royalty system which increases the rate of the return to the province as the price of oil increases. The new tax policy “removes the risk premium which is at the top.” Investors in the oil industry in Canada have come to expect a far greater return on their investment than they could find elsewhere.
The approach of the new Obama presidency
Bruce Bulloch, Director of the Maguire Energy Institute, Southern Methodist University in Texas, outlined what we could expect from Barrack Obama in the field of energy policy. He started by saying that “No one really knows what Obama is going to do.” His policies are not well developed. Furthermore, as the new president he will be greatly constrained by the financial and economic crisis and the huge deficit in the budget that he will inherit from the Bush administration.
In the presidential campaign Obama proposed a cap-and-trade system to deal with greenhouse gas emissions, spending $150 billion on “green energy,” emphasis on energy efficiency, and a windfall profits tax on the oil companies. The last policy is “simply off the agenda,” Bulloch argued. Furthermore, it is clear that Americans will never accept any form of a carbon tax. He noted that Obama has expressed skepticism of nuclear power. In contrast, Bulloch argued that nuclear power would be necessary if the U.S. were to reduce greenhouse gas emissions.
Bulloch suggested that we should look at the research done by Matt Simmons, the Texas banker who specializes in oil and gas. Energy supply, as the IEA finally admitted this year, is in decline. Peak oil is here
Environmental problems with natural gas extraction
Natural gas drilling is expanding everywhere, using the new technologies. He stated that wells are being drilled within 300 feet of people’s homes.
In response to a question from the audience, Bullock admitted that there is an environmental downside to the new drilling technology being used to extract natural gas. Everywhere, the high pressure extraction process, which induces fracturing of coal and shale deposits, is leading to natural gas contamination of water aquifers and wells. The chemicals used in the process are often very toxic, including benzene, which is a strong cancer-causing agent. This contamination is leading to widespread grass roots opposition. Bullock said a recent court decision for damages in Texas has caused a major ripple in the industry.
Canadian energy policy
Keith Brownsey, from the Department of Policy Studies, Mount Royal College, Calgary, presented an overview of energy policy in both Canada and the United States. Basically, Canada has had no policy since the reversal in 1985 of Pierre Trudeau’s National Energy Policy. All subsequent governments have emphasized devolution of policy to the provinces, private corporate development of the industry, and the international market. There has been no effort to develop a national strategy or address the issue of sustainability.
The policy priority of Stephen Harper’s government, he stressed, is to protect the oil and gas industry and to guarantee the continuation of continental integration. In contrast, the Bush administration established a national energy policy in the Cheney Report of May 2001, the U.S. Energy Act of 2005, and the Energy Security Act of 2007. Goals have been set to develop alternative energies, support new technology, but always relying on the large private corporations and the market.
Brownsey concluded by arguing that in his opinion the two countries have a common approach: “lack of action, obstruction, avoidance and retrenchment.” Nothing was said at the symposium on the overall U.S. policy set forth in the Carter Doctrine of 1980: using the U.S. military to defend U.S. corporate access to oil around the world.
The problem of climate change is ignored
It was expected that Adam Wellstead, of Natural Resources Canada, would focus on the issue of climate change and greenhouse gas emissions. He was one of the authors of the the NRC study, Climate Change: Impacts and Adaptation (2008). It has a section summarizing the scientific research on the impact on Saskatchewan. However, Wellstead’s presentation concentrated on the lack of co-ordination of policy makers on the issue. He did note that for Saskatchewan and the prairies the central issue is “where is the water.”
In contrast to the symposium, the new World Energy Outlook by the IEA also stresses the serious question of greenhouse gas emissions from the burning of fossil fuels. Under the present business-as-usual approach of the past ten years, fossil fuel consumption continues to increase as do greenhouse gas emissions and the average temperature. The IEA argues that if the world continues to refuse to seriously deal with this issue, the end result will most likely be a six degree increase in the average global temperature by the end of the century.
The present course of action is in reality a suicide policy for the world as we know it. The scientists with the U.N. Intergovernmental Panel on Climate Change have argued that we need a 70% reduction of fossil fuel consumption to stabilize greenhouse gas emissions and prevent the increase in average temperature by two degrees. There was nobody at this symposium who wanted to deal with this issue.
Profits from the Alberta tar sands
“Taking into consideration operating costs, the discount given to low-quality oil sands crude, the falling Canadian dollar and other factors, Suncor would be able to earn $28 on each barrel of oil at a West Texas Intermediate price of $60 (U.S.).”
Rick George, CEO, Suncor Energy, October 29, 2008
The Booming Saskatchewan Oil Industry - Who Benefits?
By John W. Warnock
April 20, 2008
In mid-April the international price for WTI crude oil reached $110 per barrel. In Saskatchewan the price of a litre of gasoline rose to $1.23. The large oil corporations are reporting record profits. Land sales for exploration and development rights for oil are at an all time high in Saskatchewan. Why is this happening? Who is benefitting?
At a recent conference in Washington sponsored by the U.S. Department of Energy, experts argued that the world production of conventional crude oil peaked in May 2005 at 74 million barrels a day. The gap to 88 million barrels a day is now being filled by much more expensive non-conventional sources. There no longer are any large new pools of conventional oil be discovered. Despite warnings by scientists about the looming disaster from global warming, fossil fuel demand is steadily rising.
Where can we find more oil?
Of the remaining oil reserves 77% are controlled by producing countries with state-owned National Oil Companies (NOCs) where the privately-owned International Oil Companies (IOCs) are excluded. These NOCs often employ western oil and service companies to extract much of their oil and gas. The Washington conference pointed out that the countries which have NOCs prefer to deal with other countries which have NOCs and a state-controlled industry.
Another 11% of reserves are in countries with NOCs where the private IOCs have some access through production sharing agreements. Venezuela is one of these. The norm in Venezuela is that the state-owned oil corporation (PDVSA) owns 60% of all developments and the private IOCs own the other 40%. Only Exxon-Mobil has declined to participate in these joint ventures.
Russia has six percent of the remaining reserves and is re-establishing state-ownership and control over the oil and gas industry. The government has also imposed export taxes when the price exceeds $25 per barrel in an effort to capture most of the excess profits.
Only seven percent of the remaining world reserves of crude oil are in countries like Canada where the IOCs have full access to the resource. Thus the large private oil corporations are having a difficult time finding new reserves. Talisman, for example, has seen the price of its stock drop due to the fact that its reserves are primarily found in mature areas with declining supply and production.
Oil and gas reserves in western Canada
As the industry moves to non-conventional sources of oil and gas, costs rise. But they have not risen nearly as fast as the international price. In the 1990s it cost around $6 to extract a barrel of oil in western Canada. This has now risen to around $15. The average in the Alberta tar sands is now between $20 and $25.
The Western Canada Sedimentary Basin (WCSB) is a mature area for oil and gas. Conventional oil and gas production peaked around 1972 and has been declining. The average productivity of a conventional oil well in the WCSB has dropped from 33 barrels per day in 1994 to 18 in 2003. In 2007 the average production in Alberta was only 12 barrels per day. This is the major reason that the oil corporations are looking elsewhere for new reserves.
Conventional natural gas production is also declining in the WCSB. The number of natural gas wells being drilled in Alberta, the main source of supply, has declined not only because of the fluctuation in the price but because the new fields discovered are much smaller and quickly depleted. Natural Resources Canada (2006) projects that natural gas production in Saskatchewan will peak in 2005 at 261 billion cubic feet per year and drop to only 70 billion cubic feet per year by 2020.
Exploiting the Bakken Formation
Geologists and oil companies have known for years about the Bakken Formation, which is primarily in North Dakota and Montana but pushes up into Saskatchewan and Manitoba. The oil is light crude, the most valuable, but it is trapped in non–porous shale rock. It was considered uneconomic to extract. But with the very high price of oil, and new technology, extraction is now possible. The new technology involves drilling a horizontal well, fracturing the shale formation, and then pumping sand into the well. Oil and gas is thus released. The oil industry believes this new technology will result in extensive extraction from Saskatchewan.
Non-conventional natural gas
At present the larger natural gas corporations are shifting to British Columbia where the Dawson Creek and Tumbler Ridge pools of non-convention natural gas are much larger. A similar technology is used to fracture the non-porous rock and extract the natural gas. There are high hopes for using this new technology in the Montney play. The higher average rate of royalties (27% compared to 14% in Saskatchewan) are more than offset by the higher rates of production.
Higher royalties are a world phenomenon
All around the world oil and gas producing countries are raising royalties and taxes in an effort to capture more of the economic rent (monopoly profits) that is accruing to the industry. This is not happening in western Canada.
In Newfoundland, Premier Danny Williams’ government has raised the royalty rates, a highly popular move. In the offshore Hibernia field the oil companies presently get 60% of the revenues, the federal government 32% and the provincial government 8%. In the White Rose field, the oil corporations get 56%, the federal government 33%, and the province 11%. Under the new royalty system for White Rose the oil corporations will get 37.5%, the federal government 37.5% and the province 25%. Has this discouraged investment? Husky and Petro Canada are rushing to invest there, hiring a new offshore rig which will cost them $1 million per day.
Oil Policy in Saskatchewan
Oil policy in Saskatchewan stands in direct contrast to the rest of the world. Since 1982 governments in Saskatchewan have emphasized maximizing the return to the private corporations and minimizing the return to the people of the province. Between 1991 and 2007 the province collected on average only 17% of the revenues from the sale of our oil, the lowest royalty rate in the world. This is a dramatic change in policy since the 1970s and early 1980s when our government collected over 50% of the revenues accruing to the industry.
The other basic policy is to export our oil and natural gas to the United States as fast as possible. We are not to be concerned about how we will heat our homes in 2020. Eastern Canada imports almost all of their oil from abroad. There is no concern in western Canada about this situation or willingness to create a new national energy policy based on conservation and assuring first access for Canadians.
The Saskatchewan NDP government fully embraced the U.S. energy strategy policy set forth by Vice President Dick Cheney in March 2001. Canadian oil is U.S. oil. On several occasions cabinet ministers, and even Premier Lorne Calvert, went to Washington to assure the Bush Administration that we will ship all of our oil and gas south of the border. Brad Wall and the Saskatchewan party agreed. And we will keep our royalties and taxes to the absolute minimum.
John W. Warnock is author of Selling the Family Silver, a study of the oil and gas industry in Saskatchewan.
Alberta Panel Recommends Higher Royalties and Taxes on the Oil Industry
by John W. Warnock
September 20, 2007
Act Up in Saskatchewan
On September 18, 2007 the Alberta Royalty Review Panel released its report on the oil and gas industry. It urged higher royalties and taxes on the industry in order to get a “fair share” for the people of Alberta. The report has been widely attacked by people in the industry. The new Alberta Premier, Ed Stalmach, has stated that the Progressive Conservative government would make a decision on the issue within three weeks.
The panel of industry experts heard testimony at hearings in five cities. Business and petroleum industry representatives strongly supported the present system. The general public, environmental organizations, and several academics recommended significantly raising royalties and taxes.
Research by the panel confirmed that conventional oil and gas reserves are declining steadily. The province is becoming increasingly dependent on extraction from the tar sands. The present royalty system has as a goal a return of 20% to 25% of the value of the sales of the resource. In recent years, because of the special low royalties set for the tar sands, this has dropped to 19%. In Saskatchewan the royalties from the extraction of oil have averaged between 14% and 16% in recent years.
For the tar sands, the present system sets royalties at 1% of gross revenues until the corporation recovers all of its investment. Then it pays a royalty of 25%. The panel proposes that the 1% rule be retained but that after they recover their investment the royalty rate should rise to 33%.
Introduce an excess profits tax
Furthermore, they make a strong case for the introduction of a “severance tax.” This would be a very moderate “excess profits” tax which would be applied when the price of West Texas Intermediate oil exceeds $40 per barrel. This would be set at 1% and rise to a maximum of 9% when the price reaches $120 per barrel. As a comparison, following the dramatic increase in the price of oil over the past three years, Russia has imposed an excise tax where the government takes 90% of the value of the oil when the WTI price exceeds $25 per barrel.
In Alberta, as in Saskatchewan, much of the conventional oil and gas deposits are depleting. Where a well or zone is mature and now is facing declining production, the panel proposes that royalties be lowered. The higher producing oil and gas wells and fields would pay higher royalties.
Blackout in Saskatchewan
While this report earned front page status in the Globe and Mail, and many articles in their business section, the Regina Leader-Post has chosen to not run any articles or comments. And of course our NDP government has remained completely silent. No need to remind the voters that the Conservative governments in Newfoundland and Alberta are moving to raise royalties and taxes on the oil industry while our supposedly left wing NDP government has been lowering them.
If David Karwacki and the Liberals came out on the side of the general public on this issue, and made it central to their campaign, they might get elected. A lot of people are looking for an excuse not to vote for the moribund NDP, and a great many people do not like or trust the Sask Party.
UPDATE: Finance Minister Pat Atkinson has announced that the NDP government is not interested in opening up a discussion of resource royalties in Saskatchewan.
Oil and Politics in Canada
By John W. Warnock
Regina Leader Post
May 9, 2006
Danny Williams, Conservative Premier of Newfoundland, recently declared that "we're not going to give away our resources any more." His government negotiated a revenue sharing agreement with Ottawa. Then they raised the royalty rate for oil extraction. In addition, all new offshore developments would have to include an equity position for the provincial government.
Newfoundland wanted the Hebron heavy oil off shore project to proceed, but Exxon Mobil, Chevron, Petro-Canada and Norsk Hydro decided to postpone development. Williams proposed the introduction of "fallow-field" legislation to allow the government to take over oil leases which were not being developed. Such legislation exists around the world, including Alberta. However, Newfoundland could not proceed without the approval of the federal government, the joint owners of these offshore resources. Stephen Harper, always loyal to the oil industry, said no.
The opposition to the Newfoundland oil policy was led by Exxon Mobil, the largest private oil company in the world, which owns and controls Imperial Oil in Canada. They threatened a major suit against Newfoundland under Chapter 11 of the North American Free Trade Agreement (NAFTA). The oil giants argue that such legislation would be "regulatory confiscation."
As Premier Williams pointed out, the price of a barrel of oil has risen from $25 in 2003 to over $70 in 2006, resulting in enormous wind fall profits for the oil corporations. In North America, precious little of this has gone to governments in the form of increased royalties and taxes. The people of Newfoundland were demanding a bigger share.
In 2005 Exxon Mobil reported sales of $371 billion, profits of $36 billion and a return of 31 percent on invested capital. They spent only $18 billion on new investments and used $23 billion to buy back their own stock. Still, at the end of the year they had $163 billion in cash held as retained earnings. All the other major oil corporations reported similar statistics.
The corporate media in Canada lined up with the oil corporations and attacked Danny Williams. The Globe and Mail likened him to Hugo Chavez, the President of Venezuela, accusing him of "bombast and bullying." Chavez, who has won nine elections in the eight years he has been in office, has undertaken to regain control over the country's oil resources, given away under previous administrations.
Venezuela took major state equity positions in 31 production sharing agreements, raised royalties and taxes, directed auditors to examine the books of the foreign oil corporations and presented them with bills for past tax avoidance. Venezuela has expanded the role of their state-owned oil company, PVSA. Nevertheless, almost all of the foreign-owned oil companies have accepted these changes for they can still make good profits. With the disappearance of new sources of oil around the world, they do not want to be excluded from the huge Orinoco River basin, an oil sands deposit larger than exists in Alberta and easier and cheaper to extract.
The days are gone when the giant private oil corporations dictated oil policy. They are now in stiff competition with the National Oil Companies from OPEC countries and those in China, India, Brazil, Malaysia, Russia and even Norway. A few of the small oil producing countries have National Oil Companies but do little direct field work themselves. There are thousands of independent oil service companies who do the work for them. Newfoundland could easily find other corporations to develop their oil and gas industry.
Canada is caught in a difficult situation. The geopolitics of oil are clear. The major oil reserves are all in less developed countries, almost all of whom have National Oil Companies. They control around 80% of the known oil reserves. The advanced capitalist countries are the consuming countries, and they have consistently opposed state-owned corporations and high royalties and taxes. So where does Canada stand in this world division?
While Canada is a major oil supplier, its governments have chosen to follow the policies of the consumer countries. As the U.S. Energy Information Agency reports, the royalties and taxes on oil in Canada are the lowest in the world. The U.S. considers Canada's oil as their oil, and our governments agree. Norway takes a different position, with Statoil as an equity partner in all North Sea developments, higher royalties and taxes, profits from Statoil's world operations, and a Petroleum Fund which invests oil revenues in renewable energy resources.
Since 1982 Saskatchewan governments have been lowering royalties and taxes on oil and gas extraction. Saskoil, our Crown corporation, was privatized. The Heritage Fund has been abolished. Our dwindling oil and gas resources are being exported to the United States as fast as possible. Premier Lorne Calvert and Industry and Natural Resources Minister Eric Cline have run off to Washington to convince the Bush Administration that we are loyal supporters and will not ship our oil and gas resources to China or India, or even conserve them for our own use! Is there no alternative?
John W. Warnock is a Regina political economist and author.
Oil and Gas Prices Rise -- But Who Benefits?
By John W. Warnock
November 1, 2005
Murray Mandryk, political columnist for the Leader-Post, was right to criticize the NDP government for its hypocrisy over the issue of the rapid increase in natural gas prices. Both the Tory and NDP governments have significantly contributed to this problem. But his column (October 14) also reflects the general ignorance in this province of the oil and gas industry.
As Sask Energy made clear in their presentation to the Saskatchewan Rate Review Panel on October 11, they have lost all control over the price of natural gas because of the decision by governments to introduce a policy of deregulation and privatization. This began with the Halloween Agreement of 1985 undertaken by Tory governments but was brought to fruition in Saskatchewan by the subsequent NDP governments. The policy was enhanced by the Canada-U.S. Free Trade Agreement, the building of additional natural gas pipelines to the United States, a massive increase in gas exports to the United States, and the recent peak in natural gas production in the Western Canada Sedimentary Basin. As a result, gas prices in Saskatchewan are now set in the United States. And they are steadily rising.
This policy has aided U.S. consumers by keeping prices lower than they otherwise would have been. As the U.S. Department of Energy shows, natural gas royalties and taxes in Canada are among the lowest in the world, and the "netback" (or gross profit) to corporations here have been very lucrative, around 50% in 2004 when gas was at $6.20 per thousand cubic feet (it is now over $10). The policy of deregulation has been very good for oil and gas corporations and those who own them but hardly good for the great majority in Saskatchewan.
In contrast, in Europe the major gas utilities, both private and state owned, seek long term supply contracts and are directly engaged in the development of pipelines bringing gas from North Africa and Russia. They also are taking equity positions in projects for natural gas development. Their policies are guided by long term planning for security of supply, stability of price to consumers, and equitable distribution. Under government directed guidelines, their goal is to serve the needs of consumers first rather than maximizing profits for investors. This used to the policy in Saskatchewan before deregulation and privatization.
The oil and gas industry in Saskatchewan, and their advocates like Mandryk, Bruce Johnstone of the Leader-Post, former Tory premier Grant Devine and Lorne Calvert's NDP government, insist that expanded drilling here is due to the reduction in royalties and taxes by the Tory and NDP governments. This is nonsense. First, Canada has a tremendous advantage over many areas due to very low risk factors, a highly educated and trained work force, the very best technology and expertise, and closeness to the main market, the United States. This favourable climate should allow our royalties and taxes to be higher than other jurisdictions. But according to the U.S. Department of Energy, Canada's royalties and taxes on the oil industry are among the lowest in the world. In their annual survey of the 28 largest oil and gas corporations, they report that in 2002-3 the direct lifting costs (production costs) in Canada averaged $5.34 per barrel while royalties and taxes averaged an additional $0.23 per barrel.
The major oil corporations have demonstrated that they are willing to pay much higher royalties and taxes than in Canada. Here are a few examples.
The government of Venezuela has recently raised royalty rates to over 50% and have transformed 32 existing operating service agreements with private corporations to production sharing agreements where the national oil company (PVDSA) will get at least a 50% equity position. Yet the private corporations have accepted these changes.
Russia has recently raised its royalties and excise taxes on oil. The government will now take 100% of the value of all sales over $27 per barrel. Yet the private corporations are still seeking investments, particularly in the Arctic area.
Libya, with the international boycott lifted, is again opening up its oil regions for development. In recent bids the large foreign corporations agreed to give the government between 70% and 94% of the value of oil and gas sales.
Kazakhstan, hardly a world power, has recently opened bids to investment in Caspian Sea offshore blocks. They have demanded, and obtained, contracts with the private corporations which grant their national oil company a 50% equity position and which will pay 80% of the value of all sales to the government. When the oil majors objected to the tough terms, the government told them if they didn't like it they had a lineup of investors who were willing to take their places.
The fact is for many years now the provincial governments in Canada, including Saskatchewan, have been giving our oil and gas away for virtually nothing.
Mandryk states that "unless you're a dyed-in-the-wool socialist who still believes that a potash-industry-like nationalization of resources is a sound economic strategy, it's tough to quibble with Devine's point." This may sound good to the oil majors, but it is utter nonsense. There are now around 60 countries which have state-owned national oil corporations (known as NOCs). They control about 77 percent of the world's 1.1 trillion barrels of proven oil reserves. None of these countries have socialist governments. They recognize that oil is a finite and strategic natural resource, and they are determined to retain a high percentage of the economic rent from its depletion for their own citizens. Overall, they are doing a very good job at this. Some NOCs completely dominate the industry, as in Mexico, others stress joint venture development with private firms, and others just manage their national assets and set royalties and taxes. Of course the big NOCs like those from China, India and Russia are involved in projects all around the world. But relatively small NOCs like Norway's Statoil, Malaysia's Petronas, and Brazil's Petrobras are each involved in dozens of oil and gas developments in all parts of the world.
In a public opinion poll in late August of this year Leger Marketing found that 49% of Canadian respondents wanted to see petroleum resources nationalized and 43% wanted to see the oil corporations nationalized. Canadians are on the right track. Unfortunately, there are no political parties here willing to take up the cause.
John W. Warnock, a Regina political economist, is currently researching the oil and gas industry in Saskatchewan.
The Geopolitics of Oil in the Era of Peak Oil
by John W. Warnock
OIctober 28, 2005.
Opening presentation to the workshop on "Peace in the Era of Peak Oil" at the Fourth Annual Making Peace Conference, Saskatoon, SK, October 28-30, 2005.
Oil is a very special natural resource, Since the invention of the internal combustion engine, oil has been the energy source that has driven economic growth. Transportation, agriculture, manufacturing, urban living - none would exist in their current form without oil and natural gas. And as we all know too well, it is oil which fuels the world's military machines.
The oil industry has been historically dominated by very large corporations closely linked to the governments of the United States and Great Britain. On a world wide basis, the western imperial powers, the major consumers of oil and gas, have sought to dominate and control the sources which are primarily in the less developed countries.
The cartel of the infamous Seven Sisters dominated the industry until the collapse of the old colonial system. The former colonies with oil resources have sought to gain control over their industry through nationalist policies, the creation of state-owned national oil companies, and the formation of OPEC. The western powers have replied by creating the International Energy Agency and using the World Bank, the International Monetary Fund, the World Trade Organization and other organizations to try to impose a free market-free trade model on the less developed countries, one which would again open their oil reserves to penetration by the major private oil corporations.
The imperial focus on North Africa and the Middle East
Shortly before World War I the United Kingdom switched its naval fleet from coal to oil. However, in contrast to the United States, it had no domestic source of oil. The same was true for France. This began their long imperial intervention in North Africa and the Middle East as both sought to control this important source of oil. For both countries, this was the key to defence of their imperial and colonial systems.
Oil was an important factor in World War II. The Japanese invasion of Dutch East Indies was to gain access to this key energy. The Germans sought oil in Russia and North Africa. The success of the United States and Great Britain in the war was to a large extent due to their control over oil.
As oil sources in the United States began to peak, the government and its key corporations sought overseas sources in Venezuela and the Middle East. The key to U.S. foreign policy in the Middle East has been the alliance with the Saudi royal family and the political-commercial links with the U.S. oil super majors. U.S. foreign policy from the time of the Truman Doctrine, through the Eisenhower Doctrine and the Carter Doctrine, has declared that free access to oil in the Middle East as essential to U.S. national security. After the disaster of the French-UK-Israeli attack on Suez in 1956, the United States took on the role as chief neo-colonial power in the area. Since the collapse of the Soviet Union, a central goal of the U.S. government has been to guarantee access to oil supplies through Saudi Arabia and OPEC, and to manage the price of oil within a band that guarantees a good return to the producing countries while allowing the super majors profits in higher cost areas like North America and the North Sea.
U.S. policy and Iraq
The British government had a long history of imperial and colonial penetration of the Persian Gulf, Iran and Iraq. The French government constantly sought a position in Iraq. The United States pushed the UK government into the background after they engineered a coup against the elected government in Iran in 1953. Few remember how the U.S. government used the Baghdad Pact to defend its interests in Iraq and Iran. The U.S. government developed a close political alliance with Saddam Hussain, who seized power in Iraq in 1978. The revolution against the puppet regime in Iran in 1979 forced the U.S. government to develop even closer ties with Hussain and Iraq. In the Iran-Iraq war (1980-8), the governments of the United States, the United Kingdom, France and Germany backed Iraq.
When Iraq invaded Kuwait in 1990, the U.S. mobilized the former imperial powers to intervene to protect their economic and political position in the Persian Gulf area. But fearing a radical Shiite government in Iraq, the U.S. government did not remove Saddam Hussain from power. Between 1991 and 2003 the U.S. and UK governments enforced a blockade on the Iraq economy, patrolled Iraq's air space, and launched four major air and cruise missile attacks on military targets. The key US and UK oil corporations supported the oil embargo because Saddam Hussain's government was developing a close relationship with French, Russian, Japanese and Chinese oil corporations, and they were being shut out.
Why did the United States decide to invade Iraq in 2003? The issue has been obscured by the largely phony debate created by the U.S. and UK governments and supported by the mass media. The focus on "weapons of mass destruction" is a red herring. The western powers provided Saddam Hussain with such weapons and technologies during the Iran-Iraq war. The other reason commonly cited was to remove a mad dictator and create a democracy in Iraq. But the U.S. and UK governments long supported Hussain and other vicious dictators in the Middle East and elsewhere. The U.S. government had first hired Hussain back in 1959 to assassinate the Iraqi Prime Minister Abd el-Karim Qasim. The most ridiculous excuse was that Hussain's regime had aided al-Qaeda. In fact, Hussain's government, basically a secular regime, had long opposed and repressed Islamic fundamentalism.
The administration of George W. Bush had specific objectives when they launched this war, and it was fully consistent with U.S. policy in the region for many years. That is why the vast majority of Democrats in Congress supported the war, including John Kerry and Hilary Clinton. The basic goals were as follows.
(1) Continue the support for the Saudi royal family, their close links to the U.S. government, and their domination of OPEC.
(2) Replace the Hussain government with one which would have close ties to the U.S. government. This would require the application of controlled "elections" as the U.S. government has managed since the collapse of the Soviet Union.
(3) A new Iraq government would give preference to U.S. and UK oil companies in developing their very substantial oil reserves. This would reduce the growing presence and influence of China in the region. In a world facing peak oil and the decline of easy access to new oil by U.S. oil corporations, the vast oil reserves in Iraq are a key strategic resource.
(4) The U.S. would establish several new military bases in Iraq which would increase their influence in the area and allow them to remove the U.S. military from Saudi Arabia and reduce the pressure from the Islamic fundamentalists.
Many find it easy to put all the blame for the Iraq war on the administration of George W. Bush. But the war is fully consistent with the Iraq Liberation Act of 1998 passed by the U.S. Congress and signed by President Bill Clinton. As the war drags on and victory for the US-UK forces seems ever more remote, support for the war is falling rather dramatically. But President Bush argues that the U.S. cannot withdraw without victory. Otherwise, the broad U.S. policy objectives would have to be abandoned.