Royalty review rancour!

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Oil has been a pivotal part of the North American economy for a while now. By the time the Beverly Hillbillies struck black gold, the province of Alberta had been enjoying the benefits of the energy sector for close to two decades. Despite some hiccups in the sector in the 1970s and '80s, the Alberta government has been collecting large amount of royalties for their role in managing the resource on behalf of Albertans.

Due to fluctuations in the price of oil, the province has had the option to adjust royalties over time to account for higher or lower prices. The last time the royalty scheme was adjusted in the mid-'90s, the oil price was in the area of $20 a barrel. Nowadays, it's in the area of $85 to $90. In Sep., a royalty review panel submitted a series of recommendations to premier Ed Stelmach. On Thu., Oct. 25 Stelmach made the royalty announcement. Reaction has been mixed.

Under the new scheme--which begins in 2009--royalties will be tied to price, rather than the flat percentage system used previously. The concept somewhat quells the fears of the energy sector, who thought perhaps the government would simply bump up the flat percentage due to the higher commodity costs and not allow it any flexibility should prices fall. The sliding royalty system at least ensures that, should the bottom fall out of the industry, everyone won't be completely screwed. Still, the moderate move by Stelmach--who rejected about half of the review panel's recommendations--hasn't been met with much love from the oil patch, who have repeatedly derided any adjustment schemes, citing an increase in the cost of doing business and all but threatening to pull out of Alberta should royalties be increased. The week of the review panel's report, EnCana announced plans to remove $1 billion of investment from the province should royalties be adjusted. At press time, EnCana had not announced formal plans in light of the new royalty scheme.

On the other hand, groups not tied to the energy sector have also complained about Stelmach's decision. In a statement on their website, the Parkland Institute criticized Stelmach for his moderate decision, noting that between 50 and 60 per cent of "investable oil" is found in Canada. With the rest of the oil located in areas containing high political risk or exploration costs, the institute noted the province could easily raise royalty rates by the full panel recommended levels without adversely affecting production. For their part, the panel's report estimated Alberta's royalty levels would be amongst the lowest in the world even after incorporating all of the recommendations.

Ever since he took over for Ralph Klein in Dec. 2006, Ed Stelmach has seemingly been stuck in King Ralph's long shadow. While changing royalty levels is something that has been needed to be done for a long time, it was also seemingly a calculated move by Stelmach to make his own legacy. Unfortunately, it's been a bit of a misfire. Ralph Klein ruled like a king, throwing out dictates designed to keep Klein's supporters happy and his detractors marginalized. The way Stelmach has gone about doing business, it's impossible for anybody to love him. Seemingly every Albertan has some kind of problem with the royalty review, the way it was conducted or thinks the new system is either too strict (the energy sector) or too lax (everybody else). Despite trying for a middle-of-the-road approach, Stelmach now appears to be biting the hand that feeds to half the province or in the pocket of big business to the other.