Hunter (2007) and the panel of experts have compiled the report to quantify the main grievance of the people of Alberta, Canada, that the people in this province do not receive a fair share of the oil revenue. Studies by the panel were supported by interviews with Albertans and posts left on the panel’s website and over 66% felt that Albertans are not getting a fair share. The region is rich in natural crude oil deposits and the people feel that as the lands belong to them, the region should be seen more like an investment decision than as an area where crude oil is extracted and exported. Detailed data on the reserves have been provided and it is estimated the reserves are next in quantity to Saudi Arabia. The report has substantiated the claim with extensive data about the different types of oil reserves such as oil sands, conventional oil, and natural gas and recommends that the current share of Alberta from the three reserves, which is beneficial towards the developers, should be changed so that Albertans get an increased share of 20% in 2006, 26% in 2010 and 37% by 2016. The report claims that if the recommendations were implemented, the government would have about 2 billion dollars extra as funds. In the report, Hunter has agreed that developers must be duly compensated for their efforts and financial investments, especially in the oil sands oil recovery areas, where a significant financial outlay is required for the project to get started. However, the authors suggest that the income must be fairly distributed between the producers and the people of Alberta. The report has dealt separately with all the three types of natural oil resources and has adopted a differential model that takes into account the current market price, justified returns to the developers, and the fair share that must be given to the Albertans.
While comparing the total government takes in Alberta with other jurisdictions, the report has used computer simulation project analysis models that are used to estimate the total government takes from the oil and gas activities. Data from different oil and gas producing regions have been mapped for each type of reserve and a total of three charts have been created. Reference areas used for comparison mapping are New Mexico, Texas, Wyoming, Colorado, California, and three areas of Alberta. In each case, the take of the respective governments in the region and the developers have been computed. The report has argued that treating royalties as costs, has resulted in the METR for conventional oil and natural gas in Alberta are lower than other industries and such a practice leads to sharp erosion of royalties.
The report has made several recommendations in areas such as rentals, base royalty, net revenue royalty, corporate income tax, and accelerated capital cost difference, oil sands severance tax, grandfathering, bitumen pricing, upgrade royalty credit, etc. While the issues for conventional oil sources and natural gas are more transparent since they can be benchmarked against other areas, the oil sand reserves are the cause for much dissatisfaction. For the oil sands, the panel has suggested that the royalties be increased from the current 16.8% to 31.8 %. For rentals, the panel has suggested that the current system of a 20 year grace period for developing oil sands be reduced to 6 years as this will bring pressure on the developers and more revenue for the government. The current base royalty of 1% for the pre-payout should be retained while for the post-payout period; it should become a deduction in the calculation of the net revenue royalty. The current post payout royalty of 25% should be increased to 33%. The panel has recommended the elimination of the preferential treatment for provincial ACCA should be removed. The Oil sands severance tax should be zero for WTI prices that are less than 40$ per barrel; 1% at 40$/ barrel and increasing by 0.1% for each $1/ barrel price rise and a maximum of 9% at 120$/ barrel. Taking a severe view of the loophole that the upgrader act, the panel recommends that under section 41 of the Canadian Income Tax Act, qualifying costs should only be allowed for costs that are shared between or incurred for the actual process of upgrading bitumen.
The report has also suggested that the government should be held accountable for collecting the economic rent and the monies that are generated should be used to increase the quality of life of Albertans, provide them tax cuts, create jobs, improve the infrastructure, and so on. The report also urges transparency in governmental operations and suggests that information about the data collected should be made public.
From the analysis and recommendation presented in the report, the implications for the foreign developers are deep. The major developers are vast oil companies with major oil wells in different regions and they would have to ensure that there is parity in the way wealth is distributed in the Albertan community and the manner it is done worldwide. The increase in royalties of up to 33% would mean that their profits would go down. The recommendations for income tax would deduction would mean that expenses declared for oil sand upgrade would have to be used for this purpose only and this would require the developers to invest in new technology. Since recommendations for rentals have suggested a reduction of the 20 year grace period for developing oil sands be reduced to 6 years, developers need to take up work in the oil sand regions and this would mean that more investment has to be made in the low revenue yield areas of oil sands. To make profits, the rate of oil must be 60 USD per barrel and since the oil prices fluctuate, the financial risk and exposure of the developers are increased.
References
Hunter William H. (2007). Report of the Alberta Royalty Review panel. Web.