Main menu:

Posts by Author

History of RPE Thought

Posts by Tag

RSS New from the CCPA

Progressive Bloggers

Meta

Recent Blog Posts

Recent Blog Comments

The Progressive Economics Forum

Getting Over Brad’s Wall of Potash

On Thursday, Saskatchewan Premier Brad Wall said “No” to BHP:

Do we want to add PotashCorp to that list of once-proud Canadian companies that are now under foreign control? . . . It’s our government’s belief that the people of Saskatchewan deserve nothing less than a potash industry unequivocally managed, operated and marketed for the benefit of Canada and Saskatchewan.

Of course, it is still possible that his Conservative counterparts in Ottawa will approve BHP’s bid. That approach would allow the Premier to play to his home crowd without ultimately offending prospective foreign investors. In any case, Wall’s rhetoric leaves essentially no room for the provincial NDP to position itself as tougher or more patriotic regarding Potash Corp.

However, a different opening was apparent on Thursday. Wall quite rightly referred to “the owners of the resource, the people of the Province of Saskatchewan” and “the rent you should be getting for the resource that you own.” But he ruled out actually doing anything to collect a fairer share of potash rents for Saskatchewan people:

We know the affect [sic] on business and the investment climate, on your economy when you’re having royalty shock. When there is a bunch of changes in your royalty structure. We don’t want to do that. Right next door we saw what happened as a result of that.

“Royalty shock” is apparently the hypothesis that Alberta’s energy industry slowed in 2009 not because the price of oil plummeted from $147 to $34 and the price of natural gas dropped from $11 to $3, but because the Alberta government modestly increased the royalty rates that would have applied at the higher prices. It might be worth noting that Saskatchewan potash production also contracted sharply in 2009 when the price of potash collapsed, despite an unchanged royalty regime.

Wall’s position is to maintain the status quo on royalties. Rejecting BHP’s takeover bid would prevent it from writing off Jansen Lake development against Potash Corp profits. Wall’s other scheme, not discussed on Thursday, to extract a one-time “resource transfer tax” from BHP in the event of a takeover would (partially) offset this writeoff.

But just upholding the status quo is not good enough. As I pointed out in The Leader-Post and StarPhoenix, Saskatchewan produced the same amount of potash in 2008 as in 2005. But higher prices increased the value of that production by $4.7 billion. The province’s current royalty regime collected only $1.1 billion of this windfall for the resource owners and then refunded much of that to potash companies in the following year.

The 2009-2010 refund occurred because potash royalties are calculated on a calendar-year basis but reported on a fiscal-year basis. Payments in 2008-09 reflected overly optimistic projections for the 2009 calendar year. Averaging the two calendar years (2008 and 2009), the industry sold seven million tons of K2O for $5.2 billion. That’s $3.0 billion more than the industry got for eight million tons in 2006.

Averaging the two fiscal years (2008-09 and 2009-10), the government collected $590 million in potash royalties, which is $428 million more than it collected in 2006. So, higher prices gave the potash companies an extra $3 billion and the potash owners got one-seventh of it: $428 million.

However you slice it, Saskatchewan could collect substantially more. And lefties like me are not the only people making this point. Murray Mandryk has done so in several columns.

Even the Conference Board made a couple of positive, albeit timid, suggestions to collect more royalty revenue. Jack Mintz, who panned Alberta’s last attempt to raise oil and gas royalties, wrote the following about Saskatchewan’s potash regime: “special treatments enable producers to pay fewer royalties than they would under a better-designed royalty.”

Saskatchewan has ample economic space to increase potash royalties. Since Premier Wall refuses to do so, there is ample political space for the NDP to advocate higher royalties.

Share and Enjoy:
  • Digg
  • Facebook
  • Twitter
  • Google Bookmarks
  • Reddit
  • Tumblr

Comments

Comment from Mark Bigland-Pritchard
Time: October 27, 2010, 9:52 am

Just going off-subject slightly, this is not the only way in which the potash industry is being subsidised by the people of Saskatchewan. The state of the province’s electricity provision is currently such that (owing to a failure to invest seriously in efficiency) any new major potash development (such as Jansen Lake) will require new capacity to be built. SaskPower cite no new generation option with a levelised busbar cost of less than 7cents/kWh – adding on the costs of transmission, distribution and administration makes 10cents/kWh a reasonable assumption for total cost. But what will new potash mines pay? Well, adding the industrial rate of 5.6cents/kWh to a peak demand charge likely to be less than 2cents/kWh, new mines will in reality be paying somewhere between 7 and 8 cents/kWh – i.e. they will be subsidised by the province as a whole.

Comment from George Hambleton
Time: October 27, 2010, 10:18 am

The SaskParty and the NDP are playing nicely with their new BHP toy. Nevertheless, you’re not pleased ? ? ?
What would the SaskParty have to do to please you?
What would the NDP have to do to please you?

Comment from Erin Weir
Time: October 27, 2010, 12:04 pm

They would have to implement or advocate higher royalties.

Comment from Travis Fast
Time: October 27, 2010, 4:54 pm

Ha Ha! Erin you thought you were being reasonable and it turns out without the threat of expropriation you are just playing with a new toy. I agree that the threat of a real change in the royalty regime is necessary but maybe you will only get there through the threat of expropriation.

I am weird that way: I think one’s opening offer should be extreme but possible. You think one should start from a reasonable position and then make concessions from there.

How has that been working for steel? I could pull up the numbers if you would like.

Comment from George Hambleton
Time: November 2, 2010, 1:02 am

The decision to increase the royalty charges on an enterprise that is currently successful is challenging. Right now the Potash Corporation and the Saskatchewan Government are both benefitting from this success. It’s a delicate equilibrium. Deciding to raise the royalties would be a decision far above my pay grade. You may be correct, but it’s difficult to determine the boundary between plucking some tail feathers from the golden goose and wringing its neck.

I’m pleased that you actually identified what the Saskatchewan Party could do to earn your support. It indicates that you are reasonable and not a blinded by a particular ideology.

Comment from Erin Weir
Time: November 2, 2010, 8:41 am

George: I agree that, at some point, it could be difficult to determine whether increasing royalties would leave the industry profitable enough to retain private capital. However, my reading of the numbers is that Saskatchewan could substantially raise potash royalties without getting anywhere near that point.

Travis: I agree that some public ownership in the potash industry, or even the threat of it, could strengthen the government’s bargaining position on royalties. But we need to convince political leaders to want higher royalties before worrying too much about bargaining tactics. The Blakeney government started out trying to increase royalties and established PCS as a Crown corporation only after the private companies responded unreasonably.

We have already discussed some of the (huge) practical challenges for a provincial reacquisition of PCS. However, the floor is open for you to outline an “extreme but possible” proposal.

Write a comment





Related articles