CIBC and Oil Royalties

More fascinating stuff from that CIBC report follows:

While many of the big names in the mining and metal processing industry have been spoken for, there are even larger capital inflows potentially still ahead in the energy sector. Thanks to the oil sands, and a still laissez-faire attitude towards ownership of those resources, Canada represents anywhere from 50-60% of the investable oil reserves in the world, depending on whether you consider Nigeria and Kazakhstan open for private investment.

Canada’s vast and accessible oil sands are poised to become the final frontier for private energy investment, contrasting mightily with its geological competitor, the Orinoco oil sands in the effectively nationalized Venezuelan oil patch. As the Alberta oil sands become one of the premiere locations in the globe to increase privately owned oil production, its ownership will increasingly be dominated by the world’s largest oil companies—entailing significant acquisitions of existing Canadian producers.

Debates about resource royalties typically feature a great deal of bumf from oil companies, and sympathetic governments, about how “globally competitive” the oil industry is. Perceived competitive pressures largely explain why, to quote business columnist Eric Reguly, Canada’s “oil and gas royalty rates are among the lowest on the planet.”

However, a highly under-reported fact is that something like 80% of the world’s oil is produced by state-owned companies. Therefore, there is relatively little global competition for the investment from private oil companies that Canada seeks to attract. As CIBC notes, Canada probably hosts a majority of the global reserves that are open to private investment. Presumably, we could use this market power to command higher royalties for the extraction of our non-renewable resources.

When the federal and Alberta governments created an extremely low tax/royalty regime for the oil sands in the 1990s, the argument was that we had to compete with Venezuela’s oil sands for a finite pool of international investment. Now that Venezuela’s oil sands are effectively closed to international investment, we should be able to apply significantly higher taxes and royalties to our oil sands.

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