Saskatchewan’s Resource Royalties

Yesterday’s Leader-Post included the following report on my speech to the Saskatchewan Federation of Labour’s annual convention.

My topic, “Is Saskatchewan getting a Fair Return on its Resources?,” may have been poorly timed given the recent crash in resource prices. However, it is important to put this crash in perspective. The current world oil price of around $70/barrel is still far above the $20/barrel price at which oil companies made money for many years. Indeed, $70/barrel was the average world oil price in 2007, a banner year for the petroleum industry.

The value of other Saskatchewan resources has not declined at all. On Thursday, PCS reported that it sold potash for an average of $590/ton in the third quarter of 2008 and has locked in such prices for months to come. Only a few years ago, it was selling potash for fewer than $100/ton. Since all of these prices are denominated in US dollars, today’s lower exchange rate makes them higher in Canadian dollars.

These higher resource prices have expanded Saskatchewan’s economy, but have not fully “trickled down” to the people of Saskatchewan. In 2007, Gross Domestic Product per person was 10% higher in Saskatchewan than in Canada as a whole. However, personal income per person was 10% lower in Saskatchewan than in Canada as a whole. More of the resource-driven economic expansion has gone into corporate profits than employment earnings.

One way to translate higher resource prices into a higher standard of living for Saskatchewan people would be for the provincial government to charge higher resource royalties. It could distribute the additional revenue back to residents directly or through improved public services and infrastructure.

Unfortunately, in an effort to accelerate resource extraction, the provincial government has instead slashed royalty rates. In 2007, Saskatchewan’s resource sales were worth $14.4 billion, but the provincial government collected only $1.8 billon in resource royalties. Since the vast majority of these resources are Crown-owned, it seems to me that the Government of Saskatchewan should be able to collect more than 13% of their value.

Some 80% of Saskatchewan’s resource sales and more than 80% of its royalty revenues come from two commodities: oil and potash. Despite rising prices and falling royalty rates since 2000, Saskatchewan’s oil production has not increased. The petroleum industry appears to have been producing at full capacity in Saskatchewan, which implies that the government could raise royalties somewhat without reducing production.

The following table assumes that the industry needs 150 Canadian dollars per cubic metre (provincial documents use this measure instead of barrels) to generate a healthy profit producing at full capacity. In theory, the Government of Saskatchewan should be able to collect all of the revenue beyond this price. In reality, a more achievable goal might be to collect three-quarters of this surplus revenue.

 Year  2001  2007
 Oil Output (million m3)  24.8  24.8
 Oil Price (C$/m3)  $149.13  $333.89
 Value of Sales (millions of C$)  $3,693  $8,253
 Extra Revenue  –  $4,560
 75% of Extra Revenue  –  $3,420
 2001 Royalties  $478  $478
 Potential Royalties  $478  $3,898
 Actual Royalties  $478  $1,219
 Uncollected Royalties  –  $2,679

The same type of calculation for potash suggests that, in 2007, the government could have collected $1.1 billion instead of $0.3 billion in royalties.


Oil royalties could give $2.7B more

The Leader-Post (Regina)
Saturday, October 25, 2008
Page: D3
Section: Business & Agriculture
Byline: Neil Scott
 
The provincial government could be earning as much as $2.7 billion more per year in oil royalties, according to an economist who spoke Friday at the Saskatchewan Federation of Labour convention in Regina.
Erin Weir, an economist employed by the United Steelworkers Union, said the tax breaks provided to Saskatchewan citizens by the provincial government earlier this week only cost an amount equal to about one-ninth of the revenues lost by the province by not charging oil companies appropriate royalties.
“The government of Saskatchewan has some room to increase oil royalties,” Weir told an audience of more than 600 at the Conexus Arts Centre.

Weir said he believes there was room last year for the provincial government to have charged $2.7 billion more in oil royalties while still leaving oil companies room to make an adequate profit.

The provincial government could also have earned about $800 million more last year by raising potash royalties, Weir said.

Weir dismissed any suggestion that his proposal for higher oil royalties is a radical left-wing proposal. Conservative governments in both Alberta and Newfoundland have squeezed oil companies for more royalties, Weir said.

And Weir said he isn’t especially worried that oil companies will pack up their oil-drilling equipment and leave the province if royalties are raised.

“If Saskatchewan raises its royalties where are they (oil companies) going to go — go back to Alberta?” Weir asked.

Alberta itself raised its oil royalties not too long ago, Weir said, and that move by Alberta opens the door for Saskatchewan to also raise its oil royalties but still remain competitive.

But Weir also conceded there is a potential that higher royalty charges could slow down activity in the Saskatchewan oil patch. That slowdown may be a price worth paying, he said.

“Each barrel of oil we can only sell once, so we better get the best possible price,” he said.

Money raised by increasing resource royalties could be used to provide benefits to Saskatchewan residents in the short term, Weir said.

But the extra money could also be used to pay down the provincial debt and even create a fund of money that could be used by future generations when the province’s resource riches are depleted, Weir said.

While Saskatchewan is now a “have” province in Confederation, Weir said wages paid in the province — despite some increases in the last year or two — continue to lag behind the national average.

Unions, including unions that represent workers in resource industries, have a role to play in pushing for higher wages for the workers they represent, Weir said.

But only a small percentage of Saskatchewan workers are employed directly in resource-based industries, Weir said.

The government has a responsibility to make sure that all people in the province get a fair share of the revenues from the province’s resources, Weir argued.

6 comments

  • Hi Erin. Keep up the good work. A short while ago Bruce Johnstone of the Leader Post wrote that “John Warnock is the only person in Saskatchewan who thinks that the royalties on oil should be raised.” Still stands, as you are only a visitor now.
    You might have seen that the editors went after you today. First, of course, they praise the Romanow and Calvert NDP governments for cutting the royalties. Then they attack the federal government in the early 1980s for playing “tough guy” with the oil industry, which they said led them to flee to the United States. No mention of the period of the Blakeney government when they paid 50% royalties and kept on drilling.

  • Speaking of royalties on Oil, I find yesterday’s action by the Harper crew call into Mr. Obama, as reported by the Globe, as appalling abuse of priorities and totally unrepresentative of Canadians.

    This is an abysmal us of stewardship of our country. The first thing out of our mouth to this new government is Mr Haprer’s best friend;s the oil companies and there pleas too be considered a special interest group.

    Of all the damn idiocy by Harper, I mean really do these oil execs, really feel their needs usurp everybody else’s in the country in issues that need to be addressed.

    What kind of crap is this?

    What hell is Harper, merely a hand maiden to the Oil industry, give us a break. How about taking a back seat for awhile, you would think that these guys are hurting or something. With all the wealth in the country does Harper actually think Obama not going to see through his idiotic lobbying effort.

    We are not talking about Mr. Bush and his oil savy friends anymore.

    Hey Mr. Canadian Oil Man, get to the back of the damn bus would you!

    How about discussing the auto sector instead, an industry that actually employs people and provideshigh paying quality jobs.

    Gee us Canadians are in for a long painfull, Bush like voyage.

    Thankfully he didn’t get a majority, watch as our Haprer led politics start looking retro, when compared to the Obama style politics, and none to soon.

    Who is running this country, oil companies?

    Hell Mr. Harper, we are trying to have a SOCIETY HERE.

    Paul

  • Paul, you should talk to the Liberals. They have the power to take over the government. I expect the other opposition parties would cooperate. They just have to sort themselves out and place the good of Canada ahead of their petty leadership problems.

  • Darwin,

    Although theoretically you are right, I do not think the Bloc and the Liberals could ever form a coalition government.

  • During the beginning of the previous Harper term they had the support of the Bloc without being in a coalition. They where losing support because of it.

    If the Liberal gave the Bloc a public choice between supporting a Conservative government and a Liberal-NDP government I think they would chose the Liberals-NDP.

  • Darwin,

    I will make a post on this over at rppe so we don’t clog this blog post with off-topic commentary.

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