The Case for Boosting Oil and Gas Royalties |
I write to question the government of Saskatchewan's recent decision to lower its oil and gas royalties.
In effect, this reduces the price that firms must pay the province to exploit its fossil-fuel reserves. In announcing this policy, the provincial government suggested that lower royalties would stimulate so much additional economic activity as to increase provincial revenues. While there is no doubt that these changes will expand the petroleum sector by making new investment in it more profitable, it is wildly optimistic to believe that this will raise provincial revenues.
Figures from the Saskatchewan Mineral Statistics Yearbook, expressed in constant 2000 dollars, paint a much different picture.
Between 1975 and 1982, Saskatchewan's oil and gas sales averaged $1,705 million per year. During this period, the government of Premier Allan Blakeney collected an average of $848 million (or 50% of the value of sales) per year in oil and gas royalties.
Between 1983 and 1991, oil and gas sales amounted to $2,387 million per year, and the government of Premier Grant Devine collected an annual average of $640 million (or 27% of sales) in royalties.
Between 1992 and 2000, sales were $3,264 million per year, and the government of Premier Roy Romanow collected only $567 million (or 17% of sales) per year in royalties.
These figures show that, over the past quarter-century, dramatic reductions in provincial royalty rates have facilitated a massive expansion of Saskatchewan's oil and gas sector. However, this growth has not increased provincial oil and gas revenues.
On the contrary, lower royalty rates have meant significantly lower royalty revenues.
In effect, Saskatchewan people financed industry expansion during the Devine and Romanow periods by forgoing millions of dollars of royalty revenues every year. The royalty reductions announced by Premier Lorne Calvert will affect a further transfer of funds from the people of Saskatchewan to oil companies.
While increased profits will generate additional corporate tax revenue, it will be a fraction of lost royalty revenue since corporate tax rates are much lower than royalty rates.
The provincial government also argues that increased industry activity will create many jobs in Saskatchewan. However, the number of jobs created in the petroleum industry by forgoing royalty revenues will be limited by the fact that its operations are highly capital-intensive and largely headquartered outside the province.
Collecting these revenues and transferring them to other areas of Saskatchewan's economy by lowering taxes or increasing public expenditures would have created many more jobs. Reducing royalties is therefore likely to eliminate more jobs than it creates.
To implement the Kyoto Accord, the government of Canada will have to tax or restrict the emission of greenhouse gases. Given this, one wonders why the government of Saskatchewan has embarked on an economic development strategy of increasing the volume of Saskatchewan's oil and gas output and the associated greenhouse-gas emissions.
The Kyoto Accord creates a regime under which it would be more appropriate to increase royalties with the aim of extracting more revenue from a reduced volume of oil and gas production.
These facts throw into question the government of Saskatchewan's policy of accelerating the depletion of the province's finite reserves of oil and gas for the sake of increased industry activity. Instead, the provincial government should consider raising royalties to maximize the return that Saskatchewan people receive from the exploitation of their non-renewable resources.
This approach would generate the provincial revenues needed to expand and diversify Saskatchewan's economy.
ERIN WEIR
Weir is a Regina resident currently attending university in Calgary.
Calgary