Resource Royalties and Taxes : The Record of Saskatchewan | The Persistence of Neo-Colonialism
Resources, Empire and Labour
Crisis, Lessons and Alternatives
The interconnections of natural resources, empire and labour run through the most central and conflict-ridden crises of our times: war, environmental degradation, impoverishment and plutocracy. Crucial to understand and to change the conditions that give rise to these crises is the critical study of resource development and, more broadly, the resources question, which is the subject of this volume.
Intended for researchers, students and activists, the chapters in Resources, Empire and Labour illuminate key aspects of the resources question from a variety of angles through concrete analyses and histories focused on the extractive industries (mining, oil, gas) by examining such issues as: resource-dependency at the international, country and regional levels; the neglected role of metropolitanization; environmental impacts and limits; the colonial basis of and imperial patterns in today’s globalized resource exploitation system; lessons of Indigenous and working-class resistance to corporation resource extraction; the importance of democratic control and public ownership; new avenues in shifting the debate on resources and hinterlands.
Saskatchewan's Resource Royalties
By John W. Warnock
The Leader Post
October 3, 2011
There has been some discussion recently about the rate of return the people of Saskatchewan receive for the extraction and sale of our non-renewable natural resources. Unfortunately, our governments have not informed the general public on this issue. How does the province compare to other political jurisdictions which are dependent on resource extraction?
Commonly, the term “royalties” is used to describe the return to the owners of the resources, but all political jurisdictions use a variety of policy tools. We can get a general picture of our situation by looking at the total effective rate of return in a few mining jurisdictions, using a model prepared by the World Bank:
South Africa 45.0%
The Philippines 45.3%
How does Saskatchewan compare? The Ministry of Energy and Resources reports that over the past ten years the total of royalties and taxes on the potash industry have averaged 10.8% of revenues. For the uranium industry, the return to the public has been 9.8% of revenues.
The most valuable mineral in today’s economy is petroleum. Around the world, since achieving independence from their colonial masters, the major producing countries raised their royalty rates and then created state-owned National Oil Companies to enable the capture of all the profits from extraction and use. Today 90% of the conventional oil reserves are found in countries where National Oil Companies have complete control of the industry. In many of these countries privately-owned Independent Oil Companies operate on a joint venture basis.
We can get an idea of the general state of the industry by looking at the share of oil revenues collected by governments in several jurisdictions, reported by the U.S. Government Accountability Office and cited by Andrew Nikiforuk in his recent book, Tar Sands.
United Kingdom 52%
How does Saskatchewan compare? The Ministry of Energy and Resources reports that over the past ten years all returns to the province from the extraction of crude oil have averaged 15.2% of industry revenues. The present royalty structure was set by the NDP governments of Roy Romanow and Lorne Calvert.
This apparently low level of return to the people of the province was not always the case. During the NDP government headed by Allan Blakeney (1971-82) oil royalties and taxes were raised to over 50% of industry revenues. The expansion of Crown corporations in the area of resource extraction by the Blakeney government proved that the people of Saskatchewan are just as capable as the people of Kazakstan.
A notable success was the development of the natural gas industry. Under the CCF government of T.C. Douglas, ownership and control of the industry was given to the Saskatchewan Power Corporation. Like all other state enterprises in the field, they searched the geophysical data, bid and acquired land claims to develop resources, paid their fees and royalties to the province, and hired service companies to develop the resource. They acquired large reserves in Alberta. This was deemed a prudent policy given the fact of our climate and the necessity of providing energy to home owners and industries in the province. This highly successful business, owned and operated by the people of the province, was privatized by the Romanow and Calvert NDP governments.
Our governments, political parties and the transnational corporations that dominate our resource sector may be satisfied with the status quo. But at the very least, the general public has a right to a complete and open examination of this vital sector of our economy.
John W. Warnock is retired from teaching political economy and sociology at the University of Regina.
Who is Getting the Oil Profits?
By John W. Warnock
April 24, 2008
In early April the international price for WTI crude rose to $110 per barrel. The price of gasoline was $1.23 for a litre. Oil corporations are reporting record profits. Land sales for exploration and development rights for oil are at an all time high in Saskatchewan. What’s happening?
At a recent conference in Washington sponsored by the U.S. Department of Energy, experts argued that the world production of conventional crude oil peaked in May 2005 at 74 million barrels a day. The gap to the current production level of 88 million barrels a day is now being filled by much more expensive and difficult to access non-conventional sources.
Of the remaining oil reserves, 77% are controlled by producing countries with state-owned National Oil Companies (NOCs) where the privately owned International Oil Companies (IOCs) are excluded. Another 11% of reserves are in countries with NOCs where the private companies have some access through production sharing agreements. Russia has six percent of the remaining reserves and is re-establishing state-ownership and control. Only seven percent of the remaining world reserves of crude oil are in countries like Canada where the IOCs have full access to the resource.
Thus the large private oil corporations are having a difficult time finding new reserves. Talisman, for example, has seen the price of its stock drop due to the fact that its reserves are primarily found in mature areas with declining supply and production.
As the industry moves to non-conventional sources of oil and gas, costs rise. In the 1990s it cost oil corporations around $6 to extract a barrel of oil in western Canada. This has now risen to around $15. The average in the Alberta tar sands is now between $20 and $25.
The Western Canada Sedimentary Basin is a mature area for the production of oil and gas. Conventional oil and gas production peaked around 1972 and has been declining. The average productivity of an oil well in the WCSB has dropped from 33 barrels per day in 1994 to 18 in 2003. In 2007 the average oil well in Alberta produced only 12 barrels per day. New gas wells are much smaller and quickly depleted. This is the major reason that the oil corporations are looking elsewhere for new reserves.
All around the world oil producing countries are raising royalties and taxes in an effort to capture more of the economic rent (monopoly profit) that is accruing to the industry. Even in libertarian Republican Alaska the government is raising the basic royalty on oil from 22.5% to 25% and eliminating many of the key deductions and subsidies.
In Newfoundland in the offshore Hibernia field the federal government gets 32% of revenues and the provincial government 8%. In the White Rose field the federal government gets 33% and the province 11%. Under Danny Williams’ new royalty system for White Rose the federal government will get 37.5% and the province 25%. Husky Oil and Petro Canada are rushing to invest there, hiring a new offshore rig which will cost them $1 million per day.
Petro-Canada complained when the government of Alberta decided to raise its royalties back to the 20% -25% range required under provincial legislation. They are moving their capital to Libya. They will pay a $1 billion “signature bonus” to the Libyan National Oil Company. All new developments will be 50-50 partnerships with the NOC. But when it comes to sharing the oil produced, 88% will go to Libya and only 12% to Petro Canada.
In contrast to the general world wide trend, recent governments in Saskatchewan have emphasized maximizing the return to the private corporations and minimizing the return to the people of the province. Between 1991 and 2007 the province collected only 17% of the revenues from the sale of our oil. This is a dramatic change in policy since the 1970s and early 1980s when our government collected over 50% of the revenues. The second basic policy is that Saskatchewan should export our oil and natural gas to the United States as fast as possible. In contrast to Alberta, there is no public debate or discussion in this province. We can thank the NDP for that.
John W. Warnock is author of Selling the Family Silver published by the Parkland Institute and CCPA-SK in November 2006.
Resource Royalties in Alberta and Saskatchewan
by John W. Warnock
October 30, 2007
On October 25 Alberta Premier Ed Stelmach released his government’s position on new royalties for the oil and gas industry. Increases were announced, but they were lower than those recommended by the government-appointed panel of inquiry. The oil industry did not want any increases. The general public wanted major increases.
In response to public demands, outgoing Premier Ralph Klein had appointed an independent commission to look at oil and gas revenues in the province. It held public hearings. The panel’s report called for increases in royalties in the range of 20%, which would have brought the provincial government an estimated additional $2 billion in revenues.
The opposition Liberal Party said the 20% increase was the absolute lowest increase that was acceptable. The NDP urged higher royalty rates. The Alberta Federation of Labour insisted on higher rates and argued that if the Stelmach government did not carry through they would make resource royalties a key issue in the upcoming provincial election.
The Parkland Institute argued that natural resources are owned by the people of Alberta. The province allows the private corporations to extract and use the oil and gas to make a profit. It argued that all the economic rent, the excess or monopoly profits, should go to the people as a whole. The private investors were only entitled to a normal rate of profit. Over the past several years the price of oil had risen from $20 a barrel to over $90 and the corporations have been making huge monopoly profits. This is reflected in their record profits and bloated retained earnings.
So what about Saskatchewan? While prices of oil, potash and uranium have been skyrocketing, the NDP government has been cutting royalties and taxes. The opposition Saskatchewan Party and Liberal Party are on side. The Saskatchewan Federation of Labour has been silent on this issue while arguing for additional taxpayer subsidies for Weyerhaeuser Corporation. The NDP government says it is not interested in opening a debate on resource royalties. The mass media agrees. We have a consensus in Saskatchewan among those whose opinion counts.
Saskatchewan’s resource industries are all dominated by large transnational corporations. Even the large Canadian oil corporations trade their stock on the New York market and are majority owned by American investors. Saskatchewan’s political and business leaders agree it is better for the economic rent from exploitation of our resources to go to the United States than to the provincial government treasury.
John W. Warnock is author of Selling the Family Silver: Oil and Gas Royalties, Corporate Profits, and the Disregarded Public, published by the Parkland Institute and CCPA Saskatchewan in 2006.
Hike Royalties and Start Debate on Them
by John W. Warnock
June 27, 2007
All the political posturing on equalization by the Calvert government is designed to divert the attention of the public from their policy on the extraction of our natural resources, and in particular oil and natural gas.
The NDP government has consistently pursued two policies since 1991. First, the province will do everything in its power to promote and enhance the export of our oil and gas to the United States, as fast as possible. There is no regard for the finite nature of these non-renewable resources nor our future needs.
The United States, with five percent of the world’s population, consumes 25 percent of the world’s energy. Saskatchewan extracts around 152 million barrels of oil per year, and over 70 percent of that is exported to the United States. The U.S. armed forces alone consume 124 million barrels of oil per year, more than the annual consumption of Sweden.
The second policy is to try to maximize the profits of the oil and gas corporations operating in Saskatchewan. All kinds of direct subsidies are offered to the industry. But the key factor has been the steady reduction of royalties and taxes imposed on the industry. During the NDP government of Allan Blakeney (1971-82), the government took a number of steps to increase the returns to the province from the private exploitation of our natural resources. In the period from 1979-82, provincial revenues from the exploitation of oil averaged 56 percent of the value of sales, which was roughly the general level found in most other oil producing areas around the world.
Grant Devine’s government (1982-91) reversed this policy and began to reduce the royalties and taxes on the industry. The Tory policy was continued by the NDP governments of Roy Romanow and Lorne Calvert. While oil prices were rising, the Calvert government continued to reduce royalties. In this period of obscene profits by the oil and gas corporations, the province now only collects around 16 percent of the value of the extraction of oil.
All the bluster over equalization, and the demand to exempt the oil and gas industry from the formula used to determine a province’s “fiscal capacity”, is an attempt to head off any debate over natural resource policy. How many people know that the royalties and taxes collected from this industry in Saskatchewan are the lowest in the world? That even the Alberta Tory government receives between 20 and 25 percent of oil sales? The OPEC countries in the Middle East and Mexico collect close to 100 percent of the value of the extraction of oil. Libya collects around 80 percent. Norway collects around 78 percent. Venezuela collects around 65 percent. Russia collects 90 percent of the value of oil sales above $25 per barrel. Kazakhstan collects 80 percent. Even Alaska, with its right wing Republican governments, collects around 25 percent.
It seems that we are about to elect a Saskatchewan Party government. If so, it will just be more of the same.
John W. Warnock is a Regina political economist and author of Selling the Family Silver: Oil and Gas Royalties, Corporate Profits, and the Disregarded Public, published by the Parkland Institute and the Canadian Centre for Policy Alternatives (November 2006).
Is Lorne Calvert Right on Equalization?
Canadian Dimension Magazine
Premier Lorne Calvert, backed by Jack Layton, leader of the federal NDP, insists that Stephen Harper has broken an election promise to Saskatchewan to exclude revenues from natural resources as part of the formula designed to determine which provinces should receive equalization payments from the federal government as a “have not” province. Ralph Goodale, the former Liberal Minister of Finance, also insists that the Harper government has broken a solemn promise to the province. This does appear to be the case. But this political tactic serves the purpose of dodging the more important question: What is the purpose of equalization payments, and how should they be determined?
Of course we all know that politicians regularly break election promises. In 1984 Brian Mulroney campaigned that he would end political patronage in Ottawa. In 1993 Jean Chretien promised to renegotiate NAFTA and to repeal the GST. Some will remember that in the 1991 provincial election Roy Romanow and the NDP promised to end poverty and close all food banks in their first term of office, which would have cost the province around $350 million. They also pledged to stop cutting royalties on the extraction of natural resources and begin raising them back to the levels they were under the government of Allan Blakeney. Had they reversed the cuts to resource royalties they would have had more than enough revenues to eliminate poverty. A second question that should be asked is who would benefit from the exclusion of natural resources from the equalization formula?
What is equalization?
During the Great Depression of the 1930s a number of provinces, including Saskatchewan, faced financial bankruptcy and had to be bailed out by the federal government. Under the BNA Act, provinces were given the responsibility for the key areas of education, health and social services, but they were not given the taxing authority to carry out this mandate. Furthermore, many of the less industrialized provinces, including Saskatchewan, did not have the economic base to provide services equal to those available in the more prosperous areas of the country.
In 1937 Mackenzie King’s Liberal government created the Royal Commission on Dominion-Provincial Relations, better known as the Rowell-Sirois Commission after its two chairmen. Unlike other Royal Commissions, this one held hearings all across Canada, even in small towns. A wide variety of people gave evidence at these hearings, not just “stakeholders.” Furthermore, the commissioners actually listened to what the people told them. Their report recommended that the federal government adopt a system of “National Adjustment Grants” provided to a provincial government whenever it “could not supply Canadian average standards of service and balance its budget without taxation (provincial and municipal) appreciably exceeding the national average in relation to income.” This was necessary in order to guarantee “a national minimum standard of social services” across Canada. John Diefenbaker’s government gave strong support to this policy in 1957, and it was included in the Constitution Act of 1982.
The people of Canada told the Rowell-Sirois Commission that family, friends and community were very important. People should not be penalized because they live in rural and remote communities or hinterland provinces. Canadians demanded at least equality of opportunity if not social justice. The goals of the equalization program were to reduce regional disparities, create national standards for basic public services, assist the mobility of people across provincial borders, create a sense of Canadian identity, and even share the wealth across provincial borders. It was also established that basic public services should be considered a citizenship right. This set Canadian confederation off from that of the United States. These principles have always been opposed by those who insist that we should allow the economic free market to determine what is best for all of us.
Creating a formula for equalization grants
Implementing these principles has been difficult. However, from the beginning it was agreed that in creating a formula for federal equalization grants the criteria should be the “fiscal capacity” of all provincial governments to raise revenues through taxation. To be fair, all potential sources of revenues must be included. Under the existing formula, thirty-three sources of revenues are covered, including most resource revenues.
There are some exceptions. Water is excluded because it is almost always given to industry as a free subsidy, as in the development of the Alberta tar sands. This was a policy demanded by big business and granted by our governments. Rents for water use and hydro power are not adequately assessed, as they usually take the form of a general subsidy to consumers through low rates and special low rates for industrial enterprises. This exclusion from the equalization formula creates a disparity as it greatly benefits Manitoba, Quebec and British Columbia, which have extensive water and hydroelectric resources. This is an obvious fault in the program.
Natural resources and equalization
Almost every country in the world regards natural resources as a national resource. This is logical and fair because the geographic placement of natural resources is an outcome of nature and not human endeavor. The failure to take that position in Canada has led to significant political and economic problems. To exclude non-renewable natural resources from equalization would completely undermine the basic principles of equalization. All provinces have some capacity for raising revenues from the taxation of natural resources, and do so. In Saskatchewan, all revenues from the extraction of natural resources go into general government revenues. They are treated just like any other revenue.
The application of any equalization formula is a difficult political task. For example, when Lorne Calvert’s NDP government reduces taxes on corporations and people with high incomes, should this loss of government revenue be offset by equalization grants from Ottawa?
The position of the Calvert government
During the NDP government of Allan Blakeney resource royalties and taxes were increased. Saskatchewan became a “have province” and for a few years did not receive equalization payments. The last three provincial governments have all steadily reduced the royalties and taxes on the use of natural resources. This policy has been warmly received by the owners of the corporations who extract our resources, for their income and profits have greatly increased. Of course, this policy has reduced provincial revenues. But is it fair that this pro-business policy be offset by equalization grants from the federal treasury?
On a number of occasions officials in the NDP government, including then Finance Minister Janice MacKinnon, have told me that they had no intention of raising royalties and taxes on natural resources back up to the levels they were during the Blakeney government. They could instead get roughly equivalent revenues from the federal government under the equalization program.
However, the federal government is not that stupid. In 1994 they introduced an amendment to the equalization program called the “Generic Solution.” This was specifically designed to deal with the Saskatchewan policy, the “distortion” of the program which occurs when a province reduces its tax rates knowing that equalization grants would provide compensation.
In January 2003 the NDP government feigned surprise when there was a reduction in the equalization grant from Ottawa. Instead of continuing to assess Saskatchewan’s mining tax base on the value of mineral production, it shifted to the use of “net profits.” Saskatchewan’s mines produced 13 percent of total Canadian mineral sales but 55 percent of mining company profits. This was a result of the steady reduction of provincial royalties and taxes on the mining industry.
There is no money tree in Ottawa. Equalization payments come from the taxes we all pay to the federal government, most notably income taxes and the GST. The policy of the NDP government has been to cut the royalties and taxes on corporations extracting our resources and instead collect revenues from federal equalization payments. Now that the boom in resource prices has produced enough additional revenue to make Saskatchewan a “have province” under the equalization formula, the Calvert government is insisting that natural resources be eliminated from the formula so that the province can collect another $800 million from the federal treasury. This policy of taking from the poor and giving to the rich does not serve us well.
John W. Warnock is a Regina political economist and author of Saskatchewan: The Roots of Discontent and Protest (2004).
The Saskatchewan Budget and Resource Royalties
by John W. Warnock
Canadian Centre for Policy Alternatives - Saskatchewan
Prepared for Saskatchewan Alternative Budget
This is an election year for Saskatchewan. To no one’s surprise, Lorne Calvert’s NDP government brought in a budget that increases spending by about 1.5%. However, the estimated revenues will not cover the additional expenditures, so the government has chosen to withdraw around $700 million from the Fiscal Stabilization Fund, which is little more than a line of credit. This has brought howls of protest from the usual sources and charges that the budget is "unsustainable."
Total government spending in Canada has been declining in recent years. As a percentage of the gross domestic product, it has fallen from 52.3% in 1992 to 39.5% in 2006. In Saskatchewan government expenditures have fallen from 22.7% of provincial GDP in 1994 to 20.6% in 2004.
Over the past 20 years federal and provincial governments have been steadily cutting taxes, particularly taxes on corporations and those in the higher income brackets.
When major sources of taxation are cut then either programs have to be cut or revenues have to be raised from other sources. In Saskatchewan we have seen both program cuts and a shift to consumption taxes, fees for services and property taxes.
While some business organizations and the Canadian Taxpayers Federation are complaining about government expenditures and demanding even more tax cuts, other sectors of our society have different complaints. Property taxes are among the highest in Canada. Schools are being closed. Municipalities and school boards are complaining that provincial grants have been cut drastically since the days of Allan Blakeney's NDP government (1971-82). There are long waiting lists to enroll in most of the programs offered by SIAST. The tuition at our two universities, once the lowest in Canada, is now near the top. There are waiting lists for many medical services and serious shortages of nurses. Social assistance rates are now well below the basic needs level. The province is desperately short of decent affordable and social housing. Seniors cannot afford to buy new glasses, get their teeth fixed, acquire hearing aids and are hit hard when they have to take an ambulance to go to this hospital. Everyone is complaining about the sad state of our roads. And the list goes on.
Revenues from resource extraction
In all the discussion of the budget by our politicians and media commentators, no one has brought up the major issue of revenues from resource extraction. Without capturing a fair return from the extraction of our resources, most of which are non-renewable, we cannot pay for the government services we desire. In the past when we had good services, we also had higher royalties, fees and taxes on the extraction of our resources. The cuts in resources royalties and taxes have been welcomed by the transnational corporations that extract these resources, but they have left the province with a high debt and diminished services. We can get an overview of the loss of resource revenues by looking briefly at each sector.
The royalties (stumpage fees) paid to the province for massive clear cutting our forests are probably the lowest in the world. The cost of wood to the forestry firms is the lowest in Canada. Under the 1999 Forest Resources Management Act, royalties on softwood large enough to be used to make lumber is set at $2 per cubic metre of wood. Corporations cutting similar wood in Montana pay around $30 per cubic metre. The stumpage fee for smaller wood used to make fibre boards and pulp is only between $.75 and $1.00 per cubic metre. The stumpage fees collected do not begin to cover the costs that the Ministry of the Environment undertakes to serve the industry and protect the forests. The province takes in more revenues from hunting and fishing licenses than it does from stumpage fees.
Between 1975 and 1981 royalties received from the extraction of potash were 24% of sales. In addition, we also benefitted from earning the profits from the Potash Corporation of Saskatchewan, a Crown corporation now privatized. In the period between 2000 and 2006 royalties were only 10% of sales. Potash sales began a steady increase in 2001, reflecting the growing world demand for fertilizer for the production of food. Over the past two years prices have risen by over $80 per tonne. The private potash corporations report that since 2003 their gross margins have almost tripled. Yet in 2003 and 2005 Lorne Calvert’s NDP government reduced the royalties on the potash industry and provided a range of other subsidies.
While uranium has been a very important export mineral, since the beginning the province has received precious little from its extraction. Royalties were always set at a very low rate. The return to the province increased during the Blakeney government through joint ventures between the Saskatchewan Mining and Development Corporation, a Crown corporation, and the major private corporations. However, this return ended when SMDC was transformed into Cameco Corporation and privatized by the Tory government of Grant Devine (1982-91) and the NDP government headed by Roy Romanow (1991-2002).
Uranium prices were low after 1978 due to the freeze on the building of new nuclear power plants, rarely exceeding $15 per pound. Nevertheless, annual consumption of uranium has exceeded production for over the last 25 years. The gap was filled by the reprocessing of Soviet nuclear weapons. But this source diminished and has now ended. India and China began to build nuclear power plants, and the price for uranium began to rise. To everyone’s surprise, right at this moment the NDP government decided to further reduce the royalties paid to the province. The price of a pound of uranium rose to $20 in 2004, $26 in 2005, and $45 in 2006. By March 2007 the price had risen to $95 per pound. Profits for the uranium corporations rose dramatically. The 35 biggest uranium corporations reported an average return on investment of 90 percent over 2006-7! But very little of this market value has gone to the people of Saskatchewan.
(4) Natural gas.
The volume of natural gas extracted and exported to the United States and Eastern Canada has risen dramatically from 1987 to the present. The market value of Saskatchewan production rose from $166 million in 1987 to $2.1 billion in 2005. However, North America has entered the era of “peak oil,” and natural gas production peaked in the Western Canada Sedimentary Basin in 2004. The average production from a natural gas well fell from 65 BOE in 1995 to 30 BOE in 2004. Natural Resources Canada estimates that Saskatchewan production will fall from 261 billion cubic feet in 2005 to only 70 billion cubic feet in 2020. We are fast running out of natural gas.
Royalties from natural gas extraction in Saskatchewan have been very low by world standards; since 2001 they have averaged around 13% of sales. Most producing countries around the world get a return of at least 50%. Bolivia, for example, gets between 50% and 82%, depending on the natural gas field. The economic rent (surplus profit) from natural gas and oil production is mainly captured by producing countries through the use of state owned corporations, production sharing agreements, and a variety of excess profits taxes. We no longer use any of those fiscal tools in Saskatchewan.
The production and export of oil has greatly increased in recent years. In 1991 78.1 million barrels were extracted in Saskatchewan, and this rose to 153.7 million barrels in 2003. The value of sales over this period has risen from $1.2 billion to $4.8 billion.
In the past, the government of Saskatchewan used royalties to try to capture some of the economic rent from the extraction of petroleum. During the last two terms of the NDP government of Allan Blakeney (1976-82), petroleum royalties received by the province represented 51% of sales. In the period from 2000-06, the royalties we received fell to only 16% of sales. As the international price for oil rose from $40 to $70 per barrel, so did economic rent. In spite of the windfall profits going to the oil corporations, in 2002 and 2005 the NDP government of Lorne Calvert reduced royalties and taxes on the industry. All the governments in the world’s other oil producing countries were raising royalties, fees and taxes to increase their share of the windfall profits. Many governments were also expanding the role of their state owned oil corporations. But no governments in Canada were moving to defend the public interest. It was as if the oil industry were actually running the government.
There is a “gentlemen’s agreement” among the major political parties, the large transnational organizations which control the resource sector, and the mass media that there should be no public discussion of natural resources, their extraction, and resource royalties and economic rent. Business as usual is to continue. Only the small Green Party wants a major public discussion, and they have very little influence in the province.
However, the general concern over loss of public services and increases in regressive taxes cannot be resolved without confronting the current unacceptable situation in our resource industries. Even in Alberta, where the political right and the oil companies have totally dominated for many years, there is a formal public inquiry now under way into the level of royalties and taxes paid by the oil industry.
John W. Warnock is a Regina political economist, author, and research associate with the Canadian Centre for Policy Alternatives - Saskachewan.
Capturing Revenues from Resource Extraction
Energy Security and Climate Change
Cy Gonick, editor
Winnipeg: Fernwood Publishing, 2007.
pp. 69 - 76.
Extract from Chapter by John W. Warnock:
Economic rent is identified with the extraction and use of natural resources. The most widely cited liberal definition of economic rent was set forth by David Ricardo (1772-1823). This is the concept which is presently used by economists, resource industries and governments. Economic rent is the surplus that is created by the use of a natural resource over and above what is necessary to keep labour and capital on the land and producing products. These costs include a normal profit. Under a condition of perfect competition, there is no economic rent. Economic rent is created only when the exploitation of a natural resource like oil or gas produces a return that is over and above the normal rate of return in a competitive market. It is a monopoly profit or an excess profit.
The oil and gas industry
Within the oil and gas industry today, economic rent is generally defined as the difference between the cost of exploration, field development, extraction, royalties and fees and the market price. These costs include a normal rate of return on investment. While the normal return on equity in Canada is around 4.5%, the oil and gas industry insists that a 12% return is needed to attract capital investment because of various “risks.” In this industry there has always been a very large economic rent and an ongoing political struggle over what share of that surplus profit should go to the private corporations and what share should go to the government.
Therefore, in a democratic society, governments should be seeking to maximize their share of the economic rent, or excess profits, over the life of any resource development project. All governments also want to have a steady and predictable revenue so that they can plan for government expenditures. A democratic government would be expected to place a high priority on developing policies which guarantee that the economic rent is re-invested in the local area or province. If this does not happen, resource development results in boom and bust communities. A socially responsible democratic government also aims to have a large share of the benefits from resource development accruing to local indigenous populations.
Royalties and bonus fees are a cost of production – a payment to society as a whole for the use of resources which belong to all the people. In order to stimulate production, governments have on occasion introduced very low royalties. The social democratic government in Venezuela in the late 1990s lowered the royalty rate to only one percent. The government of Alberta has set the royalty rate in the tar stands at only one percent until the corporations have recovered all of their capital investments. (Mommer, 2002)
In the 1970s Allan Blakeney’s NDP government in Saskatchewan raised royalties significantly in order to capture a greater share of resource revenues from the extraction of oil and gas. Between 1976 and 1982 royalties averaged 52% of oil sales. This has been reduced to only 16% under the present NDP government headed by Lorne Calvert. The current figure is not out of line with royalties charged around the world. It is widely understood that royalties are not the appropriate government tool to capture economic rent. (Warnock, 2005)
Capturing economic rent: an example from Saskatchewan
In Saskatchewan reserves of light crude and medium crude are in steady decline, as is the case across the Western Canada Sedimentary Basin (WCSB). The decline in these higher priced and more valuable sources is being replaced by heavy crude, which is more costly to extract and process. Technological innovations, including horizontal drilling, have actually reduced the costs of drilling wells on the Canadian prairies. The industry also benefits from federal and provincial subsidies and supports, very low royalties and tax rates, a good drilling environment, local refineries, and a pipeline system to the most important world market. (Canadian Energy Research Institute, 2005)
What market price is necessary to produce a viable oil industry on the Canadian prairies? In 2004 the Canadian Energy Research Institute (CERI) reported that for new tar sands projects a “West Texas Intermediate price of US$25 per barrel would enable an oil sands project developer to cover all costs and earn a 10% return on investment.” In 2003 the National Energy Board concluded that “a price of US$22 per barrel provides adequate returns to support investment in the oil sands and offshore oil development.” (Dunbar, 2004; National Energy Board, July 2003)
The cost of extracting heavy oil in Saskatchewan is below that incurred in the off shore and tar sands industries. In 2003 Li Ka-shing, the Hong Kong owner of Husky Oil, stated that the Lloydminister Heavy Oil Upgrader was profitable when the price of West Texas Intermediate (WTI) light crude was $18 per barrel. In 2002 Saskatchewan Energy and Mines reported that “reasonable levels of conventional activity can be maintained at the WTI price in excess of US$20 per barrel.”(Saskatchewan Energy and Mines, Oil in Saskatchewan, 2002)
In 2005 the average price of light and medium crude extracted in Saskatchewan was $68 per barrel. But heavy oil has a discount price from light crude oil, in recent years around 30%. The price of Hardisty Crude Oil at Bow River (heavy oil) has gone from $25 a barrel in 2001 to $38 in 2004 and $46 in 2005. So how much economic rent is captured from the extraction of heavy oil in Saskatchewan?
It is very difficult to determine the profitability of the oil and gas industry. Their data is not made public. They also have a range of methods of transfer pricing plus all the major corporations use off shore tax havens. The public is forced to depend on the data provided by the Canadian Association of Petroleum Producers (CAPP) or the U.S. Energy Information Administration. The cost figures provided by CAPP are significantly above those provided by the corporations to the U.S. Department of Energy.
One recent study was done by ARC Financial Corporation using CAPP data. It reports that the average annual operating cost of conventional wells in the WCSB in 2006 was around $7 per barrel. To this is added $2 per barrel for General and Administrative expenses. In addition royalties and bonus fees averaged $8 per barrel. There are provincial and federal taxes on profits and income, but these apply to all corporations and cannot be seen as a method of collecting economic rent. While CAPP data indicates that the cost of capital for the industry had fallen to around 5% in 2005, in that year the industry reported an average return on equity of 22%. (Tertzakian and Baynton, 2006)
The Globe and Mail Report on Business Magazine records that for 2003 the Big 10 Canadian oil companies reported a return on equity which ranged between a low of 18% for Talisman Energy to a high of 34% by Imperial Oil. The very high return on equity reflects the fact that almost all of the economic rent produced in recent years in Canada has gone to the private sector. ARC Financial Corporation finds that the tremendous growth of equity capital in the industry has resulted in “an elevated level of ‘unemployed’ capital in the Canadian upstream oil and gas industry.” (Report on Business Magazine, July/August 2004; Tertzakian and Baynton, 2006)
Looking at the case of heavy oil in Saskatchewan, the report by ARC Financial Corporation suggests that extraction costs were around $9 per barrel, royalties and bonus fees were $8 per barrel, and return on equity would be well above the cost of capital. This confirms the statements by Husky Oil and the Saskatchewan Department of Industry and Resources. Of the $46 average price for heavy oil in 2006, at least $26 per barrel would be economic rent, and all of this went to the private sector.
Other oil producing countries use a range of tools to collect economic rent. These include state owned oil corporations (NOCs), joint ventures between NOCs and independent oil companies, production sharing agreements with private oil firms, and various forms of excess profits taxes. OPEC countries in the Middle East use special term contracts which specify that when the international oil prices rise, so does the share of revenue that goes to the state. None of these fiscal tools are used in Canada.
John W. Warnock has recently retired from teaching political economy and sociology at the University of Regina and is author of Selling the Family Silver; Oil and Gas Royalties, Corporate Profits and the Disregarded Public, published by the Parkland Institute at the University of Alberta and the Canadian Centre for Policy Alternatives, Saskatchewan Division.
Collecting Rents from Resource Extraction: The Advantages of State Ownership
by John W. Warnock
Natural resources are a free gift from nature. All governments wish to obtain at least some revenues from the extraction and use of renewable and non-renewable resources. Today, these resources are commonly owned by the state, and governments have responsibility for controlling their extraction and use.
Thus in a democratic society governments should be seeking to maximize their share of the econonic rent (defined by economists as “excess profits”) over the life of any resource development project. Economic rent should be re-invested in the local economy. A substantial share should go to the local indigenous communities. A large share should be saved for the use of future generations.
Economic rent is most easily captured when resource development is through state-owned enterprises. The success of these national enterprises (known in the oil industry as National Oil Companies or NOCs) depends on the degree of democracy that exists in the province or country. In an advanced industrialized democracy, like Norway, a NOC like Statoil is a very successful and efficient company. Petrobras in Brazil has a similar reputation. In Saskatchewan our state-owned public utilities have been very efficient and innovative and provide excellent services. We know that the Crown corporations that were created in the past in the resource sector, including the Potash Corporation of Saskatchewan, the Saskatchewan Mining and Development Corporation and SaskOil, were all very well run and provided much greater returns to the general population than they have since they were privatized. In sectors of the economy which are dominated by large foreign-owned corporations with monopoly power, local, democratically controlled, state enterprises offer a very good alternative.
Between 60 and 100 countries have had state-owned oil and gas companies at one time or another, and they have a wide variety of histories. For example, in Mexico it was normal for PEMEX, the NOC which has completely dominated the oil and gas industry, to be used as a patronage instrument by the Institutional Revolutionary Party (PRI). Furthermore, it was government policy to require PEMEX to pay 65 percent of their annual revenues to the federal government. Revenues from PEMEX provided 35 to 40 percent of the federal government’s revenues and greatly contributed to providing foreign exchange. But these two policies left PEMEX with inadequate retained earnings to develop new oil and gas resources.
In Argentina, the Peronista governments required YPF, its local oil and gas NOC, to pay 68 percent of its annual revenues to the government, which left it with inadequate funds for expansion. Furthermore, both Mexico and Argentina dictated that their NOCs should heavily subsidize the retail price of oil products, which cut into their revenues. Why did this happen? In both these cases the general policy was determined by the rich and powerful who controlled the government. Revenues from the NOCs allowed government to avoid imposing taxes on private corporations, wealth or individuals with high incomes.
It is also much easier to collect rent when resource development is through joint ventures with private corporations. In these cases, because of direct financial and management participation in the operation, the costs and revenues are known to the government. Many governments in oil producing countries have utilized production sharing agreements; it is common practice that the government takes a share of the oil or gas that is produced. But because the government does not have a direct equity position in the private firms, they do not really know the details of how the companies are operating. Thus in Venezuela the new government of Hugo Chavez sent auditors to examine the books of the private corporations who had production sharing agreements, and they reported wide spread tax avoidance.
The advantages of having a NOC and government control of the industry was demonstrated during 2005 when there was a rapid increase in the price for oil and gas and windfall profits which bore no relationship to the cost of production. In the OPEC countries the governments and NOCs had term contracts with the foreign-owned private oil corporations (known in the industry as IOCs). Under these term contracts they were able to raise their prices for contract holders to match the increase in world prices. Thus in OPEC as a whole prices increased from their 2004 levels by 40.9 percent for the first nine months of 2005, and the income to OPEC countries increased 46.4 percent over the same period. In contrast, in Canada and the United States almost all of these windfall profits went to the private corporations.
It is much more difficult for governments to recover a large part of the economic rent when the natural resource is being developed by private corporations. It is most difficult to gain a major share of the rent when development is by large foreign-owned transnational corporations who operate on a world wide basis and are vertically integrated. The secrecy of operations, transfer pricing, and the increasing use of offshore tax havens have posed a very serious problem for governments around the world. These practices were well demonstrated in the cases of Enron and Yukos.
Governments have an additional role to play in resource development. Resource extraction can be very destructive to the local environment, often involving the production of toxic wastes. Furthermore, those working in the industry can be exposed to harmful and life-shortening products. We know this only too well in Saskatchewan where uranium mining in the North has been devastating to the environment and the health of workers. Governments need to establish and enforce strong regulations to protect the environment, communities and workers.
John W. Warnock recently retired from teaching political economy at the University of Regina. His study Selling the Family Silver: The Oil and Gas Industry in Saskatchewan will be jointly published by the Saskatchewan branch of the Canadian Centre for Policy Alternatives and the Parkland Institute in November 2006.
Canada's Incontinent Energy Policy
by John W. Warnock
Oil is a natural resource in a category all its own. Ever since the invention of the internal combustion engine, oil has been - quite literally - the fuel that fires economic growth. Transportation, agriculture, manufacturing, large cities - none could exist in their current form without oil. Indeed, the entire global economy as it is currently constituted would simply grind to a halt withlout it.
The global struggle to control the resource began as soon as the British Empire switched it fleets from coal to oil, signaling a profound shift in the imperial powers' strategic priorities. The United States had plenty of domestic oil reserves, but Great Britain, France and the other European powers needed secure supplies from the major oil fields in North Africa, the Middle East, Asia and Latin America. In the struggle among the imperial powers, and between the advanced capitalist states and the colonized Third World (where most of the world's reserves were and still are located), First World governments and the largest oil companies worked closely together to gain and maintain control of strategic reserves so as to ensure a ready supply of cheap and secure oil. Recent wars in Afghanistan and Iraq - which are widely condeded to have been wars over control of oil - are merely the last moves in this grand game.
With global reserves nearing peak production, and world-wide demand continuing to grow at an alarming rate, the stakes of this game have risen significantly in recent years, and Canada's role in America's energy wars has become increasingly evident. Canadian policy has stressed ownership and control of the oil and gas industry by large corporations that have enjoyed very high profits. Rather than developing this strategic industry in a sustainable way to benefit present and future generations of Canadians, federal and provincial governments have chosen to support the policy goals of the U.S. government by steadily increasing our exports to the United States. As a result, Canadians now face the grim prospect of higher and higher fossil fuel costs, with virtually no infrastructure of sustainable energy alternatives.
The current situation
So how do things stand today? Canada produces around 3.2 million barrels of oil per day. We export around 1.65 million barrels per day to the United States. Since Canadians consume 2.3 million barrels per day, the balance has to be imported. According to the U.S. Energy Information Agency, Canada has the lowest royalties and taxes on oil of any producing area in the world. Thus, when there are huge windfall profits from high oil price rises unrelated to costs of production, as has occurred in the past year, the oil corporations take almost all of the increase.
Meanwhile, conventional oil is drying up on the Canadian prairies. Production peaked in 1971 and has steadily declined since then. In 1994 producing wells delivered on average around 30 barrels per day; this fell to 18 barrels by 2003. New fields are smaller. Fewer wells are being drilled. As they say in the industry, "the fruit on the bottom of the tree has been picked." Our cheaper oil has been exported and we will now have to depend on more expensive, harder-to-extract oil - which, incidentally, we are also bound by NAFTA to export.
Canadian oil and gas policy has served, and continues to serve, the interests of the oil companies and the U.S. government. It has propped up the U.S. economy by keeping U.S. oil and gas prices artifically low.. It has brought enormous returns to the owners and shareholders of the private corporations. As a capital intensive industry, it has brought well-paying jobs to some areas of Canada as well as significant revenues to the government of Alberta and, to a lesser extent, other provinces. But as prices for oil and gas continue to rise, and supplies dwindle, Canadians will come to realize that oil and gas integration has left them out in the cold; short-term gains for some have come at the expense of long term pain for the great majority.
John W. Warnock, a Regina political economist, is preparing a report on the oil and gas industry in Saskatchewan for the Canadian Centre for Policy Alternatives.
New Study on Resource Royalties in Saskatchewan
Regina. June 16, 2005
CCPA Saskatchewan is pleased to be releasing a new report today about natural resource revenues and recent government trends in Saskatchewan by John W. Warnock. A copy of the full report, as well as a shorter Saskatchewan Note's piece, can be found on the national website which is linked below for your convenience.
It’s time for a public debate on resource royalties in Saskatchewan!
A new study released today by the Canadian Centre for Policy Alternatives says it is time there was a serious public debate in Saskatchewan about resource royalties.
The report shows that resource royalties in Saskatchewan are among the lowest in the world. The report also documents trends around the world which show that governments in most other jurisdictions are increasing royalty rates and control over resource industries.
“Around the world it is not uncommon for private corporations to pay up to 50% of natural resource sales to the host country,” says John W. Warnock, the report’s author and Research Associate for CCPA Saskatchewan.
“In Saskatchewan the amount of royalties as a percentage of sales has decreased on average since the 1980s to less than 15%,” says Warnock. “At the same time the international price for the majority of natural resources has increased dramatically and resource extraction corporations are recording record sales and profits.”
Warnock says it is not surprising that royalty reductions have been welcomed by Saskatchewan’s large corporations, but he says the revenue losses have created serious problems.
“Devine’s Government responded with budget deficits and increases to the provincial debt, while Romanow and Calvert’s NDP Government’s balanced the budgets by cutting programs, introducing gambling, increasing user fees, and off loading costs,” says the author.
“Property taxes have risen to the highest level in Canada because municipality and school board grants have been cut. If the royalties had remained at their previously high levels, the government would have had an additional $2 billion to spend in 2003.
Warnock says that in the 1991 provincial election, the NDP pledged to raise royalties on natural resource extraction back to the Blakeney Government’s levels. But once in office, he says, they rejected their pledge and continued the Devine Government’s policy and steadily reduced the extraction royalties on non-renewable natural resources.
“Saskatchewan’s government is moving in the opposite direction and the public must demand that serious public debate take place on resource policy,” concludes Warnock. “It is especially ironic that the Government of Saskatchewan is undertaking a Business Tax Review and the businesses already getting the biggest breaks in this province – the resource extraction corporations - are exempt from this process.”
Sustainable Forestry is Possible
by John W. Warnock
Review article of Thomas Davis, Sustaining the Forest, the People and the Spirit.
Albany: State University of New York, 2000.
Extract: Saskatchewan can learn from the Menominee First Nation
From the beginning of commercial exploitation by European immigrants to the present, the foresty in Saskatchewan has been viewed as a natural resource to be used for private exploitation. From small independent loggers to the monopoly domination by American giant Weyerhaeuser Corporation, there has never been any policy dedicated to sustainability. That is the North American capitalist tradition of resource extraction. But the Menominee First Nation in Wisconsin has demonstrated that this does not have to be the case and that the ecological alternatives is better in every way.
In New York in 1995 the United Nations presented a special award to the Menominee of Wisconsin for their contribution to the world's environment through sustainable forestry development. The Menominee forest, 235,000 acres in Wisconsin close to Green Bay, is the only true forest left in the Great Lakes area, abd for that matter, in the Eastern United States. People from all over the world come to see how it is possible to maintain a forest, with all its original diversity, and still carry out logging. Between 1865 and the early 1990s, over two billion board feet of saw timber had been harvested with no reduction in the existing saw timber stock. Biodiversity had been meaintained. The Menominee Forest stands in direct contrast to the Nicolet National Forest on its northern border, which has been managed in the "business as usual" way. Many studies have compared the two forests.
Today in Saskatchewan over 90 percent of all forests are clear cut. Around 600,000 hectares of forest area is classified as "not satisfactorily restocked." This amounts to 66 percent of the forest harvested, by far the highest in Canada. At best, Saskatchewan's policy has been to replace forests with plantations of single species, at a single age, and to spend large amounts of public money to fight disease and insect infestations.
Not much has changed over the years. In 1999 the NDP government of Roy Romanow announced a new plan for forestry which would double the annual allowable cut in the Commercial Forest Zone in central Saskatchewan. If forest firms actually carried out the allowed cut, it would clear all the commercial timber from this zone in just 27 years. Forest regeneration takes between 70 and 90 years in the boreal forest.
John W. Warnock is a Regina political economist, author, and activist with the New Green Alliance.
Saskatchewan's Neo-Colonial Forest Policies
by John W. Warnock
Extract: Understanding Saskatchewan's Forestry Policy
The Canada-U.S. Softwood Lumber Agreement has expired, and the U.S. forest industry, represented by the Coalition for Fair Lumber Imports, has asked the U.S. Department of Commerce to impose countervailing duties against the Canadian industry. They argue that if Canadian governments wish to subsidize their forest industry, that is their choice. But under international trade rules set forth in the Canada-U.S. Free Trade Agreement, the North American Free Trade Agreement and the World Trade Organization, such subsidies cannot be used to promote exports. The U.S. forest companies are supported by a long list of Members of Congress, trade unions and environmental groups.
The U.S. industry has accused Canadian provincial governments of providing subsidies to the forest industry through very low royalties on timber, non-enforcement of forestry rules, mandating forest firms to comply with minimum cut requirements, providing tax benefits to private firms, bailing out firms in financial difficulty, and providing extensive infrastructure, clean up and reforestation. Direct subsidies have been given to forest corporations to encourage local employment. They argue that our forestry policy encourages over-harvesting and wasted wood resulting in environmental damage. By granting very large corporations long term cutting rights on huge areas of land, the provincial governments have hurt small, independent forestry companies and have denied Aboriginal Canadians, who actually live in the forests, access to forest resources.
The response by our political leaders, government spokesmen, trade union leaders, and the mass media is to emphatically dismiss the charges out of hand. In Saskatchewan there is almost no public debate on this issue.
The complete text of this article can be downloaded from Policy Options: http://policyoptions.irpp.org/issues/political-dissent/saskatchewans-neo-colonial-forestry-policy/
What is the Truth Behind Forest Industry Subsidies?
by John W. Warnock
Canadian Dimension Magazine, Vol. 35, No. 4, July/August 2001, pp. 39-41.