|Natural Resources and
by John W. Warnock
Exploiting Potash in Saskatchewan: Who Benefits?
by John W. Warnock
January 27, 2011
In August 2010 BHP Billiton, the largest mining corporation in the world, announced that it was making a bid to buy control of the Potash Corporation of Saskatchewan. For the next three months there was a national debate on the issue. The provincial Saskatchewan Party Government took a strong stand against the takeover, as did the opposition New Democratic Party, the federal Liberal Party and various business interests. It was expected that Stephen Harper's Tory government in Ottawa would approve the takeover. The Harper government had consistently supported increased foreign investment in Canada and had opposed any government taking action in such cases.
Many across Canada expressed dismay at the prospects of another takeover of a major Canadian corporation. The provincial government went to Investment Canada asking it to rule that the foreign takeover was not of "net benefit" to Canada. Investment Canada was created by Brian Mulroney's federal Conservative government in 1985 to replace the Foreign Investment Review Board. Its goal was to promote foreign investment. Since that time it had reviewed over 1600 takeovers of Canadian corporations by foreign corporations and rejected only one!
Nevertheless, major political and business pressure was put on the Harper government. Under threat from their political allies in Saskatchewan, they caved in and blocked the takeover. But during the political discussion none of the political parties, business leaders or the mass media asked the most important questions. Who owns and controls the Potash Corporation of Saskatchewan? Is it really a Canadian corporation? Why are the royalties and taxes on the industry in Saskatchewan so very low? Why are its profits so high? Has the province in any way benefitted from the privatization of the Potash Corporation of Saskatchewan, a vibrant Crown corporation at one time? How would it be possible for the people of Saskatchewan to once again own and control this most important resource corporation? These are the issues that I have addressed in this paper. It is now available on the CCPA-SK web site:
Selling the Family Silver: Oil and Gas Royalties, Corporate Profits, and the Disregarded Public
by John W. Warnock
Edmonton: The Parkland Institute, University of Alberta; Regina: Canadian Centre for Policy Alternatives-Saskatchewan,
November 16, 2006.
This study was published right before the Parkland Institute's 10th Annual Fall Conference, November 17 - 19, 2006, at the University of Alberta in Edmonton. For an overview of the conference, "Power for the People: Determining Our Energy Future," see the link below. The full report, and the executive summary, are available at both of the web sites:
The Parkland Institute: http://www.ualberta.ca/parkland
The Canadian Centre for Policy Alternatives: http://www.policyalternatives.ca
This in an appendix in the paper on the Potash industry in Saskatchewan.
Natural Resources: The Struggle between Democracy and Liberalism.by John W. Warnock
December 15, 2010
For thousands of years human beings lived in
small communities, commonly referred to by
anthropologists as “band societies.” These were all
egalitarian, democratic societies, based on the
principles of reciprocity. Given this long history, one
could argue that this is the normal social structure for
human beings. The basic moral principles of these
societies was altruism and solidarity. Land and natural
resources were common to all.
Unequal access to land and
Land rights and imperialism
Liberalism and the right to
steal land and resources
The democratic reaction
Barbara. 1996. John Locke and America: The Defence
of English Colonialism. Oxford: Oxford Clarendon
Re-examine the Status Quo
Are We Getting a Fair Return for the Exploitation of Our Natural Resources?
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 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.
Saskatchewan as a Resource Hinterland Economy
by John W. Warnock
October 2, 2010
Conference on Resources, Empire and Labour: Globalization and Alternatives
Saskatchewan is a hinterland region. Once the indigenous population had been removed, European settlers created a province based on dry land farming and ranching. The period after World War II saw the development of mineral resources: coal, oil and gas, uranium and potash. While these new industries were important to the nominal gross domestic product, they have provided very limited employment. Development has been dominated by large transnational corporations.
Saskatchewan was also the home of the populist movement which created the social democratic Co-operative Commonwealth Federation/New Democratic Party. As the dominant governing party after 1944, they set the policy on resource extraction. The CCF/NDP originally stressed the objective of public ownership and control of resource development, including ioncreased resource royalties. However, NDP governments between 1991-2007 shifted to a neoliberal strategy on resource development. This paper presents an overview of this history and attempts to explain the shift in policy oreintation by the local social democratic government and party caucus.
To acces the full text of this paper it will be necessary to use Adobe Acrobat or Foxit Reader:
Text of paper.
A shorter version of this paper will be published as part of a book next year, edited by David Ledbetter, Department of Economics, Laurentian University.
How do we collect economic rents from non-renewable resources?
Note: This is an extract from John W. Warnock, Saskatchewan: The Roots of Discontent and Protest. (Montreal: Black Rose Books, 2004. Chapter 11: "The Struggle over Resource Royalties."
The concept of economic rent used in the petroleum and mining industries today is that set forth by David Ricardo in 1817. If all mines have the same degree of ore concentration, and the same costs of production and transportation, then the value of the extracted resource would depend only on the quantity of labour needed to bring the resource to market. Following from his argument on rent in agricultural land, Ricardo’s thesis is that the resource extracted from the poorest mine, sold in the market, and returning the normal rate of profit will yield no rent. Rent only comes from those mines which have the higher grade of ore or mineral fuel. Rent is a surplus income over and above normal profit.
An example of this would be uranium. Saskatchewan has 31 percent of world uranium production, by far the highest grade ore deposits, and modern efficient mining operations. Under free market conditions, it should bring in a high level of economic rent. Markets have been somewhat limited because of uranium’s key role in nuclear weapons; other governments maintain extensive subsidies to less efficient operations for the purpose of national security controls. The domestic nuclear industry is also limited. Nuclear power plants are very expensive to build, and because of the hazardous nature of the entire nuclear fuel cycle, there is strong opposition around the world to further development. Nevertheless, the profit margin of the Saskatchewan mines should be high. This may be the case, but we do not really know. A high level of Ricardian rent extraction in Saskatchewan is definitely not reflected in the provincial royalties and taxes the corporations pay. (Anderson, 1987; Whillans, 1997; Pembina Institute, 2001; Prudhomme, 1998)
Capturing economic rent
It is very difficult to determine the economic rent for the extraction of mineral resources in Canada’s political economy. Natural resources are in theory owned by the public as a whole and managed by our elected provincial governments. It is presumed that the public as the owners of the resources should get a return when they are privatized. The mining and fossil fuel industries are dominated by large trans-national corporations which are granted licenses to extract and use natural resources. There are many different resource royalty systems which vary between provinces, and they vary between projects in the same industry. However, there are a few basic approaches to rent extraction that are in use today. (See Gunton and Richards, 1987)
First, a government can try to capture some of the economic rent through a flat rate which is usually a quantity-based royalty. This was the system used originally in the coal mining industry. A flat rate per tonne was charged. This approach does not take into consideration ore grades or the costs of production. The reasoning behind this approach is the belief that when a private company takes a natural resource from the public for its own use and profit they owe the people some basic return. The purchase of the raw material should be considered a cost of production. However, under the flat rate system inflation reduces the value of the royalty. This system is not widely used today, although it is still common for construction materials. Other similar royalties include a property tax, usually a percentage of the value of the land for mineral or oil extraction, or a lease fee, an annual fee on land leased for mineral purposes. These are used in Saskatchewan.
Second, an ad valorem royalty is widely used, usually a percentage of the sales price or gross revenues that the operator receives. This approach should be easy to calculate. However, it is very difficult to determine when “sales” are in fact intra-company transfers by trans-national corporations. These “sales” are not market transactions but administered prices. This situation is the norm in Saskatchewan.
Third, a net profits royalty is used. This also takes the form of an ad valorem rate, usually a percentage of the profits, which can increase as the rate of profit increases. This is the approach favoured by the private corporations and has been widely adopted in Saskatchewan in more recent years. This tends to result in low royalty payments, sometimes approaching zero. Michael Cartwright, a U.S. specialist in this field, has commented that “there are virtually no buyers for this type of royalty [in the United States] because of the creative accounting that the mining operator can use to depress the royalty payment account.” When the Blakeney government enacted a net income royalty on potash, the private corporations refused to provide data on their operations. This provoked the NDP government into nationalizing part of the industry. (Cartwright, 1999; Gunton and Richards, 1987)
Fourth, a government can introduce a marketing board with monopoly power to purchase all the output from the corporations and market the product. This approach gives the government additional power when dealing with large trans-national corporations. It can increase the ability of the government to assess the real costs of resource extraction. Ross Thatcher’s Liberal government set up the Potash Conservation Board in 1969, a marketing board with monopoly power to sell potash. The government was trying to capture a royalty in a situation of over investment and excess capacity, but it was also trying to create a cartel which could set prices and production quotas. In 1973 Peter Lougheed’s Conservative government in Alberta created the Petroleum Marketing Commission, a Crown corporation which had broad control over the production and marketing of oil. It held ownership of all oil in the province until it was sold to the consumer. It was quite successful in capturing economic rent. (Warnock, 1974; Richards and Pratt, 1979)
Finally, there is the use of the state through joint ventures with private corporations and the use of state-owned corporations. Through a number of joint ventures between the Saskatchewan Mining and Development Corporation (SMDC) and private corporations, the government of Saskatchewan was directly involved in the extraction of uranium and was able to determine the real costs of uranium production. Through the Potash Corporation of Saskatchewan (PCS) and the Saskatchewan Oil and Gas Corporation (Sask Oil) they appropriated all the rent from some resource extraction and paid it into the provincial treasury.
PEMEX as a case study
A very good exampe of the benefits of state ownership can be seen in Mexico. Petroleos Mexicanos (PEMEX), a state owned enterprise, has had monopoly control over the extraction, refining, processing and distribution of oil since 1938. The government of Lazaro Cardenas, facing a capital strike by the foreign-owned oil companies, responded by nationalizing all of them. PEMEX has been criticized by mainstream economists as inefficient, hiring too many workers, hiring too many high paid executives, and being under the control of patronage. These criticism are certainly true. But it is the largest employer in Mexico, pays the highest wages and salaries, and over the years has provided around 40 percent of all federal government revenues. Students going to state owned universities in Mexico pay no tuition. This is provided by grants from the federal government, economic rent from the extraction and sale of oil. The vast majority of the people in Mexico are determined to keep state ownership of this industry. State ownership of the oil industry is entrenched in the constitution. The economic rents stay in Mexico, and they do benefit ordinary people. However, this approach to capturing economic rent is out of fashion in the new era of globalization, free trade and the private enterprise economy. State ownership certainly benefits the population as a whole, but not private investors. (See Teichman, 1988)
The case for public ownership
The case for public ownership of natural resource extraction industries was advanced by Eric Kierans in his report on the mining industry to the government of Manitoba in 1973. He argued that it is extremely difficult to devise a system of capturing economic rents when the mining industry is dominated by large trans-national corporations. Even when there is some revenue in the form of royalties, it is usually not enough to “finance the costs of the highways, schools, hospitals and other services that are required to make a new community livable.” With the wide range of subsidies found in mineral extraction, “the social costs will exceed the returns and the resource development, far from yielding a net income to the province, becomes a burden on the whole community.”
Kierans argued that “it is vital to the growth and development of a province or nation that it retain these super-returns [the Ricardian economic rent] as a means of ensuring its growth and lessening its dependence on others.” The former president of the Montreal Stock Exchange went farther:
"To be satisfied with the new jobs created and to forego the surpluses and profits inherent in the development of its own endowment is hardly the mark of a strong and mature government. It accepts the role of “hewers of wood and drawers of water” for its people when they are capable of much more. That role provides wages and salaries and little else. The profits, which direct and finance the future, belong to those who have been invited in, and this capital formation . . .does nothing for [government] priorities in the fields of agriculture, health, education or whatever. A developing nation, a province or a colony may be rich in its beginnings but when that wealth is depleted through the poverty of its policies, nothing remains of the original endowment but the instability, dissatisfaction and political unrest arising from poorly conceived policies. "(Kierans, 1973)
The Future of Oil and Gas in Saskatchewan
by John W. Warnock
November 17, 2008
The Johnson-Shoyama Graduate School of Public Policy at the University of Regina hosted a mini-symposium on Saskatchewan energy policy last Friday. However, the afternoon meeting only considered oil and gas policy.
Appropriately, the first speaker was Pierre Alvarez, former president of the Canadian Association of Petroleum Producers (CAPP), the industry lobby group. Alvarez cited the newly-released report by the International Energy Agency (IEA) which emphasized that if current production and consumption trends are to continue, we will need a massive new injection of capital in the industry. The IEA estimates this at $26 trillion between now and 2030.
Continental energy integration
Canada is to continue as the most important source of U.S. imports of oil and gas. This explains the new pipelines being constructed to ship bitumen from the Athabaska tar sands (and perhaps Saskatchewan) to Chicago and Louisiana for refining, Alvarez argued.
North American energy security has been improved due to the development of new technologies which make possible the economical extraction of natural gas and oil from coal and shale deposits. Horizontal wells and fracturing have revived the natural gas industries in Alberta, British Columbia, Wyoming, Montana, Colorado and Texas. The new drilling techniques have also enabled the exploitation of the Bakken play in Saskatchewan and the Northern United States, reviving the light oil industry.
A member of the audience argued that Canada has no sovereignty in this area because of the North American Free Trade Agreement (NAFTA) which requires Canada to ship oil and gas south even when it is against the public interest. This policy has blocked the development of a national energy policy which would allow western Canadian oil to replace the supply of oil eastern Canada now imports. Alvarez was vehement in his rejection of any national energy policy. He further argued that “shipping Canada’s oil and bitumen to Chicago and Louisiana is simply a matter of economics. The distance is shorter than shipping to eastern Canada.” No one questioned whether this was actually true.
The need for low royalties and taxes
Alvarez stressed that the key to this essential development is government financial incentives and regulatory frameworks which assist the industry to grow. To no one's surprise, he strongly attacked the decision of the Conservative government in Alberta to raise the royalties on the oil and gas industry. Praise was heaped on recent governments in Saskatchewan who lowered royalties and taxes on the industry.
In response to a question on what is a fair return to investors in the oil and gas industry, Alvarez stated that the historic rate of 12% “will not come close” if the industry is to attract sufficient investment. He denounced the Alberta government’s new royalty system which increases the rate of the return to the province as the price of oil increases. The new tax policy “removes the risk premium which is at the top.” Investors in the oil industry in Canada have come to expect a far greater return on their investment than they could find elsewhere.
The approach of the new Obama presidency
Bruce Bulloch, Director of the Maguire Energy Institute, Southern Methodist University in Texas, outlined what we could expect from Barrack Obama in the field of energy policy. He started by saying that “No one really knows what Obama is going to do.” His policies are not well developed. Furthermore, as the new president he will be greatly constrained by the financial and economic crisis and the huge deficit in the budget that he will inherit from the Bush administration.
In the presidential campaign Obama proposed a cap-and-trade system to deal with greenhouse gas emissions, spending $150 billion on “green energy,” emphasis on energy efficiency, and a windfall profits tax on the oil companies. The last policy is “simply off the agenda,” Bulloch argued. Furthermore, it is clear that Americans will never accept any form of a carbon tax. He noted that Obama has expressed skepticism of nuclear power. In contrast, Bulloch argued that nuclear power would be necessary if the U.S. were to reduce greenhouse gas emissions.
Bulloch suggested that we should look at the research done by Matt Simmons, the Texas banker who specializes in oil and gas. Energy supply, as the IEA finally admitted this year, is in decline. Peak oil is here
Environmental problems with natural gas extraction
Natural gas drilling is expanding everywhere, using the new technologies. He stated that wells are being drilled within 300 feet of people’s homes.
In response to a question from the audience, Bullock admitted that there is an environmental downside to the new drilling technology being used to extract natural gas. Everywhere, the high pressure extraction process, which induces fracturing of coal and shale deposits, is leading to natural gas contamination of water aquifers and wells. The chemicals used in the process are often very toxic, including benzene, which is a strong cancer-causing agent. This contamination is leading to widespread grass roots opposition. Bullock said a recent court decision for damages in Texas has caused a major ripple in the industry.
Canadian energy policy
Keith Brownsey, from the Department of Policy Studies, Mount Royal College, Calgary, presented an overview of energy policy in both Canada and the United States. Basically, Canada has had no policy since the reversal in 1985 of Pierre Trudeau’s National Energy Policy. All subsequent governments have emphasized devolution of policy to the provinces, private corporate development of the industry, and the international market. There has been no effort to develop a national strategy or address the issue of sustainability.
The policy priority of Stephen Harper’s government, he stressed, is to protect the oil and gas industry and to guarantee the continuation of continental integration.
In contrast, the Bush administration established a national energy policy in the Cheney Report of May 2001, the U.S. Energy Act of 2005, and the Energy Security Act of 2007. Goals have been set to develop alternative energies, support new technology, but always relying on the large private corporations and the market.
Brownsey concluded by arguing that in his opinion the two countries have a common approach: “lack of action, obstruction, avoidance and retrenchment.” Nothing was said at the symposium on the overall U.S. policy set forth in the Carter Doctrine of 1980: using the U.S. military to defend U.S. corporate access to oil around the world.
The problem of climate change is ignored
It was expected that Adam Wellstead, of Natural Resources Canada, would focus on the issue of climate change and greenhouse gas emissions. He was one of the authors of the the NRC study, Climate Change: Impacts and Adaptation (2008). It has a section summarizing the scientific research on the impact on Saskatchewan. However, Wellstead’s presentation concentrated on the lack of co-ordination of policy makers on the issue. He did note that for Saskatchewan and the prairies the central issue is “where is the water.”
In contrast to the symposium, the new World Energy Outlook by the IEA also stresses the serious question of greenhouse gas emissions from the burning of fossil fuels. Under the present business-as-usual approach of the past ten years, fossil fuel consumption continues to increase as do greenhouse gas emissions and the average temperature. The IEA argues that if the world continues to refuse to seriously deal with this issue, the end result will most likely be a six degree increase in the average global temperature by the end of the century.
The present course of action is in reality a suicide policy for the world as we know it. The scientists with the U.N. Intergovernmental Panel on Climate Change have argued that we need a 70% reduction of fossil fuel consumption to stabilize greenhouse gas emissions and prevent the increase in average temperature by two degrees. There was nobody at this symposium who wanted to deal with this issue.
John W. Warnock is a Regina political economist.
Profits from the Alberta tar sands
“Taking into consideration operating costs, the discount given to low-quality oil sands crude, the falling Canadian dollar and other factors, Suncor would be able to earn $28 on each barrel of oil at a West Texas Intermediate price of $60 (U.S.).”
Rick George, CEO, Suncor Energy, October 29, 2008
The Booming Saskatchewan Oil Industry - Who Benefits?
By John W. Warnock
April 20, 2008
In mid-April the international price for WTI crude oil reached $110 per barrel. In Saskatchewan the price of a litre of gasoline rose to $1.23. The large oil corporations are reporting record profits. Land sales for exploration and development rights for oil are at an all time high in Saskatchewan. Why is this happening? Who is benefitting?
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 88 million barrels a day is now being filled by much more expensive non-conventional sources. There no longer are any large new pools of conventional oil be discovered. Despite warnings by scientists about the looming disaster from global warming, fossil fuel demand is steadily rising.
Where can we find more oil?
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. These NOCs often employ western oil and service companies to extract much of their oil and gas. The Washington conference pointed out that the countries which have NOCs prefer to deal with other countries which have NOCs and a state-controlled industry.
Another 11% of reserves are in countries with NOCs where the private IOCs have some access through production sharing agreements. Venezuela is one of these. The norm in Venezuela is that the state-owned oil corporation (PDVSA) owns 60% of all developments and the private IOCs own the other 40%. Only Exxon-Mobil has declined to participate in these joint ventures.
Russia has six percent of the remaining reserves and is re-establishing state-ownership and control over the oil and gas industry. The government has also imposed export taxes when the price exceeds $25 per barrel in an effort to capture most of the excess profits.
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.
Oil and gas reserves in western Canada
As the industry moves to non-conventional sources of oil and gas, costs rise. But they have not risen nearly as fast as the international price. In the 1990s it cost 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 (WCSB) is a mature area for oil and gas. Conventional oil and gas production peaked around 1972 and has been declining. The average productivity of a conventional oil well in the WCSB has dropped from 33 barrels per day in 1994 to 18 in 2003. In 2007 the average production in Alberta was only 12 barrels per day. This is the major reason that the oil corporations are looking elsewhere for new reserves.
Conventional natural gas production is also declining in the WCSB. The number of natural gas wells being drilled in Alberta, the main source of supply, has declined not only because of the fluctuation in the price but because the new fields discovered are much smaller and quickly depleted. Natural Resources Canada (2006) projects that natural gas production in Saskatchewan will peak in 2005 at 261 billion cubic feet per year and drop to only 70 billion cubic feet per year by 2020.
Exploiting the Bakken Formation
Geologists and oil companies have known for years about the Bakken Formation, which is primarily in North Dakota and Montana but pushes up into Saskatchewan and Manitoba. The oil is light crude, the most valuable, but it is trapped in non–porous shale rock. It was considered uneconomic to extract. But with the very high price of oil, and new technology, extraction is now possible. The new technology involves drilling a horizontal well, fracturing the shale formation, and then pumping sand into the well. Oil and gas is thus released. The oil industry believes this new technology will result in extensive extraction from Saskatchewan.
Non-conventional natural gas
At present the larger natural gas corporations are shifting to British Columbia where the Dawson Creek and Tumbler Ridge pools of non-convention natural gas are much larger. A similar technology is used to fracture the non-porous rock and extract the natural gas. There are high hopes for using this new technology in the Montney play. The higher average rate of royalties (27% compared to 14% in Saskatchewan) are more than offset by the higher rates of production.
Higher royalties are a world phenomenon
All around the world oil and gas producing countries are raising royalties and taxes in an effort to capture more of the economic rent (monopoly profits) that is accruing to the industry. This is not happening in western Canada.
In Newfoundland, Premier Danny Williams’ government has raised the royalty rates, a highly popular move. In the offshore Hibernia field the oil companies presently get 60% of the revenues, the federal government 32% and the provincial government 8%. In the White Rose field, the oil corporations get 56%, the federal government 33%, and the province 11%. Under the new royalty system for White Rose the oil corporations will get 37.5%, the federal government 37.5% and the province 25%. Has this discouraged investment? Husky and Petro Canada are rushing to invest there, hiring a new offshore rig which will cost them $1 million per day.
Oil Policy in Saskatchewan
Oil policy in Saskatchewan stands in direct contrast to the rest of the world. Since 1982 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 on average only 17% of the revenues from the sale of our oil, the lowest royalty rate in the world. This is a dramatic change in policy since the 1970s and early 1980s when our government collected over 50% of the revenues accruing to the industry.
The other basic policy is to export our oil and natural gas to the United States as fast as possible. We are not to be concerned about how we will heat our homes in 2020. Eastern Canada imports almost all of their oil from abroad. There is no concern in western Canada about this situation or willingness to create a new national energy policy based on conservation and assuring first access for Canadians.
The Saskatchewan NDP government fully embraced the U.S. energy strategy policy set forth by Vice President Dick Cheney in March 2001. Canadian oil is U.S. oil. On several occasions cabinet ministers, and even Premier Lorne Calvert, went to Washington to assure the Bush Administration that we will ship all of our oil and gas south of the border. Brad Wall and the Saskatchewan party agreed. And we will keep our royalties and taxes to the absolute minimum.
John W. Warnock is author of Selling the Family Silver, a study of the oil and gas industry in Saskatchewan.
Saskatchewan and Oil Depletion
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.
The Northernmost Banana Republic
by John W. Warnock
January 6, 2008
In the 1960s Saturday Night was a very popular Canadian weekly magazine. Much of its success was due to its editorl, Ralph Allen. Unlike Maclean's Magazine of today, it was not a voice of the political establishment.
Allen looked at the high degree of foreign ownership and control of the economy, our heavy dependence on trade with one country, and our emphasis on exporting raw materials and natural resources and declared that Canada was “The Northernmost Banana Republic.” He looked at U.S. political domination of Canada, based in our subordinate position in NATO, NORAD, the Defence Production Sharing Agreement and other military alliances and declared that Canada had no sovereign independence. He described Canada as “Puerto Rico North.”
On a more intellectual level, Harold Innis, distinguished professor of political economy at the University of Toronto, argued that Canada went from being a colony of Great Britain to being a satellite of the United States without ever having been an independent country. And all of this was before the continental free trade agreements.
Saskatchewan as a resource colony
If Canada is a Banana Republic, then what is Saskatchewan? Our leaders brag that we are no longer an agricultural province, dependent on exporting basic food products. Our strength, it is argued, is in the extraction and export of our natural resources.
Yet all of our resource industries are dominated and controlled by large trans national corporations, most of them foreign owned. Even the nominally Canadian corporations, like the largest oil companies, the Potash Corporation of Saskatchewan, and Cameco, sell their stock on the New York Stock Exchange and are majority-owned by U.S. investors.
Excess profits in the oil industry
So what difference does that make? Let’s look at the oil industry as one example. As everyone knows, the general international price for oil has gone from $20 a barrel in 2002 to $100 a barrel in 2007. We know that because we all pay that at the gas pump.
But these price increases far exceed the increases in the cost of the extraction of oil, and the result is that the oil companies have record profits and so much cash on hand they don’t know what to do with it all. Economists call this “economic rent,” the monopoly or excess profits that are made from the extraction of a natural resource when the returns are higher than the general rate of return on invested capital.
Around the world oil producing countries are increasing the royalties and taxes on the private oil companies to try to get a larger share of these monopoly profits. In almost all producing countries, the governments have taken the position that natural resources are a free gift from nature and therefore the benefits from their extraction should go to all the citizens, not just private investors. Almost every oil producing country has at least one state-owned National Oil Company (NOC), designed to capture as much of the economic rent as possible for the government. But not in Canada!
What is a fair return to the owners?
What about Saskatchewan? We have had a consistent policy since 1982, covering the Tory government Grant Devine, the NDP governments of Roy Romanow and Lorne Calvert, and now the Sask Party government of Brad Wall. Policy should minimize the return going to the province and maximize the return going to the investors in the oil corporations.
When private oil corporations seek the right to extract and use a natural resource like oil they must pay a fee to the general public for the use of the resource. These take the form of royalties and fees. In Saskatchewan during the NDP government of Allan Blakeney royalties and fees rose to 56% of the value of the sales of petroleum. Since then they have steadily declined in value. During the period of the recent oil boom, royalties and fees collected by the NDP government averaged only 15% of the value of petroleum sales. This royalty rate has been the lowest in Canada.
Alberta swings to the left?
In Alberta the legislature mandated that royalties from the extraction of oil should range between 20-25% of oil revenues. When the Provincial Auditor reported that they had fallen to only 19% in recent years, there were public demands for an increase, a special government-appointed panel to investigate the industry, and a government recommendation to raise the royalties by 20% to bring them back up to the level of the government mandate.
We all know the result of this. The oil corporations vigorously protested. They threatened to take their cash and invest it somewhere else. But the question was always where would they invest? New areas to invest overseas were more costly, and there would be higher royalties and taxes to pay.
Conservative governments want more
In December Newfoundland announced that it had signed a new deal with Husky Energy and Petro-Canada to further develop the White Rose offshore oil fields. There is a basic royalty of 30%. In addition the companies will pay a “super royalty” of 6.5% when the price of oil is above $50. This brings the total royalties up to 36.5%.
The libertarian Republican government in Alaska recently announced that it was raising the basic royalty on oil from 22.5% to 25% and eliminating many of the key deductions and subsidies. The oil corporations grumbled.
Petro-Canada moves to Libya
But the big news story is that Petro-Canada has announced that it is shifting its investment from Alberta to Libya. Petrocan renegotiated and extended its existing development contracts. For this it will pay $1 billion as a “signature bonus” to the Libyan National Oil company. All new developments will be in a 50-50 partnership with the Libyan NOC. While each of the two companies will contribute 50% of development costs, profits from these operations will be shared 12% to Petrocan and 88% to the Libyan NOC.
What is the message here? Libya is a world power. Canada and Alberta are banana republics. Then there is Saskatchewan, where Petrocan has to cough up 15% in oil fees and royalties. All our political leaders agree: there is no reason to open any discussion of resource royalties. Ralph Allen called this our “colonial mentality.”
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.
Alberta Panel Recommends Higher Royalties and Taxes on the Oil Industry
by John W. Warnock
September 20, 2007
On September 18, 2007 the Alberta Royalty Review Panel released its report on the oil and gas industry. It urged higher royalties and taxes on the industry in order to get a “fair share” for the people of Alberta. The report has been widely attacked by people in the industry. The new Alberta Premier, Ed Stalmach, has stated that the Progressive Conservative government would make a decision on the issue within three weeks.
The panel of industry experts heard testimony at hearings in five cities. Business and petroleum industry representatives strongly supported the present system. The general public, environmental organizations, and several academics recommended significantly raising royalties and taxes.
Research by the panel confirmed that conventional oil and gas reserves are declining steadily. The province is becoming increasingly dependent on extraction from the tar sands. The present royalty system has as a goal a return of 20% to 25% of the value of the sales of the resource. In recent years, because of the special low royalties set for the tar sands, this has dropped to 19%. In Saskatchewan the royalties from the extraction of oil have averaged between 14% and 16% in recent years.
For the tar sands, the present system sets royalties at 1% of gross revenues until the corporation recovers all of its investment. Then it pays a royalty of 25%. The panel proposes that the 1% rule be retained but that after they recover their investment the royalty rate should rise to 33%.
Introduce an excess profits tax
Furthermore, they make a strong case for the introduction of a “severance tax.” This would be a very moderate “excess profits” tax which would be applied when the price of West Texas Intermediate oil exceeds $40 per barrel. This would be set at 1% and rise to a maximum of 9% when the price reaches $120 per barrel. As a comparison, following the dramatic increase in the price of oil over the past three years, Russia has imposed an excise tax where the government takes 90% of the value of the oil when the WTI price exceeds $25 per barrel.
In Alberta, as in Saskatchewan, much of the conventional oil and gas deposits are depleting. Where a well or zone is mature and now is facing declining production, the panel proposes that royalties be lowered. The higher producing oil and gas wells and fields would pay higher royalties.
Blackout in Saskatchewan
While this report earned front page status in the Globe and Mail, and many articles in their business section, the Regina Leader-Post has chosen to not run any articles or comments. And of course our NDP government has remained completely silent. No need to remind the voters that the Conservative governments in Newfoundland and Alberta are moving to raise royalties and taxes on the oil industry while our supposedly left wing NDP government has been lowering them.
If David Karwacki and the Liberals came out on the side of the general public on this issue, and made it central to their campaign, they might get elected. A lot of people are looking for an excuse not to vote for the moribund NDP, and a great many people do not like or trust the Sask Party.
Update: Finance Minister Pat Atkinson has announced that the NDP government is not interested in opening up a discussion of resource royalties in Saskatchewan.
Saskatchewan Resources and Royalties
Who benefits from low royalties and taxes?
by John W. Warnock
September 8, 2007
In the area of business economics and political economy, one of the major topics over the past few years has been the dramatic rise in the price of most natural resource commodities, the profits being made by the large trans-national corporations and the efforts by resource producing countries to capture the surplus or excess profits created in these industries. Across North America there has been widespread criticism of the oil corporations for the high price of gasoline. But there has been absolutely no debate on this issue in Saskatchewan. The major political parties, the business community and the mass media are not interested. Why is this the case?
It is not that the issue is foreign to Canada. In Newfoundland the major political issue over the past two years has been the effort by Danny Williams’ Progressive Conservative government to get a greater share of the value of oil from offshore extraction. In Alberta the Tory government created a special commission to look into the royalties and taxes being paid by the large corporations extracting bitumen from the tar sands. This commission has held hearings across the province, with the general public demanding higher royalties and taxes and the oil and gas industry and the business community in general supporting the status quo.
In the past this issue has been central to political debate in Saskatchewan. During the NDP government headed by Allan Blakeney (1971-82) a major effort was made to capture more revenues for the people of the province. This invoked a major struggle with the potash and oil industries.
The Tory government of Grant Devine (1982-91) began the process of privatizing and deregulating the oil and gas industries, the potash industry, the uranium industry and the coal industry. This brought major confrontations, protests, marches and most likely led to the defeat of the Tory government.
In the election of 1991 the New Democratic Party promised to raise royalties back up to the levels that they were under the Blakeney government. But once elected they reversed direction and completed the privatization and deregulation policies begun by the Tories. They even started to privatize Sask Power, one of the most sacred Crown corporations, and completely divested the government from any control over the natural gas industry. Furthermore, as the resource industries became more profitable, they introduced further cuts to royalties and taxes.
Perhaps this is why there is no debate over this most important issue. There is now a consensus among the three major political parties in this province that privatization, deregulation and the reduction of corporate taxes is the right way to go.
Economic rent as monopoly profits.
There are two basic theories of the role of resources and their use by human beings. From the beginning there was the democratic theory, that natural resources are a free gift from nature (or the Creator) and are there for the use of all on an equitable basis. No one should profit from the exploitation of natural resources to the detriment of others. Since early 1970 the Green approach has been added, that resources should only be used in a sustainable manner and that other species have just as much right to exist on the planet as human beings. Historically this democratic theory was identified with the political “left”, which since 1791 meant those who favoured the expansion of democracy, the expansion of human rights, and the creation of a more egalitarian society.
Changes under the new world capitalist system
The liberal theory of the use of natural resources came with the rise of capitalism. The first comprehensive case for the liberal vision of resource use was set forth by John Locke in the 17th century in defence of the British seizure of Aboriginal lands in North America. This view, supported by Adam Smith and other liberals, held that men had the right to seize land and resources which were not be used, were not being used to make a profit, or were not being used to produce products for sale in the world market. The capitalist view emphatically opposed collective or communal ownership of land and natural resources. Exploitation of natural resources should be by individuals or corporations who claim ownership of them. In this process, they argued, the private exploiters of these resources did not owe any compensation to the general public. One of the major developments of the 19th century was the world wide transformation of land and resources from common property to private property, imposed by the imperial and colonial regimes from Europe. Since the liberal theory promotes unequal access to and unequal profit from the exploitation of natural resources, it has always been seen as the “right wing” theory of resource use.
Contemporary rent theory
Today in the world capitalist economy David Ricardo’s theory of economic rent from the exploitation of natural resources is the guide used by mainstream and business economists. Ricardo argued in 1818 that economic rent is a excess or surplus profit that comes from the exploitation of resources under a monopoly condition. If there is a competitive market, Ricardo argued, there will be no economic rent. Rent under this definition only occurs where there is a return to the investor over and above what is necessary to keep labour and capital producing products.
Thus across industrial Canada the average annual real return on equity (ROE) is 4.5%, which excludes inflation. The oil industry insists that it needs a 12% ROE because of extra “risks” involved, although these are virtually non-existent in Canada. In 2005 the Globe and Mail Report on Business found that among the ten largest oil and gas corporations in Canada, the lowest ROE was 18%, earned by those who invested in Talisman Energy Corporation. The highest ROE was 38%, earned by those who invested in Imperial Oil. Clearly, the oil corporations in Canada are capturing excess profits, referred to in political economy as economic rent.
Recent trends in Saskatchewan’s resource industries
Let us take a quick look at trends in prices, revenues and royalties for the extraction of Saskatchewan’s major natural resources.
(1) The uranium industry. For many years the price of a pound of uranium oxide hovered around $10. No new nuclear power plants were being built and few nuclear weapons. But everyone knew this was going to change. Beginning in 1985 the consumption of uranium exceeded production. The gap was covered by the conversion of nuclear warheads in the former Soviet Union into fuel for nuclear reactors. But this ended when President Vladamir Putin announced that the remaining warheads would be reserved for conversion and use in Russia. China and India announced plans to build nuclear reactors. The price began to skyrocket. By 2005 the world’s spot price for a pound of uranium rose to over $100. The NDP government reduced royalties on the industry in 1998 and 2002.
Who has benefitted from the dramatic increase in economic rent from the extraction of uranium in Saskatchewan? Areva (formerly Cogema) owned by the French government and their nuclear partners, Mitsubishi, and Cameco Corporation, formerly a Saskatchewan Crown corporation, based in Saskatchewan, but with a majority of its stockholders living in the United States.
(2) The potash industry. The price for a tonne of potash was about $80 in 2003. By June 2007 it has increased to $192 per tonne. The price increase has followed the general rise in fertilizer prices, as farmers are using more fertilizer to try to keep food production up with increasing demand. Furthermore, many countries are now subsidizing the production of ethanol, and farmers are using more potash to grow oil products. In 2003, just before the provincial election, the NDP government cut royalties on this industry. The beneficiaries have been the owners of the Potash Corporation of Saskatchewan, formerly a Crown corporation, based in the province, but with a majority of its stock holders in the United States. The other major beneficiary has been Mosaic Corporation, owned and controlled in Minneapolis by Cargill Industries and IMC Global.
(3) The coal industry. Saskatchewan produces lignite or thermal coal, a low grade coal burned for the production of electricity. The coal, owned by the people of Saskatchewan, is mined, sent down a railroad for a couple of kilometres, and burned by Sask Power, a Crown corporation owned by the people of the province. In the years before privatization and deregulation Sask Power mined the coal. Coal prices everywhere increased significantly in recent years, and in Saskatchewan they have gone from around $10 to $14 per tonne. The mining of the coal is now done by Luscar Energy, a partnership between Sherritt International Corporation and the Ontario Teachers’ Pension Fund. This is a good example showing the logic of the liberal theory of economic rent.
(4) The natural gas industry. Down until 1985 the natural gas industry in Saskatchewan was under the control of Sask Power. The Crown corporation had first claim on all development; the goal was to secure an adequate supply for the future needs of the province. Sask Power set the price for natural gas. It entered the market, developed gas fields, and owned and held them for the people as a whole. This began to change in 1985 when the federal and provincial Tory governments introduced the first deregulation of the industry. In 1988 the Devine government created Sask Energy, split off from Sask Power. Then in November 1998 the NDP government abolished Sask Energy’s monopoly of selling gas, allowed private firms to enter the gas distribution system, and required Sask Energy to allow private firms to use their infrastructure. Sask Energy is now just another corporation, required to buy natural gas on the open market. They no longer create reserves for future needs.
But natural gas is disappearing in Western Canada, as conventional sources are playing out. Many more wells have to be drilled to just maintain current production. Natural Resources Canada projects that gas production will peak around 2007 and then drop by 75% by 2020. Isn’t this something that should concern us?
In the meantime, the price for natural gas has gone from around $2.00 per thousand cubic feet in 1999 to a high of $11 in 2006 and have for the time being dropped back to around $5.50 in 2007. But a report by the International Energy Agency released in July 2007 projects that by 2010 natural gas prices in Canada will rise sharply because of a lack of supply.
The U.S. Energy Information Agency reports that profits and economic rent have been high in the natural gas industry in Western Canada due to relatively low exploration and drilling costs. There is easy access to pipelines to the United States, the market for 60% of Canada’s gas. To help this struggling industry, the NDP government reduced royalties and taxes on the industry in 2002 and 2004.
(5) The oil industry. Everyone knows that the price of a barrel of oil has gone up from $20 in 2002 to over $70 in 2007. In 2002 the Government of Saskatchewan reported that the oil industry in Saskatchewan, which increasingly depends on the extraction of lower-priced heavy oil, could do well as long as the price of West Texas Intermediate light oil was at least $20 per barrel. With the oil corporations reporting steadily increasing profits, the NDP government reduced royalties and taxes on the industry in 2002 and 2005. In 2007 the price for Hardesty Heavy crude oil was around $58 per barrel.
It is very difficult to judge just how profitable the oil industry is because the transnational corporation all use intra-corporate transfer pricing to shift costs to low tax areas. All of the large corporation follow the pattern of Enron and use off shore dummy corporations to hide profits in tax free zones. Nevertheless, the oil corporations in Canada report record profits to their stock holders. Even based on the cost figures provided by the industry’s propaganda organization, the Canadian Association of Petroleum Producers, economic rent (excess profits) are very high. On a most conservative basis, I have calculated that they are taking a minimum of $1 billion of economic rent from the province. Under a democratic theory of economic rent, all of this should go to the people of the province.
Around the world, all oil producing countries are using various tools to capture these monopoly profits. Almost all producing countries have state-owned corporations, like the formerly existing Sask Oil, which control the industry. These national oil companies (NOCs) may completely own and control the industry, which is typical of the OPEC countries. They may engage in joint ventures with private firms. All the major oil producing countries have production sharing agreements where a fixed percentage of oil must be delivered to the state. Many countries are now implementing excise taxes to capture the economic rent which has ballooned in recent years. For example, Russia has imposed an excise tax of 90% for all revenue over $25 per barrel. We have used all of these techniques in Saskatchewan in the past, but we use none of them today. In June 2007 Wood Mackenzie issued a special report on the oil industry in Canada. They found that Canada was the only oil producing country in the world that was actually reducing royalties and taxes. Even Great Britain and Alaska were raising their take.
We must remember that we all pay for this out of our own pockets when we buy petroleum products. We also pay for it in the reduced provincial revenues, leading to cuts in social programs. We pay for this give away of our resources through the higher property taxes we pay, as the provincial government, short of revenues, cuts grants to municipalities and school boards.
Perhaps the people at this meeting can come up with some ideas for how we can put this central economic and political issue back on the table for discussion.
Opening remarks delivered at a public meeting on natural resource and government revenues sponsored by the Regina Area Group of the Green Party of Saskatchewan, September 6, 2007.
John W. Warnock recently retired from teaching political economy and sociology at the University of Saskatchewan and the University of Regina. He is author of Saskatchewan: The roots of discontent and protest (2004). A research associate with the Canadian Centre for Policy Alternatives - Saskatchewan, he is author of
(1) Natural Resources and Government Revenue: Recent Trends in Saskatchewan
Canadian Centre for Policy Alternatives - SK (2005); and
(2) Selling the Family Silver: Oil and Gas Royalties, Corporate Profits, and the
Disregarded Public. Parkland Institute, University of Alberta and CCPA - SK (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?
by John W. Warnock
June 13, 2007
Canadian Dimension Magazine, Vol. 41, No. 5, September-October 2007, pp. 23-24.
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.
(1) Forestry. 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.
(2) Potash. 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.
(3) Uranium. 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.
(5) Petroleum. 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
by John W. Warnock
Energy Security and Climate Change
Cy Gonick, editor
Winnipeg: Fernwood Publishing, 2007.
Extract from Chapter:
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.
Richard Heinberg: “How Will You Heat Your Homes in Saskatchewan?”
By John W. Warnock
November 30, 2006
Last night 350 people braved the cold in Regina and went to hear Richard Heinberg, one of North America’s top experts on the oil and gas industry. He presented data showing the disappearance of oil and natural gas on a world wide basis and in particular in North America. He pointed out that the best geological research in Canada predicts a fairly rapid decline in natural gas production in the Western Canada Sedimentary Basin. He asked: “What are people in Saskatchewan going to do as the supply of natural gas declines and prices start to dramatically increase?”
He is dead right on this. In October Natural Resources Canada released its new study: Canada’s Energy Outlook: The Reference Case 2006. While predicting the demand for natural gas to steadily increase by around 1.2% per year, they expect that conventional natural gas production will peak in 2006 and then start to decline. The extraction of coal bed methane gas will increase, but it cannot begin to replace the loss of conventional natural gas.
Shipments of natural gas to Eastern Canada will have to decline, hopefully replaced by imports of liquified natural gas (LNG). The Mackenzie Valley Pipeline will be built and this gas will be available for customers on the prairies. But Natural Resources Canada ignores the fact that all of this gas is expected to be used to expand the extraction of tar sands oil, to be exported to the United States.
So what are Canadians going to do? Natural Resources Canada projects that net exports of natural gas to the United States will decline from 3,700 billion cubic feet in 2005 to 1,300 billion cubic feet by 2020. As Heinberg reminded us last night, there is the unpleasant fact of the proportionality sharing clause in the North American Free Trade Agreement (NAFTA). This states that Canada cannot reduce its exports to the United States below the average of the most recent three years. We are dreamers, he suggested, if we believe that the U.S. government will be willing give this up.
The production treadmill
If you ask anyone in the NDP government, or the opposition parties, they will say that the oil and gas industries are booming in Saskatchewan. We have never had it better. We have good reserves of heavy oil. Bids for exploration and development are rising. Many more natural gas wells are being drilled. But what does this really mean?
Between 1995 and 2003 natural gas production in Saskatchewan reached a production plateau, averaging about 285 billion cubic feet per year. But over that period the number of new gas wells drilled rose from 268 in 1995 to 2314 in 2003.
This follows the pattern of peak oil and gas seen in the United States and elsewhere. As we run out of natural gas, many more wells have to be drilled just to maintain existing production. New wells produce for a much shorter period, now with 50% of total production occurring in the first year. In Saskatchewan regulations used to specify that only one well could be drilled on every section of land. Now in the Hatton district in the Southwest corner of the province, the norm is between four and eight wells per section, and in special cases permission is given to drill twelve.
This is not an oil and gas boom, it is a sign of a collapsing industry. The rapid increase in the drilling of such marginal wells is only made possible by the existence of monopoly or excess profits, which have occurred over the past three years. Oil and gas corporations are awash in retained earnings and have relatively few places to invest to rebuild their reserves. Of course we are all paying for this through the tripling of oil and gas prices over the past three years.
Heinberg stressed that we need to press hard on this issue. Around 80% of us have natural gas heating. Natural Resources Canada projects that between 2005 and 2020 the production of natural gas in Saskatchewan will decline by 75%. This fact seems to have escaped all of our local politicians as well as those people in charge of Sask Energy and Sask Power.
What are the alternatives?
There are good alternatives, which Heinberg outlined. We know them from the studies done by the Saskatchewan Energy Development and Conservation Authority, before it was abolished by the NDP government in 1995. It starts with serious conservation programs, the promotion of energy efficiency, and the introduction of demand management programs. We have excellent wind and solar potential. Biomass in the North can provide heat and electricity. Burning coal for electricity can be reduced through the progressive introduction of switchgrass and fast growing trees, which are planted on marginal land and do not take away from the production of food. Geothermal heating can be greatly expanded. Electricity can be used to support transportation by public transit and trains. Automobiles can be built that are much more efficient. But all of these options take time to develop. When the crunch comes, as it certainly will, we can have rationing, as we had in World War II. But given the current political climate, most likely we will get rationing according to ability to pay.
Peak oil and gas is occurring right as we are beginning to experience the cost of fossil fuel development: greenhouse gas emissions and climate change. Heinberg stressed that we will have to reduce our general consumption levels and start to produce food for local consumption. The looming crisis requires a decentralization of energy production to local communities, not new centralized “clean coal” megaprojects. North American integration, pushed hard by President Ronald Reagan and Prime Minister Brian Mulroney, is the wrong approach in a period of uncertain climate. What would happen in Saskatchewan if we had an ice storm in the winter and much of the province had no electricity for days?
As we found out in the last municipal election, there is little concern over these very important developing issues. Business as usual prevails in all the corridors of power. We continue to build larger houses for smaller families. Urban sprawl, dependent on automobiles, marches on. The giant box stores and chains, so admired by our local politicians, promise us that everything we need can be supplied from China or Vietnam. As Heinberg argued, it is time to start thinking about the future we are giving our children and grandchildren.
John W. Warnock is the author of Selling the Family Silver: Oil and Gas Royalties, Corporate Profits, and the Disregarded Public, available on line at the Canadian Centre for Policy Alternatives.
Canada's Incontinent Energy Policy
by John W. Warnock
Briarpatch Magazine, Volume 35, No. 1
February 2006, pp. 14-16.
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.
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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.
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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.
For the complete text of this article see: http://briarpatchmagazine.com/news/?p=109
Oil and Politics in Canada
By John W. Warnock
Regina Leader Post
May 9, 2006
Danny Williams, Conservative Premier of Newfoundland, recently declared that "we're not going to give away our resources any more." His government negotiated a revenue sharing agreement with Ottawa. Then they raised the royalty rate for oil extraction. In addition, all new offshore developments would have to include an equity position for the provincial government.
Newfoundland wanted the Hebron heavy oil off shore project to proceed, but Exxon Mobil, Chevron, Petro-Canada and Norsk Hydro decided to postpone development. Williams proposed the introduction of "fallow-field" legislation to allow the government to take over oil leases which were not being developed. Such legislation exists around the world, including Alberta. However, Newfoundland could not proceed without the approval of the federal government, the joint owners of these offshore resources. Stephen Harper, always loyal to the oil industry, said no.
The opposition to the Newfoundland oil policy was led by Exxon Mobil, the largest private oil company in the world, which owns and controls Imperial Oil in Canada. They threatened a major suit against Newfoundland under Chapter 11 of the North American Free Trade Agreement (NAFTA). The oil giants argue that such legislation would be "regulatory confiscation."
As Premier Williams pointed out, the price of a barrel of oil has risen from $25 in 2003 to over $70 in 2006, resulting in enormous wind fall profits for the oil corporations. In North America, precious little of this has gone to governments in the form of increased royalties and taxes. The people of Newfoundland were demanding a bigger share.
In 2005 Exxon Mobil reported sales of $371 billion, profits of $36 billion and a return of 31 percent on invested capital. They spent only $18 billion on new investments and used $23 billion to buy back their own stock. Still, at the end of the year they had $163 billion in cash held as retained earnings. All the other major oil corporations reported similar statistics.
The corporate media in Canada lined up with the oil corporations and attacked Danny Williams. The Globe and Mail likened him to Hugo Chavez, the President of Venezuela, accusing him of "bombast and bullying." Chavez, who has won nine elections in the eight years he has been in office, has undertaken to regain control over the country's oil resources, given away under previous administrations. Venezuela took major state equity positions in 31 production sharing agreements, raised royalties and taxes, directed auditors to examine the books of the foreign oil corporations and presented them with bills for past tax avoidance. Venezuela has expanded the role of their state-owned oil company, PVSA. Nevertheless, almost all of the foreign-owned oil companies have accepted these changes for they can still make good profits. With the disappearance of new sources of oil around the world, they do not want to be excluded from the huge Orinoco River basin, an oil sands deposit larger than exists in Alberta and easier and cheaper to extract.
The days are gone when the giant private oil corporations dictated oil policy. They are now in stiff competition with the National Oil Companies from OPEC countries and those in China, India, Brazil, Malaysia, Russia and even Norway. A few of the small oil producing countries have National Oil Companies but do little direct field work themselves. There are thousands of independent oil service companies who do the work for them. Newfoundland could easily find other corporations to develop their oil and gas industry.
Canada is caught in a difficult situation. The geopolitics of oil are clear. The major oil reserves are all in less developed countries, almost all of whom have National Oil Companies. They control around 80% of the known oil reserves. The advanced capitalist countries are the consuming countries, and they have consistently opposed state-owned corporations and high royalties and taxes. So where does Canada stand in this world division?
While Canada is a major oil supplier, its governments have chosen to follow the policies of the consumer countries. As the U.S. Energy Information Agency reports, the royalties and taxes on oil in Canada are the lowest in the world. The U.S. considers Canada's oil as their oil, and our governments agree. Norway takes a different position, with Statoil as an equity partner in all North Sea developments, higher royalties and taxes, profits from Statoil's world operations, and a Petroleum Fund which invests oil revenues in renewable energy resources.
Since 1982 Saskatchewan governments have been lowering royalties and taxes on oil and gas extraction. Saskoil, our Crown corporation, was privatized. The Heritage Fund has been abolished. Our dwindling oil and gas resources are being exported to the United States as fast as possible. Premier Lorne Calvert and Industry and Natural Resources Minister Eric Cline have run off to Washington to convince the Bush Administration that we are loyal supporters and will not ship our oil and gas resources to China or India, or even conserve them for our own use! Is there no alternative?
John W. Warnock is a Regina political economist and author.
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
A new study
released today by the Canadian Centre for Policy
Alternatives says it is time there was a serious
public debate in
shows that resource royalties in
“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.
says it is not surprising that royalty reductions have
been welcomed by
“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.
taxes have risen to the highest level in
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.
Oil and Gas Prices Rise -- But Who Benefits?
By John W. Warnock
November 1, 2005
Murray Mandryk, political columnist for the Leader-Post, was right to criticize the NDP government for its hypocrisy over the issue of the rapid increase in natural gas prices. Both the Tory and NDP governments have significantly contributed to this problem. But his column (October 14) also reflects the general ignorance in this province of the oil and gas industry.
As Sask Energy made clear in their presentation to the Saskatchewan Rate Review Panel on October 11, they have lost all control over the price of natural gas because of the decision by governments to introduce a policy of deregulation and privatization. This began with the Halloween Agreement of 1985 undertaken by Tory governments but was brought to fruition in Saskatchewan by the subsequent NDP governments. The policy was enhanced by the Canada-U.S. Free Trade Agreement, the building of additional natural gas pipelines to the United States, a massive increase in gas exports to the United States, and the recent peak in natural gas production in the Western Canada Sedimentary Basin. As a result, gas prices in Saskatchewan are now set in the United States. And they are steadily rising.
This policy has aided U.S. consumers by keeping prices lower than they otherwise would have been. As the U.S. Department of Energy shows, natural gas royalties and taxes in Canada are among the lowest in the world, and the "netback" (or gross profit) to corporations here have been very lucrative, around 50% in 2004 when gas was at $6.20 per thousand cubic feet (it is now over $10). The policy of deregulation has been very good for oil and gas corporations and those who own them but hardly good for the great majority in Saskatchewan.
In contrast, in Europe the major gas utilities, both private and state owned, seek long term supply contracts and are directly engaged in the development of pipelines bringing gas from North Africa and Russia. They also are taking equity positions in projects for natural gas development. Their policies are guided by long term planning for security of supply, stability of price to consumers, and equitable distribution. Under government directed guidelines, their goal is to serve the needs of consumers first rather than maximizing profits for investors. This used to the policy in Saskatchewan before deregulation and privatization.
The oil and gas industry in Saskatchewan, and their advocates like Mandryk, Bruce Johnstone of the Leader-Post, former Tory premier Grant Devine and Lorne Calvert's NDP government, insist that expanded drilling here is due to the reduction in royalties and taxes by the Tory and NDP governments. This is nonsense. First, Canada has a tremendous advantage over many areas due to very low risk factors, a highly educated and trained work force, the very best technology and expertise, and closeness to the main market, the United States. This favourable climate should allow our royalties and taxes to be higher than other jurisdictions. But according to the U.S. Department of Energy, Canada's royalties and taxes on the oil industry are among the lowest in the world. In their annual survey of the 28 largest oil and gas corporations, they report that in 2002-3 the direct lifting costs (production costs) in Canada averaged $5.34 per barrel while royalties and taxes averaged an additional $0.23 per barrel.
The major oil corporations have demonstrated that they are willing to pay much higher royalties and taxes than in Canada. Here are a few examples.
The government of Venezuela has recently raised royalty rates to over 50% and have transformed 32 existing operating service agreements with private corporations to production sharing agreements where the national oil company (PVDSA) will get at least a 50% equity position. Yet the private corporations have accepted these changes.
Russia has recently raised its royalties and excise taxes on oil. The government will now take 100% of the value of all sales over $27 per barrel. Yet the private corporations are still seeking investments, particularly in the Arctic area.
Libya, with the international boycott lifted, is again opening up its oil regions for development. In recent bids the large foreign corporations agreed to give the government between 70% and 94% of the value of oil and gas sales.
Kazakhstan, hardly a world power, has recently opened bids to investment in Caspian Sea offshore blocks. They have demanded, and obtained, contracts with the private corporations which grant their national oil company a 50% equity position and which will pay 80% of the value of all sales to the government. When the oil majors objected to the tough terms, the government told them if they didn't like it they had a lineup of investors who were willing to take their places.
The fact is for many years now the provincial governments in Canada, including Saskatchewan, have been giving our oil and gas away for virtually nothing.
Mandryk states that "unless you're a dyed-in-the-wool socialist who still believes that a potash-industry-like nationalization of resources is a sound economic strategy, it's tough to quibble with Devine's point." This may sound good to the oil majors, but it is utter nonsense. There are now around 60 countries which have state-owned national oil corporations (known as NOCs). They control about 77 percent of the world's 1.1 trillion barrels of proven oil reserves. None of these countries have socialist governments. They recognize that oil is a finite and strategic natural resource, and they are determined to retain a high percentage of the economic rent from its depletion for their own citizens. Overall, they are doing a very good job at this. Some NOCs completely dominate the industry, as in Mexico, others stress joint venture development with private firms, and others just manage their national assets and set royalties and taxes. Of course the big NOCs like those from China, India and Russia are involved in projects all around the world. But relatively small NOCs like Norway's Statoil, Malaysia's Petronas, and Brazil's Petrobras are each involved in dozens of oil and gas developments in all parts of the world.
In a public opinion poll in late August of this year Leger Marketing found that 49% of Canadian respondents wanted to see petroleum resources nationalized and 43% wanted to see the oil corporations nationalized. Canadians are on the right track. Unfortunately, there are no political parties here willing to take up the cause.
John W. Warnock, a Regina political economist, is currently researching the oil and gas industry in Saskatchewan.
Sustainable Forestry is Possible
by John W. Warnock
Briarpatch Magazine, Vol. 32, No. 1, February 2003, pp. 27-29.
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
Policy Options, Vol. 22, No. 5, June 2001, pp. 31-36.
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.
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The complete text of this article can be downloaded from Policy Options:
Saskatchewan's Neo-colonial Forest Policies
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.