When I was a little kid, my best buddy would try to slide around the punishment that followed our latest mischief — such as the escapade that involved an elderly neighbour and flying crabapples — by putting on his most doe-eyed expression and pleading, “But we didn’t mean to.”

His mother, hands on her hips and steely-eyed, would always reply, “Yes, but you did it.”

Her point being: we’d made a choice, even we could foresee the result and now there were consequences. By the time we were eight, we had figured out what she meant.

The pols who’ve concocted Alberta’s energy royalty mess remind me of those two boys. The billion-dollar economic consequences, the wider market’s behaviour and endless presentations from industry haven’t done the trick. Premier Ed Stelmach and Energy Minister Mel Knight have clung to their pose that their New Royalty Framework needs just a little tinkering to ease some minor “unintended consequences.” Anything really bad is due to falling commodity prices.

In other words, they didn’t mean to. But those unintended consequences were as foreseeable as old Mr. Melnyk’s reaction to small red missiles whizzing past his head as he gardened. Western Canada’s maturing energy supply basin is one of the costliest in the world. It has outperformed much richer supply basins, thanks to a combination of free-market competition, continually improving technology and proximity to consuming markets. But investment, wells drilled and oil and gas production are highly sensitive to costs, including royalties.

Stelmach’s royalty announcement in October 2007 triggered a demonstration of the Laffer Curve — the proposition, devised by Arthur Laffer, former U.S. president Ronald Reagan’s economic advisor, that an increased fiscal burden generates lower overall government revenue. Alberta’s new royalties were explicitly marketed as a government revenue-boosting measure. The maximum rate zoomed to 50% of top-line production revenue. Stelmach & Co. aimed to increase the province’s annual royalty take by $1.4 billion, or 20%.

Even before the new rates kicked in, revenue slumped. In particular, competitive auctions of mineral leases or “land sales” all but collapsed. In a good year, land sales haul in $3 billion — often more than royalties themselves. But prices bid per hectare are highly sensitive to commodity prices, playing an indirect but highly effective role in maximizing revenue during boom times, something the government is now attempting to force royalties to do directly. Collapsing land sales in 2008 mean the provincial treasury has already lost more than 100% of the hoped-for increased royalty take.

Meanwhile, zooming industry investment in British Columbia and Saskatchewan puts the lie to the claim that Alberta’s woes are all about lower commodity prices (although lower prices do explain much of the collapse in oilsands investments). Saskatchewan’s government now makes more money from land sales than Alberta does. Saskatchewan and B.C.’s previous lowering of royalties is bearing fruit in roaring resources revenue.

The Montney play is a case study in varying fiscal regimes. The Montney is Western Canada’s most sought-after unconventional natural gas reservoir. Hundreds of multimillion-dollar horizontal wells are being drilled and billions of dollars are being invested. The Montney geological formation extends beneath both sides of the Alberta/B.C. border. Most of the Montney drilling is in B.C.

The Stelmach government’s latest attempt to limit the damage came in late November with the Transitional Royalty Framework. Almost as soon as it was announced in a press release — which omitted the most basic fact: the new percentage rates — the government was issuing further modifications. Mostly, the TRF adds further complexity to an already Byzantine new system requiring a 145-page PowerPoint presentation to explain. Some say the transitional royalties won’t generate much new oil or gas — just massive amounts of additional production accounting.

You get the impression that Alberta’s government doesn’t understand the province’s No. 1 industry. It’s going to take a lot to unravel this mess. IE



More of George Koch’s articles can be read atwww.drjandmrk.com.