Lack of diversification is a risky invitation to investment disaster. Very few institutional, corporate or individual investors would put their total net worth into one sector. Yet that’s just what Alberta, Newfoundland and Labrador, and Saskatchewan have done.
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The economies of these provinces are heavily dependent on the fortunes of the petroleum industry. Corporate and personal income taxes generated by the industry are key to the treasuries all three provincial governments.
In addition, provincial ownership of subsurface mineral rights and the right to sell drilling leases, means they’re further lashed to a notoriously volatile industry that appears to be on its way out.
In contrast, very little drilling takes place on state or federal lands in the United States, other than offshore and in Alaska. While state governments certainly suffer when the industry experiences a downturn, they’re not in dire financial straits.
American states have few land or subsurface rights. The vast majority of oil and gas drilling and production occurs on private land. Landowners derive royalties from production and any disturbance on their property.
State and federal governments glean income tax from the corporations and their employees, but don’t receive royalties, except in the rare circumstances where they hold the subsurface rights.
Many other industries and companies are usually active in oilpatch states, so if oil prices and profits slide, it’s not necessarily a source of heavy damage to state treasuries. If those states also had royalty income and land-lease sale income, their fiscal situations could be as dire as those in Canada. Lack of state ownership of these assets has largely been a blessing.
This may seem counterintuitive to Albertans. The oil and gas industry has long been key to the province’s legendary prosperity. Albertans have the highest per capita incomes in the nation, even in periods of depressed oil and gas prices.
But more than 70 years of Alberta prosperity could be in jeopardy. And the continued fixation and dependence on fossil fuels could bring disaster.
Determined anti-petroleum forces seek to make the industry extinct even sooner than might naturally occur. Carbon pricing is escalating. And the continued pressure on institutional investors to no longer fund fossil fuel-related projects is increasing.
The solution is radical but necessary.
Oil and gas subsurface rights in Alberta and the rest of the Canadian oilpatch should be sold to private investors to eliminate government dependence on a volatile, risky industry with a finite life.
While it’s unclear what the sale of these rights could net, clues can be found in publicly-traded companies that own nearly all the royalties to their production. This is the legacy of the early land grants to the Canadian Pacific Railway, the Hudson’s Bay Co. and some other lucky landowners.
Alberta could yield around $50 billion for the sale of provincially-held conventional oil and gas properties, even at today’s depressed oil and gas prices and depressed industry valuations. If you add the value of royalties on oil sands production, you get a total approaching $260 billion. And yet more if you add natural gas production value.
Having law enforcement, health care, infrastructure and maintenance subject to wild swings in oil and gas prices was never a great idea. However, greed, complacency and backward-looking bias lulled Albertans and Canadians more generally to sleep.
Courageous and rational leaders should start the process of rigorous valuation of all oil and gas assets in Alberta, Saskatchewan, Newfoundland and Labrador, and other places in Canada. And then set in motion gradual divestment of these valuable but risky assets.
The proceeds should be put in a true sovereign wealth fund (unlike the oft-plundered Heritage Savings Trust Fund) similar to Norway’s, and then invested in diversified non-petroleum assets worldwide, with the investment income used to pay government expenses.
Never again should Canadians be subject to the erratic whims of energy markets without protection.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.