By David Yager, August 11, 2020
Revisionist history and political fantasy were on full display August 6 courtesy of a Bloomberg article titled, “A $433 Billion Missed Opportunity Haunts Canada’s Oil Heartland”.
As has already been done too many times, the story’s premise was comparing Alberta with Norway. Once again it was ludicrous and devoid of context. The only thing Alberta and Norway have in common is lousy weather.
Please stop. Here’s why.
The article opened, “If any place in North America should have been prepared for the crash in oil prices, it’s petroleum-rich Alberta, the Saudi Arabia of Canada.” Citing the creation of the Heritage Savings and Trust Fund in 1976 – which was originally advertised to make tough economic times less painful – it continued, “For decades, royalties poured into Alberta’s coffers, with the gusher accelerating in the boom of the early 2000s as the province developed its vast oil-sands reserves, the world’s third largest oil resource.”
Since the fund was created, 11 consecutive governments spent the money instead of saving it. The writers concluded, “Had it set aside more during oil’s boom, Alberta could have had a $575 billion (US$433 billion) wealth fund to cushion the blow of Covid-19, according to one economist’s estimates. Instead, the …. Fund is down to just $16.3 billion…That’s not enough to provide much help in a province suffering from Canada’s second-highest unemployment rate at 15.5%, a falling credit rating and a dark period for its most important industry.”
The source of this calculation of theoretical oil wealth is the energetic and often-quoted Trevor Tombe, an economics professor at the University of Calgary.
All Alberta had to do to accumulate all this cash was to be like Norway which has piled up US$1.12 trillion, the largest sovereign (government controlled) wealth fund in the world. The formula for Norway, according to Bloomberg, has been to put all its oil and resource revenues into the fund and cap withdrawals at 4% a year.
During this dreadful year economically, the province is indeed afflicted with 2020 hindsight (pun intended). Companies struggling with debt would love to go back in time and borrow less money. Albertans should have sold all their E&P and OFS stocks in 2014 as they have never been that high since. Houses and condos peaked in 2007 and have been leaking value since. Every unemployed Albertan now wishes they had lived more conservatively when times were good.
The thesis that Alberta should have managed its oil wealth like Norway has been around for years. While the origins are unknown, it likely originated from Alberta’s left-wing politicians. Norway’s oil regime is attractive to “progressives” because of significant state ownership, big tax rates, unionized labor and a distinct shortage of self-made multi-millionaires who got rich developing publicly owned resources.
Where Alberta and Norway are similar is they produce oil, they both have high profile sovereign wealth funds, and they share bad weather.
Everybody loves talking about the weather. This chart compares the average monthly high and low temperatures of the capitals of both, Edmonton and Oslo. Edmonton is at 53.550 N and an elevation of 645 meters. Oslo sits at 59.90N and, as a port, is only 23 meters above sea level. The winters are more moderate in Oslo thanks to the proximity to the ocean.
But comparing money and oil should have never happened. Apples and oranges. How did it get this far so frequently?
Alberta and Norway are a peculiar pairing. There are 96 countries in the world producing 160,000 barrels of oil a day or more. Alberta ranks about sixth and Norway 15th. The 2019 Sovereign Wealth Report from the IE Centre for Governance Change lists 94 international entities managing US$8.34 trillion. Norway ranks number one and Alberta 36.
Of the 40 largest government-managed capital pools, half are from oil producing countries or subnational jurisdictions including US states. Three – Alaska, Texas, and New Mexico – are much more like Alberta than Norway and have funds with significantly greater assets.
That Alberta became a big oil producer is in many ways a miracle. It is a subnational province, not a country, and therefore has no legislative authority in many key areas that affect resource development. The province is completely landlocked and surrounded by the least populated regions of North America. It didn’t even legally control its resources until 1930. The closest tidewater is 1,000 km. west through near-continuous mountains.
While early conventional discoveries like Redwater and Swan Hills were all meaningful at over one billion barrels, most were much smaller. Pipeline access east, south and west was secured only because of support and cooperation by Ottawa, Washington, US states and Canadian provinces.
This is in short supply nowadays.
On a global basis, Alberta’s conventional oil production is marginal and expensive requiring many wells, pumps, extensive plumbing, and continuous maintenance. Surface access to drill must be secured from third parties. Farmers charge surface lease rentals and municipal governments levy property taxes that have crept higher for years.
Because Alberta is large and still relatively undeveloped, infrastructure like all-weather roads are essential, expensive, and too often non-existent. This drives up costs. The oil is spread out in hundreds of small pools with the furthest south being 1,000 km. from the furthest northern. To keep all these wells producing, support services and personnel must live nearby. This has resulted in numerous oil towns across the province. Some of these communities would not otherwise exist. This is the dominant business in many hamlets, villages, towns and cities.
Alberta’s highly cyclical seasonality is troublesome and expensive and prohibits predictable, lower cost, year-round operations.
The basic royalty regime was invented decades ago but has been tinkered with continuously. The Crown leases the mineral rights for cash, collects royalties on production immediately, and the developer pays for everything else. While the government would certainly prefer that the licensee makes money, profitability does not affect the royalty rate or obligation.
The only major deviation is royalty holidays to stimulate activity whereby a certain amount of production can be produced royalty free. These started as drilling incentives in the 1980s after oil prices collapsed and exist today based on wellbore length to sustain activity for expensive wells drilled into tight oil reservoirs.
The nature of Alberta’s labor-intensive production has always made employment a key policy consideration. Royalty rates and royalty holidays have been balanced with investment and jobs. There are three levels of direct corporate taxation: municipal, provincial and federal. They are not coordinated and cooperation is rare.
Alberta also deals with First Nations rights and Indigenous land claims and access issues. While the oil industry has demonstrated all over the world that it can get along with anybody, there is continuous and often unpredictable involvement from tribal councils, the federal government and environmental activists from all over the world.
Norway’s oil industry is so completely different it is astonishing this fact is never mentioned. As a sovereign nation it shares no legislative or regulatory authority. It is surrounded by oceans on all sides but its eastern boundary. Maritime industries have always been integral to the economy and Norwegians are recognized experts. All oil is offshore and is more capital than labor intensive. No pipelines are required. The oil has immediate tanker access to global markets and receives world prices at the lowest transportation costs. Roads and land disturbance – and all associated costs and headaches – are not required.
Perhaps the greatest and unrecognized value of Norway’s oil is it completely out of sight; a whole country full of NIMBYs because no industrial activity takes place in anybody’s backyard. The Norwegian oilpatch is all but invisible with no noisy, unattractive and odiferous operations taking place near anyone. Norwegians can be oily black and forest green at the same time. They get all the financial benefits of their oil without any of the inconveniences and conflicts associated with developing resources near people.
Norway’s offshore oil has only one level of taxation and administration. There are no surface lease levies or property taxes. No new communities were required. The offshore oil supply bases have all been marine ports for centuries. The workers live on the offshore platforms and their hometowns on days off. Support industries create some employment in the closest ports such as Stavanger, Bergen, Trondheim and Hammerfest. Specialized oil equipment manufacturing has grown with the industry.
Norway’s fiscal regime has two objectives: attracting and retaining development capital and collecting as much money as possible. All capital costs are deductible from government levies including asset decommissioning and wellbore abandonment expenses. Norway collects no taxes until all investment funds have been recovered by the operator.
Norway’s petroleum taxation mission statement reads, “The overall objective of Norway’s petroleum policy has always been to provide a framework for the profitable production of oil and gas in the long term. It has also been considered important to ensure that as large as possible a share of the value creation accrues to the state, so that it can benefit society as a whole.”
“The petroleum taxation system is intended to be neutral, so that an investment project that is profitable for an investor before tax is also profitable after tax. This ensures substantial revenues for Norwegian society and at the same time encourages companies to carry out all profitable projects. To ensure a neutral tax system, only the company’s net profit is taxable, and losses may be carried forward with interests.”
There is only one level of oil taxation and administration in Norway. This is breathtakingly simple compared to Alberta.
Alberta and Norway love the oil business. Both would like to expand production. But in the 21st century, Alberta is struggling while Norway thrives.
Alberta producers have endured corporate tax increases (thankfully reversed provincially), carbon taxes, property taxes, transportation obstacles, below-market prices and a multitude of campaigns and political movements against their very existence. While Alberta and most of western Canada is pro-oil, other parts of the country use their voting power and the political process to make it increasingly uncompetitive just to stay in business, let alone expand.
In Norway there are no pipeline protests, road or railroad blockades and few public demonstrations. No climate crusaders link the future of mankind with Norway’s oil. There are no oil-related physical assets for publicity seeking protesters to chain themselves to besides gasoline stations.
Not a single tree was cut down or shovelful of dirt moved to put Norway into the oil business. To what degree did this moderate the anti-oil movement? How much money did this save developers? The country?
Norway is aggressively increasing production and faces minimal public or political dissent about petroleum’s future. They love the money and that is that.
What is ironic about Norway’s petroleum taxation formula is that when a similar structure existed in Alberta, it was attacked as being excessively generous. The Generic Oil Sands Royalty Regime was created by Ottawa and Edmonton in 1997 to spur development of this huge resource. It included accelerated federal corporate depreciation deductions for capital investments from taxable income and a symbolic 1% provincial Crown royalty until payout.
After it started to work and big money flowed into the oil sands, both measures attracted significant political criticism and were eventually eliminated or amended. Today any free cash not vacuumed up by governments is routinely called a subsidy.
Since inception, Norway’s fiscal regime remains fundamentally unchanged except for some minor adjustments for macroeconomic conditions.
As for Alberta’s Heritage Fund, it was doomed to fail before it was created in 1976. Following the huge OPEC-engineered oil prices increases of 1973, royalty income began to pour into Edmonton’s treasury at previously unimaginable rates. In the 1971/72 fiscal year total non-renewable resource revenue was only $273 million. Five years later it was over seven times higher at almost $2 billion. By 1981/82 it would peak at $4.8 billion, nearly 18 times what it was pre-OPEC.
Alberta started out as a colony and in the minds of many in what is now nicknamed Laurentian Canada, it still is. It was certainly treated as such by Pierre Trudeau’s Liberal government in the 1970s. The powerful voting bloc in Ontario and Quebec was struggling with record high interest rates and inflation as fuel prices went through the roof. Ottawa responded by capping Canadian oil prices, introducing natural gas excise taxes on US exports, and creating a state oil company. The National Energy Program brought in a federal wellhead tax on Alberta production. The federal/provincial battle over oil wealth in the 1970s became political legend.
The Heritage Fund was created in part because Edmonton was collecting more money than it could spend (not that the government didn’t try as spending skyrocketed) and to make the point that oil wealth was Alberta’s by law and wouldn’t last forever.
In my book From Miracle to Menace – Alberta, A Carbon Story I devoted an entire section to Carbon Politics. On the Heritage Fund I wrote;
The commitment was that 30% of non-renewable resource would flow into the Heritage Fund. Its purpose was to protect Alberta for a “rainy day” when oil and gas did not contribute as much as it could at that time… But whatever comfort it gave Albertans, the Heritage Fund would become a lightning rod for further federal political interference as Alberta enjoyed unparalleled prosperity while the rest of Canada – at least in the minds of many voters outside Alberta – paid for it.
It started to drizzle because of falling oil prices in 1983 when the first $900 million of Heritage Fund investment income found its way into general revenues. The inclement weather continued through the 1980s. Contributions to the fund stopped entirely in 1987 and investment income was routed into general revenues thereafter.
Norway’s fund was conceived in 1980 as exploration success continued in the North Sea. The Ekofisk discovery of 1969 was a world scale whopper, some 6.4 billion barrels. Light sweet crude, the good stuff. Legislation with strict controls on contributions, management and withdrawals was passed in 1990. The first contribution was made in 1996 and the funds were invested outside of Norway, a clear method of insulating the capital from political interference. Over the next 24 years it was invested in equities, fixed income securities, real estate and emerging markets.
Norway’s oil production has always received the world price, has low transportation costs because it is produced directly into tankers, and has had not suffered from interference in pricing, market access, taxation or royalties from other jurisdictions or levels of government.
Compared to labor-intensive oil development in Alberta, no major government infrastructure was required in Norway like roads, schools and hospitals. Norway’s population in 1970 when oil was discovered was 3.9 million. This year it is 5.4 million, a 38% gain over five decades. Over the same period the population of the world more than doubled.
In 1970 Alberta had 1.6 million inhabitants. This year it is 4.4 million, nearly triple what it was 50 years ago. This has put tremendous spending pressure on the province to keep up with infrastructure. The alleged inability of Alberta to keep pace with roads, schools and hospitals has often been an election issue. But there has also been significant growth and wealth created in housing, commercial buildings and all the infrastructure and support services required to service a rapidly growing industry and population.
The way Alberta and Norway have chosen to manage their oil money is indeed materially different. For personal taxes, Alberta and Norway are polar opposites. Alberta has kept its rates as low as possible while Norway remains an expensive place to live despite having over a trillion dollars in the bank.
Alberta has always put its non-renewable resource income into general revenue. The cash flow only became meaningful after the Leduc discovery in 1947. The general philosophy of the Social Credit government of the 1950s and 1960s was efficient, low-cost government with the purpose of making life better for the citizens. And the province needed the cash to keep up with the growing demands for the infrastructure required in the vast empty areas where oil was discovered but had no roads, housing, or inhabitants.
The province was legally only 42 years old when oil was struck at Leduc. Alberta’s population was a mixture of its Indigenous peoples and settlers from many places who relocated for different reasons. The objective was to make something valuable out a vast, cold, remote and underpopulated portion of North America. Rest assured settlers moved to Alberta to build their own fortunes and families, not a giant government.
The creation of the Heritage Fund in 1976 cannot be examined without factoring in the turbocharged petroleum politics and miraculous and sudden oil wealth of the times. Those who opine that the Alberta government should have a big pile of money like Norway never mention the significant differences in the resource itself, the jurisdictional and administrative challenges, or the huge cost of the infrastructure necessary to build and populate a modern province.
Or what Alberta would look like in terms of taxation, population and personal wealth had the province hoarded the money instead of keeping it in circulation to build the province and its economy. The math is simple. If the province has a lot more, Albertans have a lot less.
The other thing we know from Canadian politics is that there is no possible way Alberta could have accumulated a $575 billion pool of capital even if the governments of the day were determined to fulfill the original mission of the Heritage Fund.
No federal government could have ever won an election in central Canada if it permitted or even publicly supported one province in western Canada accumulating this much wealth.
Norway has an entirely different history. Its current inhabitants have lived there for centuries. Cities like Oslo, Bergen and Trondheim had populations in the thousands in the 1300s. Norwegians were the conquerors, not the conquered, with the Vikings exploring and settling places like Iceland hundreds of years ago. After years of quarrels with neighbors Sweden and Denmark, Norway became a country in its current form in 1814. In the modern era of mass migration and integration, Norway must surely have one of the most historically homogenous populations in the world.
While they don’t always agree, building consensus among Norwegians on big picture policy issues like managing the offshore oil bonanza is a piece of cake compared to Alberta and Canada.
If the Norse/Viking Norwegians are not yet considered Indigenous after all these centuries, the Sami people of northern Norway, Sweden, Finland and Russia might be comparable to our First Nations. The two cultures have lived together for centuries. There are no land claim or land use issues for oil development in Norway because it all takes place offshore where it affects no one on a daily basis.
This article is already too long for today’s 280-character Twitter world. Sorry.
But stop. Please stop. Don’t ever compare Alberta to Norway again and make any more preposterous and impossible suggestions on how Alberta should or could be more like Norway. Alberta will never, and can never, be like Norway.
And be assured Norway doesn’t want to be like Alberta.
David Yager is an oil service executive, energy policy analyst and author of From Miracle to Menace – Alberta, A Carbon Story. More at www.miracletomenace.ca