Is Big Oil trying to game Alberta’s royalty structure with their risky pipeline proposal?

Growing up, I spent a fair amount of time doing puzzles. I liked the simplicity and comfort of knowing each piece had its place and, given time and concentration, I could assemble the image of a unicorn or kittens in a basket that had originally caught my eye.

My Nana was the person who taught me to “puzzle”. She showed me how to find the easiest pieces first (the four corners),  build out the edge pieces, then fill in the rest looking for little details as clues to the bigger picture. This woman wasn’t known for her patience, but when she was putting together a puzzle, she had a buddhist-like calm. That’s the soothing effect solving a complete puzzle can have on a person.

Then there were those times we would spend hours focused on solving a puzzle only to discover one (or more) pieces were missing. In these moments, when we would finish our work and see a glaring hole in the middle of an otherwise complete picture, my Nana would go for “a walk”. To her, an incomplete puzzle that had been laboured over in vain was nothing short of infuriating.

Now as an adult, I find myself working on a metaphoric puzzle — one that is just as personal to me as sitting at my Nana’s dining room table on a rainy, West Coast day. The puzzle I’m referring to is the debate over the expansion of pipelines and oil tanker projects in B.C.

For the most part, I think I have my pieces organized: scientific evidence and economic reports are the corners and the will of First Nations and British Columbians make up the edges. But the middle of the puzzle is tricky, and often I feel like a piece has gone missing, dusty under the couch or buried by my dog in the backyard. In fact, just last week I was placing pieces in my brain, trying to understand how, despite reports like that of Oil Change International, our federal government is still being rumored to approve Kinder Morgan.

Then, I found a piece — a pretty important one — that has helped me continue to build the pipeline puzzle I have in my head.

That piece has to do with current oil prices. In case you haven’t heard, they’re really low. So low they make it really hard for Canada’s heavy oil to compete. And while our provincial and federal governments seem fixated on moving ahead with antiquated infrastructure, other nations are innovating better, more sustainable technology, and getting a much needed jump on moving away from burning the fossil fuels that are destroying our Earth’s climate.

So why is the oil industry pushing to not just continue with business as usual by making billions annually, but also lobbying our government (hard, and sadly, successfully) in an attempt to secure an increase in oil production beyond what’s needed in the global market?

Two words: Albertan royalties.

The royalties oil companies pay earn almost zero attention in mainstream media, yet to me, it is one of the most compelling reasons I’ve heard to date explaining why they are desperate to continue to expand a dying industry despite the gloomy economic forecasts.

So here’s the breakdown: Because the Government of Alberta owns the majority of the oil under the ground, they charge oil companies for the rights to extract these resources. BUT, the companies can reduce the rates they pay significantly if, drumroll, they commit to capital expansion projects.

The royalty rates charged a specific project are reduced as long as that project continues to expand and spend money building out its infrastructure. Royalties are anywhere from 1 to 9 per cent during a project’s pre–payout phase (when still paying out capital costs), but then they jump to 25 to 40 per cent when costs have been recovered. So stopping expansion means cha-ching for the public purse, while increasing costs to oil sands companies to the tune of 300 to 4000 per cent, making them even less profitable than they are now.

This regime, that clearly rewards expansion, was put in place decades ago during a time oil sands were trying to prove themselves as a viable producer. Also, as a high cost producer in a world awash in cheap oil, the oil sands are not as profitable unless they can credibly make an argument for continual expansion. They need something for others to invest in… Even if it is a house of cards.  

In sum, the old Albertan royalty system encourages continued expansion despite analysis showing there is no need for additional pipelines to service existing production. The desperate demands for new pipeline infrastructure are very likely driven by the need to continue expansion.

In this context, building Kinder Morgan is less about creating jobs and getting Canadian crude to new markets, and more about maximizing the profitability of existing operations by artificially exploiting a loophole that maintains almost criminally low royalty rates on a publicly owned good.

When I heard this argument, it was like I had stepped on the sharp edge of a missing puzzle piece buried in my Nana’s shag carpeting. Oil companies will never stop trying to expand pipeline infrastructure to get their product to non-existent markets, padding their profit margins despite the damage these projects will do to our health and environment. Big Oil doesn’t care about our home, our family or our province. But we do. It’s time to blow the lid off of these shady dealings.