What's in a royalty?

Back in the last provincial election campaign, newly-chosen Progressive Conservative Party leader Alison Redford was in the fight of her party's life. A whole lot of people didn't think the Tories would actually receive its usual coronation.

That meant Redford had to spend time with the lowest of political life forms — that being newspaper editorial boards in small centres. I've been doing this job for a long time, and I can't remember a sitting (or even campaigning) premier ever wasting an hour with the likes of me.

That' s one whole hour she will never get back, and one which I will not likely forget.

Details on what was said are muddled by poor memory and worse archiving of interview notes, but one detail does stand out, because I challenged her on it. She said then that Alberta was losing more than $100 million a month of potential energy revenue, due to a lack of pipeline capacity.

I was wondering if I heard her correctly, so I asked her to say it again. Redford affirmed that, yes, that was what she said, and her press secretary promised to get back to me with exact figures, if I wanted them.

Over a hundred million a month. And today, that adds up to about $6 billion annually in provincial revenue that could have been collected if Alberta's oil sands could recover that “price bubble” the premier referred to last week.

That's the discount on oil sands bitumen below the benchmark West Texas Intermediate price of oil. The final figures for 2012 have just been posted, and the WTI, averaged for all of 2012, was $95.07. The last budget was based on a 12-month average of $99.25.

The cost of the “bubble” is beyond my capacity to guess because it changes every day, but Alberta finance minister Doug Horner recently told the Calgary Chamber of Commerce it has reached as high as $47 a barrel.

The average discount is reported to have been about $10 more than what the government had budgeted for last year, which was just under a $16-per-barrel discount.

That's the difference between WTI and the real price of Alberta bitumen. The concern for the province is that we (the resource owners) only get royalties on the bitumen price. Even though nobody buys bitumen — nobody can, it won't flow through a pipe.

In fact, hardly anybody buys the diluted bitumen that is proposed to flow through the proposed Northern Gateway pipeline to the West Coast and then to China. Even that is too crude a product for buyers — and is considered too costly to transport profitably.

Right now, there is no such thing as a major pipeline carrying dilbit, or diluted bitumen, much less a double pipeline carrying the diluent back to the source, like Northern Gateway is supposed to be.

What the pipelines are carrying today is semi-processed West Canadian Select , a partially upgraded synthetic crude that operators like Syncrude or Alsands can almost make to order.

The differential on that is less, but Alberta still only gets royalties based on the price of raw, dry bitumen that nobody buys.

Even at that, bitumen royalties accounted for fully 10 per cent of all provincial revenue in the budget year 2010-2011. At this time last year, prognosticators were prognosticating that bitumen royalties would cover 20 per cent of all government revenues by 2014-2015.

These days, bitumen is worth about $50 a barrel, and we owners get something like 4.7 per cent of that, on projects that have not yet fully recovered their cost. At $50 a barrel, minus royalties and production costs, it takes a long time for a multi-billion-dollar mining and upgrading operation to pay for itself.

For comparison, when Peter Lougheed first created the Heritage Fund, he expected Albertans to take a royalty rate of about 35 per cent.

But don't feel too angry at those foreign owners who are still realizing good profit on roughly 1.85 million barrels a day. Considering all of Canada's big pension plan investors, chances are good that most every Canadian with an RSP portfolio has a piece of that action.

The big corporate decisions may be made by foreign boards, but most of the money still stays here, and governments in every province tax it.

So what's with the panic over the $6 billion “lost” revenue, and the hard decisions said to come in the budget? Horner and Redford have both been in government long enough to know about price cycles.

What's with the panic is that through cycle after cycle, the government has every time failed to save more than pocket change in the good times. We've eaten all the returns of the Heritage Fund, and consumed most of the money in the Sustainability Fund that replaced it.

We have nothing, other than a lack of a sales tax, to show for it — and the rich benefit from that most of all.

While we take the long view and wait for the cycle to turn yet one more time, just watch the Tories recycle old promises to be prudent with your money — and your share of the energy royalties.