Alberta's Oil Revenues - October 8th 2007

BOLDER MOVE REQUIRED

A recent study has recommended that Alberta is not charging enough royalties on oil extracted from the tar sands and that they should be significantly increased. The study has provoked widespread condemnation both within the oil industry and by financial experts as being ill advised. A simplistic look at the situation shows that Alberta is charging less for its oil than other locations but the reality is much more complicated than simply looking at percentages.

In order to reduce the effects of global warming, the trend amongst consumers is moving towards the evaluation of products based upon their cradle to grave carbon footprint. These changes are beginning to be enshrined in legislation in California and other places and effectively penalize products whose carbon cost is high. Extracting oil from tar sands requires large amounts of energy, mainly in the form of steam. If that steam is generated by burning natural gas, then the carbon cost of extracting the oil is very much higher than with a traditional oil well. If the new legislation on carbon footprints is taken to its logical conclusion, then consumers would quite simply not be able to buy any of Alberta’s oil. It wouldn’t then matter what level the revenues were set at, there would be no income for the province.

The logical and quite straightforward solution to reducing the carbon footprint of the extraction process is to generate the required steam using nuclear power. Nuclear reactors incur no carbon penalty in operation as no carbon dioxide or other pollutants are emitted. That is not to say that nuclear reactors are completely clean. They do incur penalties in terms of high initial capital costs and in the costs of decommissioning at the end of their lives and these costs also have associated carbon penalties. Overall however, the use of nuclear power would silence many of the critics of Alberta’s oil.

So the question is who should pay for the construction of a nuclear power plant and how? Again, the solution is quite straightforward since this is an ideal application for a PPP (Public Private Patnership). Make the oil companies pay most of the construction costs and pay them back by providing them with cheap power and steam when the plant is online.

The oil companies win because they can continue to sell the oil and because their future extraction costs are stabilized. Alberta wins because it gains a power station for next to nothing and can continue to extract revenue from the oil companies. As with all things, the window of opportunity here is small. Instead of trying to nickel and dime the oil companies, it’s time for Alberta to make a bolder move to secure the province’s future royalty revenues.