By David Yager, National Leader Oilfield Services, MNP

So there’s going to be a royalty review. NDP Premier Rachel Notley campaigned on it and the people of Alberta voted for it. This issue is of great concern to Alberta’s beleaguered oilpatch. It is unlikely Alberta’s new, left-of-centre government is reviewing royalties because they believe producers aren’t sufficiently profitable.

The reality for Alberta’s oil industry is sobering. The NDP is in power for at least four years. The oil and gas is here. The assets are here. The people are here. Will the business remain competitive? Despite her campaign promises, Premier Notley keeps advising the oilpatch to be calm. Everything will work out, to quote the Premier, “A-OK.”

And it could. It really depends upon how the royalty review is conducted. Notley has promised public input, which would make it similar to the hearings the Stelmach PC administration held in 2007. There was no screening or stakeholder qualification to participate. Because Alberta’s oil is owned by everyone, every opinion mattered. All you needed was a pulse and a voice. Anyone and everyone was given their shot, 5 minutes for an individual and 10 minutes for a corporation or trade organization.

The industry participants universally presented mathematical arguments based on return on invested capital (ROIC) and dwelled on arcane concepts such as investor confidence and international competitiveness. Meanwhile, the public talked about highly subjective defintions of “fairness” and how Albertans needed better health care, roads and seniors’ services. Be assured fairness got more media coverage than a globally competitive ROIC.

In September of 2007 Stelmach endorsed an “expert” panel report that recommended jacking up royalties by at least $1.4 billion a year. Titled “Our Fair Share,” it was a very political document long on rhetoric and light on statistics. The report was adamant that Alberta could increase royalties by about 20 per cent on all categories of production and remain an “attractive destination” for investment.

While indusry was devastated, the report was very popular because most Albertans believed oil and gas producers were unbelievably profitable, this business is easy, and a bigger cut for the government was harmless and essential.

Stelmach held his ground after oil and gas prices and the world economy collapsed in the latter half of 2008. The New Royalty Framework (NRF) became law January 1, 2009.

Two years later, when it was clear the “my fair share” based NRF was an unmitigated disaster in the face of the global economic crisis and new shale gas and tight oil discoveries across North America, another royalty review was undertaken by the Stelmach government. Called the Competitiveness Review, this took a completely different format. Joe Public was not invited. Instead, government and industry experts studied various prospects from multiple juridications in terms of land cost, drilling and completion expenses, anticipated production and decline rates, and the full cycle return on invested capital.

The numbers were clear. Alberta was clearly not competitive under the NRFcompared to other markets with similar geological opportunities. Changes were made in the second quarter of 2010. After nearly three years in the economic wilderness, Alberta’s oilpatch went back to work.

So the fact that the Notley government may review the royalty regime does not in itself mean the outcome is predetermined. In 2007 oil prices were rising, gas prices were high and industry activity was frantic. The economy was rocking. The argument even emerged that having an enlighted government slow down an overheated economy for its own good was sound public policy.

2015 is a different story. Oil and gas prices have collapsed. Unemployment is rising. House prices are falling. Oilsands projects are being delayed or cancelled. Producers and service contractors are reporting huge losses. Nobody sees oil anywhere near $100 again without major military conflict somewhere important, like the Strait of Hormuz. If public hearings on royalties are held any time soon, it will be interesting to see who is going to publicly demand the oil industry pay its fair share when it is so patently obvious this essential business to Alberta’s economic success is struggling mightily.

This is not to say the oilpatch can relax. Far from it. Taxes are going up. Deficits will rise. Lots of tough times ahead no matter what happens. More uncertainty caused by a new, activist, left-of-centre government is not helpful. The political debate will surely escalate. In the Calgary Herald on June 8, three former NRF panelists were adamant their recommendations were sound and the government caved under intense oilpatch lobbying. Raising royalties was not about economics but political will.

That the NDP will clobber the industry when it is down is not certain. In fact it makes no sense at all considering the state of investment and employment. But we’re reminded again by three of the 2007 review panelists this process is also about perception, not reality. Here’s hoping.