Selling the - Amazon S3...In order to curtail tax avoidance, some countries have had to introduce a...

Selling theFamily Silver: Oil and Gas Royalties,Corporate Profits, andthe Disregarded Public

by John W. Warnock

November 2006

ISBN: 1-894949-12-9

Published by: Parkland Instituteand Canadian Centre for PolicyAlternatives - Saskatchewan Office

All rights reserved

The Author

John W. Warnock has recently retired fromteaching political economy and sociology at theUniversity of Regina. He is the author ofSaskatchewan: The Roots of Discontent and Protest,The Other Mexico: The North American TriangleCompleted, The Politics of Hunger: The Global FoodSystem and others. He is a research associate ofthe Canadian Centre for Policy Alternatives –Saskatchewan. He is the author of Natural Resources and Government Revenue: Recent Trends inSaskatchewan published by CCPA-SK in June 2005.

John W. Warnock: [email protected]://www.johnwarnock.ca

Acknowledgements

The author would like to thank the followingpeople for reading earlier drafts of this paper andproviding helpful comments and suggestions:Ricardo Acuña, John Dillon, Diana Gibson,John Keen, Gordon Laxer, John McClement,Joe Roberts, Rick Sawa, David Thompson, andEd Whelan. The author accepts full responsibilityfor the final text.

Special thanks goes to Lynn Gidluck and YolandaHansen for editorial work and other support onthis project. Additional thanks to Christine Petersfor cover design and layout of this publication.

The opinions expressed in all CCPA and ParklandInstitute publications are those of the authors anddo not necessarily reflect the views of either theCCPA or the Parkland Institute.

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Executive Summary .......................................................................................................... 5

Introduction ...................................................................................................................... 9

I. The Oil Industry: Historical Background .................................................................. 12Oil and the emergence of transnational corporations ............................................. 12Oil corporations and government policy .................................................................. 13

II. The Geopolitics of Oil ............................................................................................... 15Globalization and the international response .......................................................... 16A new environment begins in 2000 .......................................................................... 17Independent oil companies ....................................................................................... 18National oil companies .............................................................................................. 19

III. Peak Oil and Environmental Concerns ..................................................................... 21The looming crisis: climate change ........................................................................... 23

IV. Economic Rent from Resource Extraction and Government Fiscal Regimes ........... 25Economic rent under capitalism ............................................................................... 25The oil and gas industry ............................................................................................ 26Fiscal systems for extracting economic rent ............................................................. 26The advantages of state ownership............................................................................ 27Rent collection in a private enterprise economy ...................................................... 28Different government fiscal regimes ......................................................................... 29The problem of tax avoidance ................................................................................... 31Offshore tax havens ................................................................................................... 32

V. Canadian Oil Industry ............................................................................................... 34Promoting continental integration of the oil industry ............................................ 35Canada and the rise of windfall profits..................................................................... 36Foreign ownership ..................................................................................................... 38

VI. The Oil Industry in Saskatchewan............................................................................. 39Established reserves .................................................................................................... 40Trends in the extraction of oil ................................................................................... 41Industry profits, royalties and taxes .......................................................................... 43Royalties in Saskatchewan ......................................................................................... 45

VII. The natural gas industry ............................................................................................ 49North American gas production ................................................................................ 49New sources of natural gas ........................................................................................ 50Canadian natural gas production .............................................................................. 52Saskatchewan gas production and royalties .............................................................. 54

VIII. Summary and Conclusion ........................................................................................ 58

Annex – Fiscal Regimes ..................................................................................................... 61Table I: Petroleum Production, Sales and Royalties ......................................................... 64Table II: Natural Gas Production, Sales and Royalties ..................................................... 65Common measurements and conversions ....................................................................... 66Bibliography ...................................................................................................................... 67

Contents

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Introduction

The world of oil and gas is split between industrial-ized consumer countries and their oil corporations,and less developed producer countries, many ofwhich are former colonies. Canada is somewhatunique, as a relatively wealthy country in a closerelationship of dependency with the United States,which consumes the majority of our production,and whose oil companies dominate our industry.

For a time – mainly in the 1970s – Canadiangovernments accepted public opinion about foreigncontrol of this sector, and took action. The Albertaand Saskatchewan governments raised royalties andplaced the proceeds in Heritage Funds.Saskatchewan created Sask Oil and Sask Power(which managed natural gas). Federally, Petro-Canada was created, with a head office in Calgary.

More recently, governments have undone thesereforms, privatizing publicly-owned energy compa-nies, returning us to an era of foreign, private-sectordomination, reducing royalties and gutting heritagefunds. The predictable outcome has been rapiddepletion of these non-renewable resources, andincreased greenhouse gas emissions. Canada isnow past its peak in conventional oil and gas pro-duction, and the increasing exploitation of uncon-ventional replacements – tarsands and coal-bedmethane – bears heavy social, economic and envi-ronmental costs.

This paper explores the development of the sec-tor, globally and in Canada, and the resulting mod-ern geopolitics of oil. It discusses the environmen-tal costs, and the fiscal and royalty structures thatcapture (and fail to capture) economic rents for thepublic that owns the resource. It examines theissues in more depth with a case study ofSaskatchewan. With this context and background,it sets out the need for a new policy direction – onethat puts the interests of our populations ahead ofservice to corporate profits and the military andconsumer demands of the United States.

The geopolitics of oil

Four periods characterize the geopolitical develop-ment of the industry. In the first period, up to themid 1970s, private sector “Independent OilCompanies” (IOCs) with vertical integration domi-nated the industry, working closely with their west-ern imperial governments to secure their access tooil reserves. In the second period, former coloniespursuing national development programs strength-ened OPEC and created publicly-owned “NationalOil Companies” (NOCs). In the third period, fromabout 1980 to 2000, IOCs and their governmentsused debt crises to force privatization of NOCs,while reducing royalties in home countries.

The current period is one of growth in theimportance of NOCs. While IOCs dominate thesales of petroleum products, NOCs dominate pro-duction. China and India have become majorimporters, and the global influence of their NOCs isrising quickly. Russia’s NOCs and IOCs are alsobecoming more important. Venezuela’s NOC hasbeen re-energized, and has helped develop regionalties in the sector. NOCs have begun operating inother countries, and there is a growing reluctanceamong producing nations to sign agreements withIOCs. NOCs now control 77 percent of the 1.1 tril-lion barrels of global proven oil reserves.

The conflict today between IOCs and NOCsreflects the conflict between consuming states(mainly imperial powers) and producing states(mainly less developed countries). The OICs arevertically integrated, and have thus been able toeffect transfer pricing. As they move oil from pro-duction through to processing and sales, they setthe prices for transfers internally, at non-marketrates. Thus they are able to move profits to low-taxjurisdictions, and costs to relatively high-tax juris-dictions. They also exercise market power, andthrough barriers to market entry, their oligopolyhas kept prices high. The IOCs have undergonemajor consolidation in recent years, 1997s top 20

Selling the Family Silver: Oil and Gas Royalties, Corporate Profits, and the Disregarded Public

Executive Summary

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IOCs becoming just seven by end of 2003.

Economic rent and fiscal regimes

Economic rent is the financial surplus created bythe exploitation of natural resources, over andabove the costs of exploitation (which include“normal” profits). In the oil and gas industry today,there is a very large rent, and IOCs and theirinvestors expect to accumulate most of it.

The democratic theory of rent suggests thatgovernments should maximize their collection ofrent to the benefit of their publics, who own theresources. The liberal theory of rent suggests thatpublic resources should be privatized and employedto make profits, and that rents should remain inprivate hands either entirely, or enough to ensureinvestment in the industry.

Economic rent is most easily captured for thepublic interest when resources are developedthrough state-owned enterprises. The success ofsuch enterprises depends on the degree of democra-cy achieved by that jurisdiction, but those inadvanced democracies are well-run and providegreater returns to the public than private corpora-tions. Joint ventures between NOCs and IOCs alsoenable governments to extract reasonable rents forthe public. During the last few years of large oilprice increases, income to OPEC countries increased46.4 percent, while almost all windfall profits inCanada and the US went to private corporations.

In the oil and gas industry, rents are extractedby a number of different methods, including feesfor prospecting, bonus bids for exploration, discov-ery and production, and royalties or productionfees (based on volume of production or value).Today there are limited areas where large pools ofoil and gas can be found, and competition foraccess is keen. Thus governments are increasinglyseeking a percentage of the oil and gas produced,via production sharing agreements. In some countries,governments take equity positions; such joint ven-tures mean that government provides capital, and

shares in the risks and the profits. The private industry dislikes production royal-

ties and bonuses, and prefers a system based solelyon taxing profits, thus enabling it to employ trans-fer pricing. In order to curtail tax avoidance, somecountries have had to introduce a minimum tax, aprogressive profits tax (PPT, akin to progressive indi-vidual income tax), a resource rent tax (RRT, a tax oncash flow), or an excess profits tax. Nonetheless,through generous depreciation allowances, tax hol-idays, investment tax credits, resource allowancesand other tax incentives, energy corporation tax-able incomes are often a very small percentage ofgross revenues.

Offshore tax havens enable even greater taxavoidance. An illustration of the problem comesfrom energy giant Enron, which had hundreds ofsubsidiaries registered offshore in havens with zerocorporate taxes. A web of respectable auditingfirms, law firms and banks helped it avoid taxeswith paper transactions such as:• selling oil to a subsidiary in a tax haven for a

very high price and re-exporting it at the mar-ket price

• shifting capital to an offshore subsidiary andthey borrowing it back at a high interest rate

• transferring the ownership of patents and serv-ices to the offshore company and then payinglarge royalties for their use

• buying inputs from offshore companies athighly inflated prices

Such tax avoidance practices are common inbusiness circles, and by 2003, 58 percent of US cor-porate profits were taken in offshore tax havens. InRussia, similar schemes and firms were used toavoid oil company taxes of around $9 billion peryear.

Canadian oil industry

Global developments have had their impact on theCanadian industry, which has always been domi-nated by foreign-owned corporate giants. A fewlarge Canadian firms have emerged, such as En-Cana, Petro-Canada and Suncor, but industry ana-lysts note that the majority of their stock is nowowned by citizens of the United States.

Prior to the discovery of Alberta’s Leduc Field in1947, almost all the oil consumed in Canada wasimported. The large refineries were all owned andcontrolled by foreign-owned majors, and they hada lobby group, the Canadian Petroleum Association


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––––––––––––––––––––––––––––––––––––––––Income to OPEC countries

increased 46.4 percent, whilealmost all windfall profits inCanada and the US went to

private corporations.––––––––––––––––––––––––––––––––––––––––

(CPA). As Alberta’s industry developed, Canadaemerged with two markets: Western Canada andparts of the US and the Eastern Canadian market.

The Canadian corporations formed their ownlobby group, the Independent Canadian PetroleumAssociation (ICPA), and lobbied Ottawa to requireeastern markets to accept more expensive Albertaoil. The Conservative government agreed, thoughcaving in somewhat to lobbying by the CPA and themajors. The result was the National Oil Policy of1961, which decreed markets east of the OttawaRiver would continue to be served by the majors.Alberta’s more expensive oil would be sold at allpoints west of the Ottawa River. Essentially, Ontarioresidents would support the growth of Alberta oilcorporations.

In 1975, the Federal government created Petro-Canada, and in 1980 established the NationalEnergy Program. The aim was to increase publicand broader Canadian ownership of the industry.The oil corporations, the business press, the Reaganadministration, and Alberta’s Conservative govern-ment were all strongly opposed. Eventually thesereforms were all undone, with the privatization ofPetro-Canada and the development of continentaltrade deals.

The Canada-U.S. Free Trade Agreement in 1987surprised many, including provincial premiers, byits inclusion of a continental free trade agreementin energy. The Agreement ceded Canada’s sover-eignty dramatically. The federal government wasprohibited from reducing Canada’s exports, even intimes of energy shortages (the “proportional shar-ing clause”), prohibited from controlling transferpricing, and prohibited from setting export pricesand taxes, among other things. These prohibitionswere strengthened in the subsequent NorthAmerican Free Trade Agreement (NAFTA).

World oil prices have risen dramatically in thelast few years, more than doubling to over $70 perbarrel at times. These price increases are entirelyunrelated to production costs; in 2003 Canadianproduction costs, including royalties, averaged$5.57 per barrel. Even with higher costs and rela-tively lower oil prices in the tar sands, prices are still

well in excess of costs. Because of the cuts to royalties and taxes as well

as the move away from national or public owner-ship in Canada, the private oil industry has enjoyedwindfall profits, as have the gas companies.According to the US Energy InformationAdministration, Canadian royalties, are among thelowest in the world at an average $0.23 per barrel.The result of high prices and low royalties and taxeshas been a very high return on equity, rising to 22.4percent in 2005 and making the oil and gas indus-try the most profitable sector in Canada.

The oil industry in Saskatchewan

Most oil extracted in Canada comes from theWestern Canadian Sedimentary Basin (WCSB). Thisbasin is considered “mature,” as the extraction ofconventional light and medium oil has been declin-ing for a number of years. The extraction of lightcrude in Saskatchewan peaked in 1997, while medi-um extraction peaked in 1998. Heavy oil is now themajority of oil extracted in Saskatchewan. At thesame time, recent drilling in Saskatchewan hasfocused more on extracting from existing poolsrather than finding new sources.

The majority of Saskatchewan’s oil production– 73 percent - is exported to the US. And althoughthe industry contributes 6 percent of the province’sGDP, that proportion is falling, and it only con-tributes 0.5 percent of provincial employment.While the value of Saskatchewan oil sales has gonefrom $3.6 billion to over $30 billion, royalties haveslipped from over 56 percent to less than 16 per-cent. Prior to 1985, Saskatchewan was in a periodof increasing royalties. During this time,Saskatchewan’s royalties were higher than Alberta’sand yet there was no capital flight fromSaskatchewan. However, since 1986 royalties inSaskatchewan have dropped along with Alberta’s.And a plethora of newly-created categories of oilhas enabled further reductions in the overall levelof royalties collected. These changes have resultedfrom regular negotiations between government andindustry, and this process has always excluded thepublic and any public input.

The natural gas industry

Conventional natural gas production peaked in theUnited States around 1973, and despite develop-ment of Coal Bed Methane (CBM), the volume of


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––––––––––––––––––––––––––––––––––––––––Canadian royalties are amongthe lowest in the world at an

average $0.23 per barrel.––––––––––––––––––––––––––––––––––––––––

reserves has steadily declined. US reserves in 2003were 40 percent lower than in 1990, and CBMreserves amount to 18tcf, less than one year ofannual consumption. To fill the growing gap,imports from Canada were increased, but despiteincreased drilling in both the US and Canada,North American gas production has been flat since1997. Canada’s production peaked in 2001, andaverage production rates for new wells havedropped by two-thirds since the early 1990s.

The US Energy Information Agency character-izes the American situation as a “natural gas crisis”.And despite the massive price increases in the pastfew years, the Canadian Energy Research Institutepredicts that Canadian natural gas prices will triplein the next 13 years. In the Western CanadaSedimentary Basin (WCSB), reserves of natural gaspeaked in 1984 and have been declining since. AndNatural Resources Canada projected thatSaskatchewan will peak in 2005 and drop by 70 per-cent in the following 15 years – an alarmingprospect given the province’s dependence on gasfor home heating. Although environmentally-damaging CBM will help prolong production inCanada, it will not make up for the decline in con-ventional sources.

As imports from Canada fall off after 2010, USimports of liquefied natural gas (LNG) are expectedto rise. LNG “trains” rely upon liquefying naturalgas, transporting it, and regasifying it, and the costsare significantly higher than for regular natural gas.Developing the infrastructure – the liquefying andregasifying plants, transport ships and pipelines, isexpensive and risky.

Meanwhile, the industry is doing quite wellwith higher prices despite short term fluctuations.The US Department of Energy date confirms thatthe bulk of the economic rent from natural gasextraction is going to the owners of oil and gas cor-porations. In the WCSB, conventional natural gasproduction is allowing the industry to capture 27percent to 53 percent of the market price as rents.Royalties in Saskatchewan are quite low on a globalscale, averaging less than 14 percent of sales inrecent years, while many countries get 50 percentor more.


Conclusions

In the last 20 years, Canadian governments havegone along with the policy demands of the majorand super-major IOCs. They have reduced royal-ties, increased exports, avoided addressing globalwarming and other environmental costs of fossilfuel consumption, and ceded control over theresource.

A better government policy would put the pub-lic interest ahead of corporate profits. It wouldplace a high priority on securing energy supply forfuture generations. It would maximize returns tothe general public on the sale of the resources. Itwould address greenhouse gas emissions and thesocial, economic and environmental costs of globalwarming. It would develop alternative energysources. It would recognize that fuelling America’saddiction to fossil fuels is wrong, and that exportsto the US cannot continue to rise.

The Saskatchewan example illustrates thatthere are many policies a government willing toprotect the public interest could implement. Thesepolicies are not radical, and in some cases havebeen employed with success in the past. The fol-lowing are a few suggestions.

• Create a provincial energy conservation board tocover these industries. All sales would be made tothis agency, allowing public control over sales,prices, profits, resource rents and a level ofproven reserves to be held for future generations.

• Raise royalties up to the level that they were dur-ing the Saskatchewan government of AllanBlakeney, which was around 50 percent of sales -a common rate around the world today.

• Implement an excess profits tax, as several coun-tries have done recently.

• Merge SaskEnergy with SaskPower and give itcontrol over natural gas development and distri-bution within the province. The priority wouldbe to conserve natural gas for present and futuregenerations.

• Re-establish the Heritage Funds, allocating atleast 50 percent of the royalties from the deple-tion of oil and gas to them, and invest in renew-able energy development.

• Re-create SaskOil as a Crown corporation withthe goal of gaining ownership and control overthe remaining provincial oil reserves. Require allfuture developments to include the right ofSaskOil to 50 percent ownership.

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Over the past few years there has been a dramaticincrease in the international price for oil and gas.The price inflation has generally been attributed tothe world economic boom and the rise in thedemand for oil by China and India. Limited refin-ing capacity has been cited as a contributor to thehigh rise in gasoline prices. Costs have also gone upas it has become much more difficult for the oilcompanies to find new reserves of both oil and gas.Many of the older oil and gas fields are beingdepleted, conventional sources are shrinking, andnew supply is being provided by non-conventionalreserves, which are considerably more expensive todevelop. Nevertheless, the price inflation has gener-ally been far above the increase in the cost ofextraction and has resulted in very large profits forprivate oil and gas corporations.

There is an important factor that has not beenwidely discussed; less and less global oil and gas isaccessible to large private corporations. Most of theremaining conventional oil reserves are in lessdeveloped countries that have national oil compa-nies and higher royalties and taxes. The trend inmany of these countries has been towards greaternational control over extraction through nationaloil companies and towards increased royalty andtax rates. Access by the large private corporationshas been restricted, and their gross profits fromextraction in these areas have been reduced.

Today the world of oil and gas is basically divid-ed between the industrialized countries and theirlarge transnational oil corporations (TNCs), and thecountries with most of the remaining reserves(mainly less developed countries, many of whichaare former colonies).Oil and gas have been the keyto the development of industrial societies. Theyalso play a central role in all world military systems.Because the advanced industrialized capitalist coun-tries have had a shortage of these resources, accessto them has been a central focus of imperialism,colonialism and political domination.

The western industrialized countries want an

open world economy where their private corpora-tions can gain access to supply with little govern-ment interference. These countries, members of theOrganization for Economic Co-operation andDevelopment (OECD) and the International EnergyAgency (IEA), insist that their private corporationshave a right to maximize profits from their opera-tions in the less developed countries. They use theircollective political and economic power to try to setthe development agenda and rules.

On the other side of this division are the pro-ducing countries, many of whom are members ofthe Organization of Petroleum Exporting Countries(OPEC). They have established government controlover their resources and have created state-ownednational oil corporations (NOCs) to develop theirresources. While they engage in operations with theinternational private corporations, they assert gov-ernment sovereignty over their oil and gasresources. Their objective is to fully develop oil andgas resources but to claim as much of the econom-ic rent as possible from extraction for their ownpopulations.

Where does Canada fit into this world divi-sion? One the one hand, Canada is a major sourceof oil and gas, an important producing country.However, we are also an advanced industrializedcountry with close ties to the former colonial pow-ers. As a major producing country Canada has beenan outlier. In practice, Canada’s governments,urged on by our very influential business organiza-tions and political pressure from the US govern-ment, have chosen to follow the IEA road. Insteadof increased public ownership and higher royalties,Canada has deepened trade agreements with the USthat reduce national control over oil and gas andremoved all limits to foreign ownership.PetroCanada was recently sold off and SaskOil wasprivatized. Instead of increasing the portion of rentcaptured by the owners, governments in Canadahave generally lowered tax and royalty rates tosome of the lowest levels in the world.

Introduction


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Canada’s political and economic elite has cho-sen not to develop an independent national energypolicy or strategy; instead affirming Canada’s posi-tion as a dependent supplier to the United States.The top priority since at least the early 1970s hasbeen to maximize exports of oil and gas to theUnited States. This policy has been stronglyadvanced by the owners of the oil and gas industryin Canada. It has been entrenched in the Canada-US Free trade Agreement (1988) and the NorthAmerican Free Trade Agreement (1994). Under theprovisions of these two treaties, our governmentshave agreed to a continental energy program thatgives the United States guaranteed access toCanada’s oil and gas. We cannot cut our exports tothe United States below the average share of pro-duction over the past three years. Has this policybeen in the best interest of Canadians?

Saskatchewan has had the good fortune of sit-ting on top of Canada’s second largest source of oiland gas. The industry was developed here by pri-vate corporations with very strong support from theprovincial government. Since oil and gas are natu-ral resources, under the Canadian constitution theyare the jurisdiction of the provincial governments.In Canada, as in almost all countries, naturalresources are considered a free gift from nature andthus are under the ownership of the people as awhole. When they are extracted by private corpora-tions for the purposes of making a profit for share-holders, there is the question of what royalties andtaxes should be paid to the general public. InCanada and Saskatchewan, the historic traditionhas been to set very low royalties in order toencourage private development. In general, state orpublic development has been ruled out.

With the rise of international oil prices in the1970s, the question of who benefits from naturalresource exploitation became a major politicalissue. Following the price rises of 1973, public opin-ion polls showed a majority of Canadians wantedto see the oil and gas industry nationalized. InAlberta and Saskatchewan the provincial govern-ments moved to take greater control over the indus-try and other natural resource developments.

In Saskatchewan the NDP government of AllanBlakeney (1971-82) raised the royalties and taxes onthe oil and gas industry and created SaskOil, aCrown corporation, which was expected to gainsome control over the industry. The SaskatchewanHeritage Fund was created to receive a share of nat-ural resource royalties and use this capital to

expand other industries. The development of natu-ral gas in the province was under the control ofSaskPower, which directly developed natural gasdeposits. SaskPower had first claim on all naturalgas extracted in the province. The policy goal wasto guarantee a secure supply for the future needs ofthe people of Saskatchewan before any gas could beexported to Eastern Canada or the United States.This policy of provincial development was rejectedby the governments that assumed office after 1982.The Progressive Conservative government of GrantDevine (1982-91) and the subsequent NDP govern-ments headed by Roy Romanow and Lorne Calverthave steadily reduced the royalties and taxes on theindustry. SaskOil was privatized. The Heritage Fundwas abolished. SaskPower was split, and SaskEnergy was created to have jurisdiction over naturalgas. However, the natural gas industry was priva-tized and made part of a continental regime. Nolonger does the province try to maintain a supplyfor future generations.

Where has this left us? Saskatchewan’s conven-tional oil and gas reserves are being rapidly deplet-ed, and shipped off to the United States. We haveonly an eight year supply of natural gas at currentrates of extraction. In 2004 the premiers from thefour western provinces endorsed the call fromGeorge W. Bush for a new continental energy pactthat would further tie Canadian production to USmarkets. In February 2006 Premier Lorne Calvertand Industry and Resources Minister Eric Clinewent to Washington to meet with Vice PresidentDick Cheney, to make it clear to him that the gov-ernment of Saskatchewan is fully behind exportingeven more energy, if that is possible. There has beenno public debate on this government strategy, mostlikely because it is strongly supported by the twoopposition parties, the Saskatchewan Party and theLiberal Party. However, there is growing evidencethat a large proportion of the people inSaskatchewan do not agree with this strategy.

The other key issue for Saskatchewan is thequestion of greenhouse gas emissions and globalwarming and climate change. The general conclu-sion of the many studies of the effects of globalwarming and climate change is that the Canadianprairies, and in particular Saskatchewan, will bevery hard hit. Yet the political and economic lead-ership in Saskatchewan does not seem to be wor-ried. In 1997 the legislature unanimously passed aresolution denouncing the Kyoto Protocol onClimate Change and vowed that no government


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would impose mandatory regulations on green-house gas emissions. Since then Saskatchewan’sgreenhouse gas emissions have increased fasterthan any other province. In 2006 they are 62 per-cent above 1990 levels. Under Canada’s interna-tional commitments under the Kyoto Protocol, weare to reduce emissions to six percent less than therate in 1990 by the year 2012. There has been noeffort by the NDP government in Saskatchewan todeal with this issue. While Saskatchewan has anenormous potential for alternative sources of ener-gy including wind, solar, biomass, geothermal, andhydro, there has been very little development ofthese resources. The government has not been will-ing to implement any energy conservation ordemand management programs.

The oil and gas industry in Saskatchewan can-not be assessed outside the development of theindustry as a whole, the international situation,and our relationship with the United States. To pro-pose a policy for the province requires a firm under-standing of the world situation. Thus the paperincludes an overview of the geopolitics of theindustry, the growing debate about peak oil andnatural gas, and environmental concerns. It alsoaddresses what is meant by economic rent fromresource extraction (excess profits) and exploresglobal trends in rent and tax measures. As this is the

most important aspect of any debate on energy pol-icy, a significant portion of the paper addresses thisbackground. This includes a number of examples ofthe fiscal regimes used by other governments torecover economic rents, including public owner-ship.

Saskatchewan’s policy also is greatly affected byCanada’s policy and the continental integration ofthe industry. Thus, this paper also addresses thenational and North American context of oil andgas.

The section on the oil and gas industry inSaskatchewan includes an assessment of the extentof the resources, the nature of the oil and gas indus-try in the province, an attempt to discover the prof-itability of the industry, and the changes to the sys-tem of royalties and taxes. The conclusion is thatthere is a need to return to the policy directionstarted by the government headed by AllanBlakeney. What we need today is a policy directionthat puts the general interests of the population asa whole, and the needs of future generations, abovethe present policy direction, which puts the firstpriority on maximizing profits for the owners ofprivate oil and gas corporations and the nationalsecurity needs and consumption demands of theUnited States.


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Oil is a special natural resource, different in manyways from the others. The extraction of oil and nat-ural gas has been much cheaper than other mineralresources. The process has also required less labourcompared to mining. Historically, petroleumextraction has been a very profitable industry, andoil corporations are among the richest around theworld. Oil is the most widely used and prized ener-gy source because of its central role in transporta-tion. Natural gas, coal, and nuclear power can beused as substitutes in many industrial and commer-cial operations, but it would be very hard to findanother fuel to easily use in transportation. Oil hasanother decisive advantage: it can be rather easilytransported by pipeline and tanker. World War Idemonstrated for all the key role of oil in the abili-ty to wage modern warfare. Since then all countrieshave concluded that access to oil is a central factorin guaranteeing national security.

The oil and gas industry in Saskatchewan doesnot operate in a vacuum but it is intimately linkedto broader historical developments. This includesthe monopolistic domination of the industry by the“supermajors” as they are called today and the closelinks between the large oil corporations and all gov-ernments. Historically, there were close tiesbetween the industry and colonialism and imperial-ism, a mutually beneficial relationship. Today thereis a central conflict in the world between the indus-trialized capitalist countries and the less developedproducing countries, the site of most of the world’sremaining reserves. For Canada, the continentalintegration of the industry began with the earliestdevelopments, and this intensified during the ColdWar against communism. Under the current NorthAmerican free trade agreements, the United States isguaranteed a significant proportion of Canada’s oilproduction. These agreements greatly restrict theability of Canada to establish a nation energy poli-cy designed to guarantee energy security for futureneeds.

Oil and the emergence oftransnational corporations

The oil industry first emerged in the United Statesin the late 19th century. It became a major industryafter the development of the automobile in theearly 20th century. Large deposits in Texas andOklahoma gave the United States a tremendousadvantage over the other European world powers.John D. Rockefeller’s Standard Oil Corporation(now Exxon-Mobil) became a monopoly firm in theUnited States and the first truly American interna-tional corporation. Competition came when the USgovernment broke up the monopoly using theSherman Anti-Trust Act. From it’s assets, AndrewMellon created the Gulf Oil Corporation, othermajor capitalists created the Texas Corporation(Texaco), and several other oil corporations werecreated. However, Standard Oil remained the dom-inant integrated corporation, from oil extraction torefining and wholesale and retail distribution. Theyset the standards and prices for the industry, andthe others followed.

On the international level there was some com-petition to Standard Oil. The Nobels and theRothschilds developed the oil fields in Russia, andDutch interests developed oil fields in their colonyin the Netherlands East Indies. In 1907 British andDutch capital joined forces to create the RoyalDutch Shell Group, now one of the two dominantBritish firms.

Oil was also key to the British economy. Justbefore World War I Winston Churchill, then FirstLord of the Admiralty, converted the British fleetfrom coal to oil, which gave their ships the advan-tage of wider range as well as greater speed.However, the British did not have a domesticsource of oil, and their imperial policy concentrat-ed on gaining and keeping control of the oil econ-omy of the Middle East, in particular that of thePersian Gulf area. To confront Standard Oil theBritish Parliament created the British Petroleum


I. The Oil Industry: Historical Background

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Corporation (BP) out of the Anglo-Persian OilCompany, with the British government owning51% of the stock. Other European countries fol-lowed suit, convinced that national security anduninterrupted access to oil required a nationalstate-owned company. World War II again demon-strated the importance of control over oil, as Japansought to gain control of the Dutch East Indies andGerman armies marched into the Soviet Union andNorth Africa partly to try to secure access to oil sup-plies.

The international oil cartel was formally estab-lished by Standard Oil, BP and Shell in Scotland in1928; it soon expanded to include Gulf, Texaco,Mobil and Standard Oil of California. The infamousSeven Sisters worked together to try to control oilproduction and pricing. Throughout North Africa,the Middle East, Venezuela, and indeed around theworld, they have worked together in numerousjoint ventures. (See Engdahl, 2004; Engler, 1961;Tanzer, 1980; Yergin, 1991)

Oil corporations andgovernment policy

By the end of World War II it became very evidentto the US government that domestic supplies of oilwere limited and the future depended on secure oilsources in Venezuela and the Middle East. In thepost-war period down to 1953, the US governmentcontested with the British for control over PersianGulf oil. Each government relied on their close rela-tionship with their major oil corporations. The USgovernment dominated the huge resources in SaudiArabia through the Arabian American Oil Company(ARAMCO), controlled by US corporations, and apolitical alliance with the Saudi royal family. TheBritish government and its two corporations, BPand Shell, were dominant in Iran, Iraq and some ofthe small Persian Gulf principalities. In 1953 the USand UK governments engineered the overthrow ofthe democratically elected government ofMohammed Mossadegh in Iran and established apuppet regime. The five US majors were given a keyposition in the Iranian oil industry. After the failureof the British-French-Israeli invasion of the SuezCanal in 1956, the British government was reducedto acting in concert with the US government onMiddle East issues as a junior partner. BP and Shelljoined with the US majors to try to establish controlover oil production and pricing.

The complete domination of the oil industry

by the governments of the United States and GreatBritain and their monopoly corporations endedwith the formation of the Organization ofPetroleum Exporting Countries (OPEC) in 1960.The goal of the founders of OPEC was to create anorganization that could manage the production ofoil and influence the international price. Theirmodel was the Texas Railroad Commission, used inthe 1930s to prorate the production and sale of oilin order to raise prices and prevent market compe-tition. These producing countries, now independ-ent from colonial rule, had all suffered from a longhistory of colonial and imperial domination fromboth the European governments and the foreign-owned oil corporations. Over the 1960s and intothe 1970s OPEC aided their member governmentsin negotiations with the majors. They created state-owned National Oil Companies (NOCs) andreplaced the exploitative concession agreementswith new production sharing agreements and high-er royalties and taxes. Their goal was to capture amuch higher share of the economic rent (excessprofits) from the depletion of their natural resourcefor their governments. (See Yergin, 1991)

As many economists have argued, the oilindustry has never been an example of free marketcapitalism. The large corporations used monopolypower and international cartels to keep prices andprofits high. The US government wanted prices toremain high enough to protect their domesticindustry. For example, in 1955 it cost $0.10 toextract a barrel of oil in Kuwait that sold for $1.85in the United States. Where the average US oil wellproduced 15 barrels of oil per day, the average wellin the Middle East produced around 5,000 barrels.In 1955 the 175 producing wells in Kuwait pro-duced the equivalent of one-sixth of the averagedaily yield of the 500,000 wells in the United States.(Engler, 1961)

The ability of OPEC to control production andraise international prices was demonstrated in1973, the Afirst oil crisis.” When the US govern-ment backed Israel in the Arab-Israeli conflict, theArab states cut off oil exports to the United Statesand Europe, creating a panic situation in NorthAmerica. The Asecond oil crisis” came in 1979when a popular revolution overthrew the US pup-pet, the Shah of Iran, and a new Islamic govern-ment was installed. The political conflict resulted ina dramatic decline in oil exports. The NationalIranian Oil Company would now control all domes-tic oil production. At this time President Jimmy


| 13

Carter proclaimed the “Carter Doctrine”, stating thatthe Middle East was a “vital interest” of the UnitedStates and the US government would use military forceto prevent any obstruction to the flow of oil to theindustrialized western countries. This doctrine, support-ed by all subsequent US presidents, formed the basis forthe Gulf wars of 1991 and 2003. (See Blair, 1976;Endgahl, 2004; Klare, 2002; Paul, 2003; Tanzer, 1980;Yergin, 1991)


14 |

The current world oil and gas situation is complex,but over the years there have been major shifts thatreflect the changing system of world power. Fromthe beginning down to the mid-1970s, the industrywas dominated by the vertically integrated majoroil corporations, known in the industry as the inde-pendent oil companies (or IOCs). They were power-ful because they controlled the oil business fromdiscovery and extraction through refining to retaildistribution. They were a formal and informal car-tel, working together and not against each other.The large oil corporations also worked closely withgovernments.

This situation began to change following theindependence of the former colonies and the emer-gence of governments pursuing national develop-ment programs. From around 1970 to 1980 OPECwas strengthened and almost all of the formercolonies created state-owned oil and gas corpora-tions (known as national oil companies or NOCs).The OPEC countries managed to capture a muchhigher percentage of the economic rent from oilextraction. However, the private corporations con-tinued to make substantial profits through theirvertical control of the downstream industry. Priceswere largely held in a moderate band, controlled bythe close relationship between the US governmentand the Saudi royal family.

The world recession in the early 1980s and thedebt problems of the less developed countriesbrought major changes. Between 1980 and 2000the oil majors, backed by their governments andinternational finance and trade organizations, tookthe offensive. The Third World debt crisis was usedby western governments and the internationalinstitutions they controlled to push hard for theprivatization of the NOCs and the liberalization ofaccess to oil in the producing countries.

However, since around 2000 there has beenanother shift in policy direction. There is a revivalof the status and power of the NOCs, and govern-ments are once again moving to obtain higher roy-

alties and taxes from the extraction of their oil.Many of the NOCs, both large and small, are nowbidding for exploration and development contractson a world wide basis. The increase in oil and gasconsumption by China and India has also changedthe international market substantially. Theadvanced industrialized countries are not the onlymarket for oil exports, and competition is increas-ing. China and India, through their national oilcompanies, are seeking access to energy sourcesworld wide. Large Russian companies, both govern-ment-owned and private, have been moving intothe world market. Rising world oil prices after 2000have led to greater debate on the question of peakoil production. The US/UK war on Iraq has disrupt-ed the oil market and resulted in a new alliance ofinterest between China and Russia.

Within this general world situation there is thekey role played by the United States, the dominantworld political, military and economic power. USnational security policy on energy has stressed sev-eral key objectives. The most important is contin-ued control of oil in the Middle East, with the cen-tral focus on maintaining the partnership with theSaudi royal family. Saddam Hussein’s regime in Iraqhad been a key US client state until their invasionof Kuwait in 1991. Following the first Gulf War, theHussein regime moved to shift development toRussian, Chinese and Japanese oil corporations andexclude those from Great Britain and the UnitedStates. This was certainly one of the key reasons forthe 2003 US/UK war against Iraq. This war wasstrongly supported by the US/UK oil corporations.

A second objective of US policy has been tocontrol access to oil from Venezuela, accomplishedover the years by indirect political intervention inthat country. This began to change after the elec-tion of Hugo Chavez in 1998. Panic began to set inwhen the new government raised royalties andtaxes and insisted on majority equity positions inoil developments. However, Venezuela continues toship oil to the United States and participate in joint

II. The Geopolitics of Oil


| 15

ventures with the major IOCs. The third objective has been to maintain con-

trol over oil and gas production in Canada andMexico. Oil and gas from Canada and Mexico isseen as domestic supply and never treated as for-eign. In this they have had the allegiance of the oilindustry and all Canadian governments.

The fourth, and newest objective of US policy isto gain and maintain access to oil reserves aroundthe Caspian Sea, one of the few large remainingconventional oil pools. This was a focus of theNational Energy Policy Development Group headedby Vice President Dick Cheney, which reported inMay 2001. The war against Afghanistan has beenseen as part of this policy objective. (Clark, 2005;Engdahl, 2004; Klare, 2002; Shelley, 2005)

Globalization and theinternational response

The oil majors and the governments of the industri-alized capitalist countries were not at all happywith the changes of the 1970s: national oil compa-nies, local control over ownership and develop-ment, and increased royalties and taxes. The UKgovernment under Margaret Thatcher and the USgovernment under Ronald Reagan led the push foran international free market. The industrializedcountries, which depended on importing oil andgas, formed the International Energy Agency (IEA)to combat OPEC and the Third World drive fornational control over resource development. Theyused the International Monetary Fund (IMF), theWorld Bank (WB) and the US Agency forInternational Development (USAID). Structuraladjustment programs (SAPs) which were forced onThird World countries, required deregulation, pri-vatization and the end to limits on foreign invest-ment and control. They were supported by theOrganization for Economic Co-operation andDevelopment (OECD), regional development banksand institutions, the newly formed World TradeOrganization (WTO), and the international freetrade treaties, like NAFTA. This was part of the shiftin the world economy to “globalization” or neolib-eralism, the reduction of the role of the state in theeconomy and the liberation of private capital forworld wide investment. (Engdahl, 2004; Klare,2002; Shelley, 2005)

The model advanced by the US/UK govern-ments and the majors was the British policytowards North Sea oil and gas. Development was to

be undertaken by the private oil corporations.There would be little government regulation.Royalties and taxes would be minimal. The IOCswould be allowed to extract and export oil and gasas fast as they wanted, without government restric-tions. The majors did not hesitate, but by 1999 theextraction of both oil and gas had peaked in theNorth Sea and Great Britain once again became anenergy importing country. In contrast to thesetrends, a number of countries chose a differentpath. Norway, for example using Statoil, higher roy-alties and a range of taxes and government regula-tions, adopted a different policy for oil and gasextraction in the North Sea. (Darley, 2004;Mommer, 2002a)

The US government pushed hard for deregula-tion and privatization of the oil and gas industry inLatin America, aided by strong support from theIMF and the World Bank. There was a shift in poli-cy towards liberalization in the smaller countriesand even Venezuela, which had launched OPEC.The greatest achievement was in Argentina, wherethe government of Carlos Menem, the poster boy ofthe free market and free trade advocates, sold thestate-owned oil company, Yacimientos PetroliferosFiscales (YPF) to the now privatized Spanish firm,Repsol. (Mommer, 2002b; Palacios, 2002)

The process of privatization of the national oiland gas industries is described by Luisa Palacios.First, “reform” in the upstream sector begins withthe opening of service contracts to foreign compa-nies. Second is the introduction of “risk service con-tracts” that enable private corporations to receive ashare of the profits or oil extracted. Third, there isthe introduction of production sharing agreements(PSAs) with private and foreign oil corporations.Fourth, there is the re-establishment of concessioncontracts, where the private firm, domestic or for-eign, owns the total production. The NOC nolonger has a monopoly over local development butmust compete with the large IOCs. Finally, there isthe partial and then total privatization of the NOC.In Brazil the government allowed investors to buy alarge minority share of the stock in Petrobras.However, in Latin America only Argentina com-pletely privatized the state-owned industry. To alarge degree this is the process we saw in Canadawith the repeal of the National Energy Program(NEP) and the privatization of Petro-Canada.(Palacios, 2002)


16 |

A new environment begins in 2000

After the collapse of the Soviet system in 1989 andthe move by the Chinese government to embracethe capitalist system, the division in the worldpolitical economy was often seen only as onebetween the owners of land and resources (the pro-prietors) and the consumers. This was particularlytrue of the oil and gas industry. The proprietors,who may be individuals or the state, wish to maxi-mize their return for the depletion of the resourcethrough royalties and taxes and perhaps state own-ership. The consumers use the state and private cor-porations to secure relatively free access to naturalresources. The proprietors might wish to slowlydevelop their resources to manage them for thebenefit of society as a whole. In contrast, the privatecorporations and their government supporters seekto accelerate extraction on a shorter term basis. Ingeneral, proprietors wish to obtain immediate pay-ments for the resource depletion in the form of roy-alties; in contrast, the private corporations arguethat they should only be taxed on their profits.(Mommer, 2002b)

However, there has been a significant change inthe geopolitics of the oil and gas industry begin-ning around 2000. First, China became a largeimporter of oil, up to 2.6 million barrels per day inlate 2005. Strong economic growth has also led tosignificantly greater imports for India; almost 2 mil-lion barrels per day. Continued steady world eco-nomic growth has increased oil and gas consump-tion in general. Projections are for world demandfor oil to increase by around 2.4 percent per yearbetween 2005 and 2015. (Energy IntelligenceGroup, August 2005)

In Russia the oil industry was privatized follow-ing the collapse of the Soviet system, under the gov-ernment headed by Boris Yeltsin. However, the cur-rent president, Vladimir Putin, has concluded thatthe Russian state must have a major interest in theindustry. Gazprom, which is majority owned by thestate, has a dominant and growing role in the nat-ural gas industry. OAO Rosneft, the state-owned oilcompany, took a major ownership position in thelargest Russian oil company, OAO Yukos. In 2002the government raised royalties and taxes on oiland gas. Regulations now virtually exclude the for-eign owned IOCs from operating in Russia. (USEnergy Information Administration, June 2005)

In Venezuela, Hugo Chavez’s government hasreasserted its control over the oil industry and

PVDSA, the state-owned oil company. Concessionagreements with IOCs were transformed into pro-duction sharing agreements, and royalties and taxeswere increased. However, in addition Chavez isbuilding links with all the Caribbean and LatinAmerican countries and entering into agreementswith many local NOCs. The Venezuelan govern-ment has given support to expanded state owner-ship in Bolivia and Ecuador and has helped the gov-ernment of Argentina re-establish a state-owned oilfirm. Chavez’s government helped launchPetroamerica, a conglomerate composed of all themajor Latin American oil and gas producing com-panies. The long term goal is to exclude US oil andgas companies from Latin America and build a sys-tem linking less developed countries. (US EnergyInformation Administration, June 2005)

The world geopolitical situation also haschanged significantly since the terrorist attack onNew York City and Washington in September 2001and the US/UK invasions of Afghanistan and Iraq.In the brutally frank national security policy state-ment of September 17, 2002, the US governmentproclaimed its position as the world’s dominantpower and warned others, specifically the EuropeanUnion and China, not to try to challenge theUnited States for supremacy. The search for oil secu-rity has been seen as the dominant motive for USpolicy in the Middle East and the Persian Gulf areafor many years. As mentioned earlier, this includesthe intervention in Afghanistan. (Clark, 2005;Johnson, 2004; Klare, 2002; Shelley, 2005; NationalSecurity Strategy of the USA at www.whitehouse.gov/nsc/nss)

The US proclamation shocked the world andled to some notable geopolitical developments. InDecember 2004 the Association of South East AsianNations (ASEAN) plus China, Japan and SouthKorea met to begin creating a new East AsianCommunity similar to the European Union, andexcluding the United States. In April 2005 the gov-ernments of China and India signed a new “strate-gic partnership” designed to end long term dis-putes.

In October 2004 Vladimir Putin visited Chinaand signed agreements on military co-operationand the sharing of energy resources. New pipelineswill be built, and Russia will increase oil and gasexports to China. Furthermore, Russia and Chinacreated the Shanghai Co-operation Organization(SCO) with Uzbekistan, Tajikstan, Kazakhstan andKyrgyzstan. This new organization asked the US


| 17

government to remove its military bases fromUzbekistan. Their goal is to exclude the UnitedStates from direct access to Caspian Sea oil and gas.China and Russia have also formed a politicalalliance with Iran, a major exporter of oil to China;this runs counter to the policy goals of the US andUK governments. The strength of SCO was evidentat their fifth summit in June 2006, where Iran andPakistan officially requested membership and thegovernment of Afghanistan sought closer tiesdespite its complete political dependence on the USgovernment and its NATO allies. (Engdahl, 2006;Ismi, 2005)

The period of expanding globalization hasended. With this, there has been significant struc-tural change in the oil and gas industry. There is ageneral decline in non-OPEC oil production asreserves are disappearing. Increased world demand,the shortage of refinery capacity, the loss of muchof Iraq’s oil, and the shrinking of the “excess capac-ity” of the OPEC countries were all major factorscontributing to the oil price increases between 2004and 2006.

A major problem has been the inability of theIOCs to add sufficiently to their reserves. The largeNOCs and their supporting countries have general-ly restricted access by the private foreign-owned oilcompanies to their national reserves. The NOCs,now actively operating on a world wide basis, areproviding stiff overseas competition to the IOCs.There is also growing evidence that the NOCs andtheir government supporters prefer to sign agree-ments among themselves, excluding the IOCs.

The expansion abroad of the Chinese NOCs,supported by their government, is providing seriouscompetition for the IOCs. In the Middle East theynow present an important alternative market to theUnited States and Europe. At a conference inVienna in 2004, Vahan Zanoyan, President of PFCEnergy, a highly respected oil and gas consultingfirm, told the majors that they would have to giveup their “invader attitude” when dealing with lessdeveloped countries. In contrast, the Chinese gov-ernment stresses mutual trust and mutual benefitand the need for less developed countries to worktogether. The Chinese NOCs usually combine morefavourable oil and gas agreements with directChinese government assistance for infrastructureand social programs. (Cook, 2004; Engdahl, 2006;Ismi, 2005)

One of the major areas of conflict today isbetween the private oil and gas industry and the

state-owned industry. For the most part they reflectthe conflict between the advanced capitalist states,the major consuming countries, and the less devel-oped countries: those who have the preponderanceof the remaining proved oil and gas reserves. Giventhe prominent role of this conflict in the geopoli-tics of world oil, it is useful to look at this in moredetail.

Independent oil companies

The major oil companies were the first trulytransnational corporations, operating on a worldwide basis in many countries and colonies. Theywere the first to fully develop the system of transferpricing, where costs were shifted around within thecompany, between vertical divisions, and betweenoperations in different countries. This system isnow widely used by all major industries to mini-mize taxation. By underpricing and overpricing oiland gas, as well as other general and administrativecosts, companies shift costs to high tax areas andmaximize profits in low tax areas. Vertical integra-tion gave the majors advantages. They were able tocreate barriers to entry into the market by smallerfirms. They had the ability to act as an oligopoly,managing the system and prices through their mar-ket power. There was, of course, the formal cartel of1928, which led to the domination of the SevenSisters. In the colonies and semi-colonies wherethey extracted oil, the majors frequently formedjoint venture operations. They worked together toconfront political opposition based on nationalismand socialism. In these operations they had boththe active and passive support of the home govern-ments of the major powers. This stabilized the sys-tem to a large extent, but the oligopoly generallyresulted in higher than necessary prices beingextracted from consumers. As mentioned earlier,oligopolies are desired to keep prices higher thanwould have been the case in a relatively free marketsituation in order to expand production in relative-ly high cost areas like the United States, Canada,and the North Sea. (Drodas, 2003)

While today they are heavily in the business ofextraction of oil and gas, the majors continue tomake profits in the international market as thedominant sellers of oil and gas products. Thetakeover of smaller firms has always characterizedthe oil and gas industry, but in recent years we haveseen the merger of many of the large corporations.The top 20 IOCs in 1997 had consolidated to only


18 |

Europe. Even BP at first had over 50% ownership bythe UK government. In the 1930s NOCs were creat-

ed in a number of Latin American states,including Mexico and Venezuela. Theprocess of decolonialization in the 1960sand 1970s also led to the creation of manyothers.

There have been numerous reasons citedfor creating NOCs. In many countries it wasto counter or remove the foreign-ownedtransnational corporations. The socialistexperience encouraged state ownership as away of mobilizing economic rent for nation-al development. Because of the fact that oilis a strategic natural resource, deemed essen-tial for economic development, state owner-ship was seen as required in any system ofplanned development. In other countriesenergy was considered a natural monopoly;electricity and natural gas had already beendeveloped as state-owned industries, and oilwas seen to be similar. Social democrats sup-ported the select nationalization of a few keyindustries, and the oil and gas industrieswere seen to be central, part of the “com-manding heights” of the economy.

In many free market countries the creation ofNOCs was seen as necessary to “gain a window onthe industry.” The IOC majors were very secretive,engaged in transfer pricing, and were widelybelieved to practice tax evasion. Regulation and theimposition of corporate income taxes were deemedinadequate policies for controlling large TNCs. Insome of the large importing countries, NOCs wereestablished to promote competition with the IOCs.

However, for most governments, NOCs weredeemed essential for the capture of economic rent.There were high levels of economic rent (excessprofits or monopoly profits) in the oil and gasindustries, and governments wanted to capturethese rents for national development. In almostevery country underground mineral resources werethe property of the state, acting on behalf of thepublic in general. Even in the United States, inparks and national reserve lands, the oil and gas areowned by the state. It seemed only fitting that thedevelopment of non-renewable natural resourcesshould be for the benefit of the society as a whole,and the best way to do this was through state own-ership of development. Furthermore, IOCs wererequired to put the interest of their investors first.Maximizing profits almost always meant rapid

National oil companies

While the IOCs are for the most part the major sell-ers of petroleum products, the state-owned oil com-panies (NOCs) are the dominant oil producersaround the world. This is not to suggest that theNOCs are not also in the business of selling petrole-um products. The top twelve sellers in the worldinclude six NOCs: PDVSA (Venezuela), SaudiAramco, Petrobras (Brazil), Pemex (Mexico), NIOC(Iran) and Sinopec (China).

We generally associate state-owned oil compa-nies with the OPEC countries. However, accordingto a recent study by PFC Energy of Washington,D.C. there are today 60 or more NOCs who controlaround 77 percent of the 1.1 trillion barrels ofproven oil reserves. J. Robinson West, chairman ofPFC Energy, argues that “the rule makers are nowthe national oil companies. They drive the busi-ness.” They are not all giant corporations. Petronas(Malaysia) has exploration and production (E & P)projects in 35 countries. Petrobras (Brazil) andStatoil (Norway) have operations in dozens of coun-tries. (Washington Post, August 3, 2005)

The first NOC was created by the governmentof Austria in 1908, and five others were created in

Royal Dutch/Shell (UK/Netherlands) $337.522ExxonMobil (United States) 298.035BP PLC (United Kingdom) 285.059Chevron (United States) 155.300TotalFinaElf (France) 152.614ConocoPhillips (United States) 136.916ENI (Italy) 65.175RWE Dea AG (Germany) 52.410Repsol YPF (Spain) 51.852Marathon Oil (United States) 49.907Lukoil (Russia) 34.068EnCana (Canada) 12.433Petro-Canada (Canada) 11.045

SOURCE: Oil and Gas Journal, September 19, 2005.

NOTE: By total assets, ExxonMobil is the largest oilcorporation at US$328 billion. EnCana and Petro-Canadaare included for comparison purposes.

Independent Oil Companies by RevenuesUS$ (billion) in 2004


seven by the end of 2003. The largest in 2004 byrevenues were as follows:

| 19


outsourcing. Tariq Shafiq describes the develop-ment of the state owned Iraq National OilCompany:

“INOC had demonstrated a high degree of suc-cess and established an historical record ofachievements. As it became operational, itentered into service agreements with France’sTotal AS and others in the early 1970s, thenbegan oil exploration and development on itsown and with the aid of oil service companies.It maintained the high exploration successes ofits predecessor IPC and achieved speedy devel-opment work, multiplying the country’sreserves, accelerating building productioncapacity, and expanding oil markets.” (Shafiq,2005:20)

depletion. State governments had other priorities,like guaranteeing a steady supply of energy for theircitizens and future generations. (For a good summa-ry see Stevens, 2004)

Today there are three basic types of NOCs. First,there are the large companies that are dominant inthe oil exporting countries, most of which are inthe less developed world. This would include thelarge NOCs in the oil and gas industries in Russia.These countries now control around 80 percent ofthe oil reserves and 70 percent of the gas reserves.Second, there are the major NOCs in the large oilimporting countries. These include the three largeNOCs in China and the Oil and Natural GasCorporation in India. Third, there are the NOCs inthe smaller countries, whether producing or con-suming, as well as those former NOCs that nowhave only partial state ownership. (Kronman, 2004)

The NOCs are among the largest oil and gascorporations in the world. The four largest world oilproducers are NOCs: Saudi Aramco, NIOC Iran,PEMEX and PDVSA. They extract and sell morethan 19 million barrels per day or over 23 percentof the world’s production. Many of theNOCs do not reveal their annual sales.By production, the largest NOCs arelisted at right.

It has long been argued that state-owned oil corporations, particularlythose in the less developed countries,have been inefficient, plagued by cor-ruption and patronage, and lack thetechnology and expertise for sounddevelopment. Some of this, where it isa reality, has been due to the fact thatNOCs invariably have different man-dates than private corporations.However, where this has existed in thepast it is certainly changing, even inMexico, often cited as the worst exam-ple of patronage and inefficiency.

However, even in poor underdevel-oped countries, governments andnational oil companies can do the job.They form joint ventures with privatecorporations and/or the large NOCsthat operate on a global basis. Theycontract with or form partnershipswith service companies, universities,and research institutes and organiza-tions that have special expertise. Likeall large corporations they engage in

National Oil Companies Oil ProductionMillion barrels, 2004Saudi Aramco (Saudi Arabia) 3,248.5National Iranian Oil Co (Iran) 1,435.2PEMEX (Mexico) 1,396.0PDVSA (Venezuela) 1,127.9Kuwait Petroleum Corp. (Kuwait) 855.9Nigerian National Petroleum Corp. (Nigeria) 855.2PetroChina (China) 778.4Iraq National Oil Co. (Iraq) 731.1Abu Dhabi National Oil Co. (Abu Dhabi) 713.6OAO Yukos (Russia) 589.8Petrobras (Brazil) 583.5National Oil Corp. (Libya) 564.7Sonatrach (Algeria) 440.6Sonangol (Angola) 359.5Qatar Petroleum Corp. (Qatar) 268.9Petronas (Malaysia) 267.4Statoil (Norway) 265.0Egyptian General Petroleum Corp. (Egypt) 258.8Oil & Natural Gas Corp. (India) 202.4Petro-Canada (Canada) 101.1EnCana (Canada) 60.7

SOURCE: Oil and Gas Journal, September 19, 2005.

NOTE: Petro-Canada and EnCana are included for comparisononly. They are independent companies.

20 |

The rise in oil and gas prices since 2000 has onceagain raised the issue of the state of proven reserves.Everyone recognizes that oil and gas are finiteresources that will be depleted. In 1956 US geo-physicist Dr. M. King Hubbert predicted that US oilproduction would peak in 1970; he was denouncedby the mainstream scientists and economists.However, US production peaked in 1970 and since1973 has plateaued despite a steadily increasingnumber of wells drilled. US natural gas productionpeaked in 1973 despite the steady increase in wellsdrilled and new discoveries in the Gulf of Mexico. Anumber of recent studies have predicted that worldoil production will peak sometime between 2005and 2020. (See Darley, 2004; Deffeyes, 2001;Heinberg, 2004, 2004; Klare, 2005; www.peakoil.net; www.hubbertpeak.com)

There are many influential voices on the otherside of the issue, denying that peak oil will occurany time in the near future. These include the USGeological Survey, the US Department of Energy,the Cambridge Energy Research Association, theInternational Energy Association, OPEC and themajor oil corporations. They are joined by themainstream liberal economists like M.A. Adelman(1993) and H. J. Barnett and C. Morse (1963) whoargue that if the free market works as it should,higher prices will encourage the development ofnew technologies and the more difficult sources ofoil will be accessed. As Adelman notes today, 50years ago offshore crude was a non-conventionalsource, but it is now the major new source of extrac-tion. Furthermore, economists argue that as oilprices rise consumers will undertake conservationmeasures and shift to other energy sources.(Adelman, 2003; Farzin, 2001; Fletcher, 2005;Franssen, 2005; Takin, 2005)

Cambridge Energy Research Associates hasargued that we should not be thinking about “PeakOil” but instead an “undulating plateau” wheresupply and prices stabilize within a range, and thateven this is two to four decades away. Advocates ofPeak Oil have not adequately taken into accountthat 80 percent of the IOCs reserves are outside theUnited States and very difficult to assess, technolo-gy has made major advances, reducing the cost ofextracting oil and gas from non-traditional sources,and new drilling has significantly expanded thecapacities of older reserves. The oil capacity of theMiddle East has been underestimated and underexplored. (Esser, 2005; Yergin, 2006)

Nevertheless, there are good indications thatwe are moving closer to peak oil and gas, at least forconventional sources. The non-conventionalresources that are coming on stream are more diffi-cult and more costly to extract and are more envi-ronmentally damaging. This indicates that the eraof cheap oil and gas may well be over.

This point has been made by IHS Energy, themost prestigious independent oil research organiza-tion in the world. Based in Geneva, IHS Energy hasthe most extensive data base in the world, and isused by most private corporations and governmentagencies. Their data indicates that the volume ofdiscoveries on a world wide basis peaked during theperiod between 1961 and 1975. In a presentation toan international petroleum conference in Cairo inMay 2005, IHS Energy showed that beginning inthe 1981-5 period, the rate of oil production (orextraction) has been greater than reserve replace-ment, i.e. resources discovered. The gap has beenhighest in the 2001-3 period (see table next page):


III. Peak Oil and Environmental Concerns

| 21

It has been widely reported that the averagesize of new oil discoveries has been steadily falling.This is also reported by IHS Energy. They show thatin the 1951-6 period the average size of new oil

finds was around 300 million barrels of oil equiva-lent. Since 1971-5 the size of new oil finds hassteadily fallen to only around 40 million barrels ofoil equivalent in the period 2001-3:


Total Resources Discovered versus Resources Put On-stream

500

450

400

350

300

250

200

150

100

50

0

n Resources Discovered in Period

n Resources On-stream in Period

Post 1/1/2000Disc. Bboe2000 = 42.92001 = 20.72002 = 15.12003 = 19.72004 = 13.0**excludes USA and Canada

ProductionRate >

ReservesPlacement

Billi

on B

arre

ls O

il Eq

uiva

lent

Pre-

1901

01–0

506

–10

11–1

516

–20

21–2

526

–30

31–3

536

–40

41–4

546

–50

51–5

556

–60

61–6

566

–70

71–7

576

–80

81–8

586

–90

91–9

596

–200

020

01–2

003

SOURCE: IHS Energy IRIS21 / PEPS 2004 (© 2004 IHS Energy, Inc.)

Average International Discovery SizeAverage Size of All Discoveries by Five-year Period

1,200

1,000

800

600

400

200

0

BurganGhawarGachsaran

Mill

ion

Barr

els

Oil

Equi

vale

ntPr

e-19

0101

–05

06–1

011

–15

16–2

021

–25

26–3

031

–35

36–4

041

–45

46–5

051

–55

56–6

061

–65

66–7

071

–75

76–8

081

–85

86–9

091

–95

96–2

000

2001

–200

3

SOURCE: IHS Energy IRIS21 (© 2004 IHS Energy, Inc.)

22 |

As of the date of writing, a draft report from theNational Round Table on the Environment and theEconomy has been leaked to the press. Their reportconcludes that Canada faces a crisis “perhapsunmatched in times of peace.” There will be dam-age to forestry, fishing and agriculture as a result ofhigher temperatures and uneven precipitation. Thedamage from climate change is already well knownin Canada’s north and will be particularly devastat-ing to the Canadian prairies. The report concludesthat the impact of climate change will touch on thefoundations of Canadians’ way of life - jobs, eco-nomic competitiveness, human health and culturalvalues. Yet as oil and gas prices rise the industry andpolitical focus is almost exclusively on how toincrease production to meet growing demand.Environmental issues, including climate change,are pushed aside. (Calami, 2005)

A major concern expressed by industry analystsis the decline in expenditures on searching for newoil sources. For some time now the annual numberof exploratory wells (called “wildcats” by the indus-try) has been falling steadily. Furthermore, on aworld wide basis, both 2D and 3D seismic activitypeaked in 2000 and has since been declining. Thecompany that leads the industry in new discoveriesis Brazil’s Petrobras, which has specialized in off-shore development. A study by Wood Mackenzieconcludes that only 25 percent of the larger oilcompanies are fully replacing production throughnew field exploration. With prices high, most com-panies are expanding their drilling in producingfields to maximize cash returns. Across the compa-nies surveyed, Wood Mackenzie reports that reservereplacement has fallen to 50-60 percent of produc-tion. (Stark, 2005; Latham, 2005)

The looming crisis: climate change

There is one other major issue that is almost com-pletely ignored in all the industry and academic dis-cussion about the future of oil and gas. The ele-phant in the room is greenhouse gas emissions andclimate change. There is a mountain of evidencedemonstrating that climate change is a reality, andthis is becoming more noticeable to the generalpublic every day.

Major Discoveries Setting – 1994 to 2004Annual Number of 100 mmboe+ Discoveries from 1994 to 2003, by Physiographic Situation

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

70

60

50

40

30

20

10

0

SOURCE: IHS Energy IRIS21 / PEPS 2004 (© 2004 IHS Energy, Inc.)

Many in the industry argue that the large oilfields on land (conventional oil sources) have beendiscovered. The oil industry must now focus on off-shore and unconventional sources, which are moredifficult to access, farther from markets and requiregreater capital investment. This is reflected in thedata provided by IHS Energy; since 2000 the bulk ofnew discoveries have been in water deeper than 200metres, while the oil reserves found on land and onthe continental shelves have been declining:

n >200m Water Depthn ShelfnOnshore

DW 59%


| 23

In November 2005 the International EnergyAgency (IEA) released its annual report, WorldEnergy Outlook 2005. The focus was on the questionof peak oil and the petroleum supply available inthe Middle East and North Africa (MENA). This isone of the few major studies that includes an exam-ination of the greenhouse gas effects of increasedextraction and consumption of oil and natural gas.

The IEA sets forth three scenarios. First, there isadequate oil and gas in MENA to meet rising globaldemand for the next quarter century and beyond.However, the problem in recent years has been alack of investment in both the upstream and down-stream industries. Just to maintain the present sys-tem to 2030 requires an investment of $17 trillion.If the governments and corporations re-invest innew production, the IEA expects that energydemand will rise by 50 percent to 92 million barrelsper day (MMb/d) in 2010 and 115 MMb/d by 2030.However, carbon dioxide emissions would rise by52 percent. As they conclude, this would “call intoquestion the long-term sustainability of the globalenergy system.”

Things would be worse under their second sce-nario, which is called the Deferred InvestmentScenario. A continued decline in investment in newprojects would result in inadequate supplies andbring higher energy prices, slower world economicgrowth, and would “choke off energy demand in allregions.” With less energy production and con-sumption, greenhouse gas emissions would not riseas fast, but at a high economic cost.


The third scenario, which the IEA supports, isthe World Alternative Policy approach. This is thegeneral plan approved by the G-8 energy consum-ing countries at the Gleneagles Summit in July2005. These relatively modest proposals call foremphasis on energy efficiency, conservation andshifting away from fossil fuels. Increased energydemand would fall to only 1.2 percent per year.However, even under this proposal it is projectedthat greenhouse gas emissions would rise by 30 per-cent by 2030. (IEA, 2005)

It should be remembered that under the KyotoAccord, those countries that signed on agreed toreduce their greenhouse gas emissions by 6 percentbelow the emission levels in 1990 by 2012. Yet thescientists with the Intergovernmental Panel onClimate Change insist that there has to be a 70 per-cent reduction in greenhouse gas emissions if wewant to stabilize the carbon dioxide levels in theatmosphere and escape the worst impacts of cli-mate change. In 2005 Saskatchewan’s emissionswere around 62 percent above their 1990 levels andsteadily rising. There is obviously a fundamentalconflict between the goal of increased energy pro-duction focusing on the oil and gas industries andthe goal of limiting greenhouse gas emissions andthe impact of climate change. It seems clear thatthe business as usual approach being followed inCanada, and especially in Saskatchewan, is helpingto guarantee that we will have extreme climatechange from greenhouse gas emissions.(Environment Canada, 2006)

24 |

Natural resources are a free gift from nature. In allhuman societies for thousands of years naturalresources were considered to be common propertyavailable to all for equal use. As humans moved tohorticultural societies, families were often grantedusufruct or use rights to certain resources like landfor farming or grazing animals or special fishingsites. However, these were never considered privateproperty. These rights were granted by the societyas a whole and could be withdrawn. Those who hadusufruct rights could not sell them as if they wereprivate property.

It was only with the rise of more advanced agri-culture, and the development of class divided soci-eties, that we see the introduction of private indi-vidual ownership of land and resources and theconcept of rent in landlord-peasant societies.Private ownership of land and resources inevitablymeans that few will own the resources and themajority will not. Thus peasants, serfs, peons andother agricultural producers were forced to pay a“rent” to the landlord for access to land in order togrow crops to support their families. The rent wasgenerally considered to be the surplus over andabove what the family needed to subsist. However,in a class society this was determined by the ownersof the land, supported by their governments andthe military-police forces. Thus under the feudalsystem in Europe the serf and his family workedone half of their time on the lord’s land; the renttook the form of labour time. In general this wastransformed into 50 percent of the crop, seen as theequivalent of 50 percent of the family’s labour time.With the introduction of the money economy, theserf, gradually becoming a peasant, could pay hisrent by a cash payment equal to 50 percent of thecrop produced. This system still exists today infarming communities.

The new capitalist system required the privati-zation of natural resources so that they could bebought and sold in a market. The European powersimposed this new system on the areas of the worldthat they colonized. For example, from the earliestinvasion of Ireland, England demanded that theland of the Irish clans be transformed from com-mon social property to private property of the clanChief, to be passed on to his son by primogeniture.This was one of the fundamental aspects ofEuropean imperialism and colonialism in the 19thcentury: the world-wide transformation of com-mon land into private property. Thus we see theFirst Nations of Western Canada, in the negotia-tions that established the numbered treaties, ques-tioning how common property like land, given bythe Creator to all, could be transformed into indi-vidual private property. (Warnock, 2004)

Economic rent under capitalism

The concept of rent that we use today has its rootsin the ideological defence of private property inresources constructed by the earliest political econ-omists. John Locke (1637-1704) first set forth theclassic case that was the foundation for all others.Locke, defending England’s seizure of land from theindigenous peoples of the Americas, insisted thatany individual or business could seize land that wasnot being efficiently used to produce profits. Indoing so they owed nothing to the population ingeneral for this action. Adam Smith (1723-1790)accepted Locke’s argument. Economic rent wasdefined as the economic surplus extracted fromlabour applied to land and other resources. The cap-ital used in the extraction and production processwas nothing more than dead or accumulatedlabour, called “stock” by Smith.

IV. Economic Rent from ResourceIV. Extraction and GovernmentIV. Fiscal Regimes


| 25

However, the most widely cited liberal defini-tion of economic rent was set forth by DavidRicardo (1772-1823). Economic rent is the surplusthat is created by the use of natural resources overand above what is necessary to keep labour and cap-ital on the land and producing products. It is mostimportant to remember that these costs include anormal profit. Economic rent therefore is createdwhen the exploitation of natural resources like oiland gas produce a return that is over and above thenormal rate of return. Economic rent is a monopolyprofit or an excess profit.

Under this liberal capitalist view of economicrent, Ricardo did not include the payment of com-pensation or a royalty to the general public for theprivatization and use of natural resources that hadpreviously been considered social or public proper-ty. (Arneil, 1996; Gunton and Richards, 1987;Heilbroner, 1961; Warnock, 2004)

Nevertheless, in some pre-capitalist societiesforms of royalties had been established to compen-sate the community for the private utilization ofpublic resources. In Greek societies the silver mineswere socially owned, but individuals were allowedto work a mine provided they paid a royalty to thegovernment, a combination of a cash payment anda share of the production. In pre-capitalist Spainand its colonies there was a royalty for private useof resources, the flat rate quinta real, 20 percent ofthe value of the product. The first royalties used inthe Middle East in concession agreements for oilwere 12.5 percent, or one-eighth of the value of theresource extracted. With the spread of democracy inthe 19th century in Europe and elsewhere, electedgovernments began to demand the payment of roy-alties and taxes to compensate for the extractionand depletion of natural resources.

The oil and gas industry

Within the oil and gas industry today, economicrent is generally defined as the difference betweenthe cost of exploration, field development andextraction and the market price. These costs includea normal rate of return on investment. In thisindustry there is a very large economic rent and anongoing political struggle over what share of thatexcess profit should go to the corporation and whatshare should go to the government.

Economic rent is a concept and it is not easy tomeasure. Oil is a finite resource, and it is distributedunevenly across the planet. It is also a rare resource,

and it is characterized by different qualities anduneven concentration. Kenneth Dam has arguedthat for oil and gas the economic rent is directlyrelated to field size. Rents are high in large fields,like those in the Persian Gulf area; they will belower where the fields are relatively small, as is thecase in North America today, where oil and gasextraction has passed its peak and has reached the“mature stage.” There is also the question of risk,both technical and political, which affects privateinvestment. (Dam, 1976)

Rent is also difficult to measure because the oilindustry has never operated in a free market; it hasalways been characterized by monopoly, oligopolyand government support. In most areas of theworld access to oil and gas has either been limitedby the existence of large powerful firms or govern-ment regulations that prescribe limited access.

The oil and gas corporations have been sup-ported by governments that accept oligopoly andprovide a wide range of economic assistance. Foryears the oil industry in the United States was sup-ported by import quotas and a pro-rationing systemthat controlled production, both designed to pre-vent the free market from working and to maintainstable prices. Since the creation of OPEC the supermajors and their supporters in government haveworked closely with the Middle East countries todevelop a market system where oil sells within aprescribed band of prices that guarantees a goodrevenue to both the producing governments andthe corporations. This is a new type of oligopoly.Under this world wide system, the majors expect toaccumulate most of the economic rent. Indeed,they have created a situation where investors feelentitled to make higher profits in the oil and gasindustry than they would investing in other areasof the economy. (Mommer, 2002a; Noreng, 2002)

Fiscal systems for extractingeconomic rent

All governments wish to obtain at least some rev-enues from the extraction and use of renewable andnon-renewable resources. These resources are com-monly owned by the state, and governments havethe responsibility for controlling their extractionand use. Thus it has been argued that governmentshave a moral responsibility to ensure that futuregenerations benefit in some way from their deple-tion.

For countries moving out of an agriculture


26 |

economy (including Canada), natural resources orstaple industries have been a way of diversifying theeconomy, creating jobs, and supporting the devel-opment of those industries that provide inputs andforward links to industries that process the rawmaterials. In many cases, including Saskatchewan,these resource extraction and industrial projectscan bring development and employment to ruraland remote communities.

The approach of governments to the collectionof economic rent varies around the world andacross time. The democratic theory of rent sees nat-ural resources as a free gift from nature that shouldbe owned by and benefit the population as a whole.Governments that follow this theory of rent wouldseek to maximize their share of the economic rent,or excess profits, over the life of any resource devel-opment project. All governments also want to havesteady and predictable revenue so that they canplan for public expenditures. A government pursu-ing a democratic theory of rent would be expectedto place a high priority on developing policies thatguarantee that the economic rent is re-invested inthe country, and especially in the local area orprovince. If this does not happen, resource develop-ment results in boom and bust communities. Asocially responsible government also aims to have alarge share of the benefits from resource develop-ment accrue to local indigenous populations.

This contrasts with the liberal theory of eco-nomic rent that was developed during the rise ofthe capitalist system and in particular during theperiod when western European countries expandedabroad, implementing policies of imperialism andcolonialism. Liberal theory argues that individualsand corporations may seize natural resources thatare “not being used” for their own use. They have amoral right to transform public property into pri-vate property. Furthermore, they do not owe any-thing to the general public for the seizure of thiscommon property as long as they use it to make aprofit. Once all of the “waste land” and resourcesare acquired as private property, then a legal systemis created to defend the rights of private propertyownership. The most complete defence of this lib-eral approach to economic rent was set forth byJohn Locke in his Second Treatise on Government

(1690). In more recent times, we can see this liberal

policy in operation when the Soviet countries weretransformed into capitalist countries after 1989.Natural resource assets, like oil and gas companiesand reserves, were “sold” to a few private individu-als at prices well below the value of their assets. Theliberal approach today is vigorously pursued by pri-vate corporations and governments, demandingthat natural resources be privatized and that thosewho then use these resources should pay as little aspossible for their use. (Arneil, 1996; Bina, 1985)

The advantages of state ownership1

Economic rent is most easily captured whenresource development is through state-ownedenterprises. The success of these enterprisesdepends on the degree of democracy that exists inthe province or country. In an advanced industrial-ized democracy, like Norway, a NOC like Statoil is avery successful and efficient company. Petrobras inBrazil has a similar reputation. In Saskatchewanstate-owned public utilities have been very efficientand innovative and provide excellent services. Forexample, the Crown corporations that were createdin the resource sector, including the PotashCorporation of Saskatchewan, the SaskatchewanMining and Development Corporation and SaskOil,were all very well run and provided greater returnsto the general population than they have since theywere privatized. In sectors of the economy that aredominated by large foreign-owned corporationswith monopoly power, local, democratically con-trolled, state enterprises offer a very good alterna-tive. (For Saskatchewan, see Tables I and II)

Around 100 countries have had state-owned oiland gas companies at one time or another, and theyhave a wide variety of histories. Like private corpo-rations such as Enron (see later for details), there area few examples of bad management. For example,in Mexico it was normal for PEMEX, the NOC thathas completely dominated the oil and gas industry,to be used as a patronage instrument by theInstitutional Revolutionary Party (PRI).Furthermore, it was government policy to requirePEMEX to pay 65 percent of their annual revenues

1 Governments have an additional role to play in resource development. Resource extraction can be very destructive to thelocal environment, often involving the production of toxic wastes. Furthermore, those working in the industry can be exposedto harmful and life-shortening products. We know this only too well in Saskatchewan; uranium mining in the North has beendevastating to the environment and workers. Fossil fuel extraction normally entails production of locally- and regionally-harmful air pollutants, as well as greenhouse gas emissions that cause global warming. Governments need to establish andenforce strong regulations to protect the environment, communities and workers. (Warnock, 2004)


| 27

to the federal government. Revenues from PEMEXprovided 35 to 40 percent of the federal govern-ment’s revenues and greatly contributed to provid-ing foreign exchange. However, these two policiesleft PEMEX with inadequate retained earnings todevelop new oil and gas resources.

In Argentina the Peronista governmentsrequired YPF, its local oil and gas NOC, to pay 68percent of its annual revenues to the government,which left it with inadequate funds for expansion.Furthermore, both Mexico and Argentina dictatedthat their NOCs should heavily subsidize the retailprice of oil products, which cut into their revenues.Why did this happen? In both these cases the gen-eral policy was determined by the rich and power-ful who controlled the government. Revenues fromthe NOCs allowed government to avoid imposingtaxes on private corporations, wealth or individualswith high incomes. (Laguna, 2004; Palacios, 2002)

It is also relatively easy to collect rent whenresource development is through joint venturesbetween NOCs and private corporations. In thesecases, because of direct financial and managementparticipation in the operation, the costs and rev-enues are known to the government. Many govern-ments in oil producing countries have utilized pro-duction sharing agreements; it is common practicethat the government takes a share of the oil or gasthat is produced. However, because the governmentdoes not have a direct equity position in the privatefirms, they do not really know the details of howthe companies are operating. (Mommer, 2002b)

The advantages of having a National OilCompany and government control the industrywas demonstrated during 2005 when there was arapid increase in the price for oil and gas and wind-fall profits that bore no relationship to the cost ofproduction. In the OPEC countries the govern-ments and NOCs had term contracts with the for-eign-owned IOCs. Under these term contracts theywere able to raise their prices for contract holders tomatch the increase in world prices. Thus in OPEC asa whole prices increased from their 2004 levels by40.9 percent for the first nine months of 2005, andthe income to OPEC countries increased 46.4 per-cent over the same period. In contrast, in Canadaand the United States, almost all of these windfallprofits went to the private corporations. (PetroleumIntelligence Weekly, October 31, 2005)

In contrast it is much more difficult for govern-ments to recover a large part of the economic rentwhen the natural resource is being developed exclu-

sively by private corporations. It is most difficult togain a major share of the rent when development isby large foreign-owned transnational corporationswho operate on a world wide basis and are vertical-ly integrated. As we will see, the secrecy of opera-tions, transfer pricing, and the increasing use of off-shore tax havens have posed a very serious problemfor governments around the world.

Rent collection in a privateenterprise economy

Within the privately-owned portions of the oil andgas industry today it is assumed that private corpo-rations and governments each have a right to ashare of the economic rent (or excess profit). It isargued in contemporary liberal economic rent theo-ry the goal of a taxation policy for resource extrac-tion should be “neutrality.” A neutral taxation sys-tem reduces the amount of economic rent going tothe investor, but the taxes collected by the govern-ment would not be high enough to discourageinvestors from the industry. It should always beremembered that economic rent is an excess profitand under a democratic rent theory should all go tothe owners of the resource, the general public.

Economic rent from oil and gas developmentswill vary depending on the size of the resourcedeposit, its grade, its ease of extraction, its location,the state of the local infrastructure, and the dis-tance from important markets. Saskatchewan cur-rently offers investors many advantages associatedwith very low risk areas and countries: a tax androyalty regime that is very favourable to the indus-try, a government that strongly supports and subsi-dizes the industry, concession agreements thatmaximize the control by the private corporation,no government controls on the use of profits, ahighly skilled and educated work force, and excel-lent technical expertise available from governmentand universities. Government environmental regu-lation is minimal. There is no requirement to sharerevenues with local municipalities or Aboriginalcommunities. The present social democratic gov-ernment effectively manages the labour force, andstrikes are few and far between.

The industry believes that the share of the renttaken by the government should be spread over thelength of production, or the full cycle net cash flow,and frequently this is not the case. What is needed,the industry argues, is a system of “progressive tax-ation.” Taxes should be low while projects are


28 |

being developed, increased when production ispeaking and then reduced when a gas or oil field is“mature” and the rate of extraction is in decline.However, we should never forget, as DanielJohnston points out, “the objectives of oil compa-nies are to build equity and maximize wealth byproducing oil and gas at the lowest possible costand the highest possible margin.” (Andrews-Speed,2000; Bina, 1985; Johnston, 1994; Raja, 1999;Sarma and Naresh, 2001; Walde, 2003)

Different government fiscal regimes

The earliest systems of private exploitation of natu-ral resources involved the state granting conces-sions to individual developers. The payment by theprivate developer to the state is often describedunder the general title of “royalties.” For example,in the forest industry in Canada in the 19th centu-ry there was a flat fee per tree felled. At a later timethere was a fixed fee per cubic metre of wood har-vested. This type of return to the public on resourceextraction has the advantage of being easy to calcu-late, but it must be adjusted for inflation. In the oiland gas industries today in Canada and elsewherethere are royalty instruments or fees which includethe following:

(1) Application fees for the right to doprospecting.

(2) Signature bonus bids for exclusive right toexplore a particular piece of land.

(3) Discovery bonus payment or lease for pro-duction.

(4) Royalty or production fees, usually a per-centage of the volume extracted.2

These are all government permissions givingthe legal right to explore, develop and produce gasand oil on a particular piece of land. They are nor-mally given for a specified period of time and canbe revoked if they are not utilized. In most places,including Saskatchewan, the government auctionsoff particular tracts of land, and they are grantedexclusively to the highest bidder. As Derek Lundpoints out, this kind of royalty system is more pop-ular with governments where there is a relativelyopen economy and where transfer pricing orincome shifting within transnational corporationsis widely practiced. Michael Cartwright notes thatthis type of payment system is preferred in theUnited States where land is owned by private indi-

viduals or companies. It is a way to bypass the “cre-ative accounting” used by large corporations.(Cartwright, 1999; Lund, 2002)

Royalties are often imposed on the volume ofthe resource that is extracted, often a fixed percent-age of the volume of production. A royalty can alsobe ad valorem, i.e. a percentage of the gross revenuesfrom extraction. Royalties in whatever form areconsidered a cost of production, a cost of doingbusiness, and are deductible from gross revenues forthe purposes of taxation. In Canada and Australia,ad valorem royalties have different scales accordingto the time when the resource came into produc-tion – “old oil,” which was less costly to develop,has a higher royalty than “new oil,” which is foundin smaller pools and at deeper levels.

In the present world oil industry there are lim-ited areas where there are prospects for discoveringand developing large pools of oil and gas.Competition for access to resources is keen.Increasingly, governments are demanding a per-centage of the oil and gas produced. These areknown as production sharing agreements. For exam-ple, Venezuela and Kazakstan are now demandingand receiving 50-50 sharing of oil between theirNOCs and private corporations. Indonesia has aFirst Tranche Petroleum (FTP) system where all pri-vate developers must set aside for the state the first20 percent of all oil extracted. These are also consid-ered to be royalty systems, a necessary cost of pro-duction.

In some countries governments take equitypositions in oil and gas development. These areknown as joint ventures. This requires the govern-ment to invest in development projects. Not onlymust the government provide capital; it will alsoshare the risk and the profits. Under the provisionsof the Saskatchewan Mining and Development Act,the Crown corporation SMDC was allowed to claimup to 50 percent equity in all new private miningdevelopments. This was exercised in a number ofuranium developments, which proved to be veryprofitable for the government. (Kaiser andPulsipher, 2004; Lund, 2002; Sarma and Naresh,2001)

The industry as a whole does not like produc-tion royalties or bonuses. They are considered“regressive” in that they are a low risk to govern-ments and result in a higher effective tax rate. Theindustry naturally prefers a system based solely on

2 There are other mechanisms as well, including competitive bidding on royalties, and royalties that provide a fixed return toindustry. See Annex – Fiscal Regimes.


| 29

taxing profits, which they call a “progressive” taxa-tion system. Those fiscal regimes that have low roy-alties and bonus bids are considered by industry tobe “neutral” fiscal regimes. Many in private indus-try point to the royalty-tax regime established bythe UK government for the North Sea as close to theideal system. (Kjemperud, 2004; Raja, 1999; Walde,2003)

The industry would prefer a taxation systemwhere the only obligation to the owners of theresource would be an income tax. In Canada it hasbeen a long tradition to have a lower income tax forresource extraction than for corporations in gener-al. In many countries there are different rates ofincome tax, with lower rates offered to small orlocal companies. Where there is a federal structure,oil and gas corporations will be expected to payregional as well as national income taxes. A numberof countries impose a minimum tax because taxavoidance is such a major problem with large cor-porations.

A number of countries have introduced a pro-gressive profits tax (PPT): as the reported profits rise,so does the rate of taxation. This system is used inCanada, Australia and the United Kingdom.Canada also has had a minimal federal large corpo-rations tax on capital that exceeds $10 million.

However, the taxable net income reported byoil and gas corporations is usually only a very smallpercentage of gross revenues. Why is this the case?First, there are normally very generous depreciationallowances given to resource extraction corpora-tions. In Canada oil and gas corporations areallowed a 100 percent depreciation for capital pur-chases in the first year. Exploration and develop-ment costs can be amortized over a period from fiveto 15 years and deducted annually. It is the norm inthe industry for governments to give a wide varietyof tax incentives to companies, including tax holi-days and investment tax credits, like those given forresearch and development. Business losses can becarried forward or backward, usually seven or eightyears. Canada provides for a resource allowance anda processing allowance, which has been 25 percentof profits. (Copithorne, 1979; Lund, 2002; Noreng,2002; Sarma and Naresh, 2001; Walde, 2003)

In recent years a few countries have introduceda form of resource rent tax (RRT). Most often it takesthe form of a percentage tax on cash flow. The goalis to increase the tax take on resource developmentprojects when the returns are very high, producingsuper profits well above the average rate for the

industry. They are normally assessed on a particularproject, as is the case in the Australian system. Theadvantage of this for corporations is that any nega-tive cash flows that might occur at the beginning ofa project can be accumulated and then deductedfrom positive cash flows. In Australia the tax isassessed only when the returns exceed a particularthreshold, which in this case is 15 percentagepoints above the bond rate. (Australia, 2004; Sarmaand Naresh, 2001)

There are other forms of taxation used toappropriate economic rent. In 2005 and 2006 anumber of countries introduced some form ofexcess profits tax to try to capture some of theexcess profits being created with the rapid rise ofthe international price of oil. Russia has imposedexport tariffs and excise taxes after the privatizationof the industry (1992-6). Along with royalties andincome taxes, this regime allowed the companies tokeep around 30 percent of the revenues with 70 per-cent going to the state. However, oil and gas policyhas changed direction under the government ofPresident Vladimir Putin. Not only has he moved tore-nationalize a significant part of the oil and gasindustry, he has cracked down on tax evasion andincreased the rate of royalties and taxes. In August2004 export duties were raised; when the interna-tional price of oil rose above $25 per barrel, theexport duty was designed to take 90 percent of theprice increase. With the windfall oil profits in 2005,the government raised the export tax again, taking90 percent of all export revenues above $27 per bar-rel. With the capture of a greater share of the eco-nomic rent, the Russian government was able topay off $23.7 billion from the Soviet era owed tothe Paris Club of creditor countries. (Globe and Mail,August 22, 2006; Gray, 1998; Mikhailov, 2001;Petroleum Intelligence Weekly, August 15, 2005)

All countries apply some form of excise tax onthe retail sales of petroleum products. This hasalways been a sore point with the OPEC countries.The taxes collected at the retail level from con-sumers in the advanced industrialized countries arehigher than the revenues received by the OPECcountries at the extraction end. OPEC argues thatbetween 2000 and 2004 the G-7 western industrial-ized countries took in $1,600 billion in petroleumtaxes while the OPEC countries received $1,300 bil-lion in revenues. The highest take was in the UnitedKingdom. While UK governments have imposedvery low royalties and taxes on the extraction of oiland gas in the North Sea, they have very high excise


30 |

taxes on consumers at the retail level and receive“four times more from taxation than what OPECgets from the sale of its oil.” (OPEC, 2005)

The problem of tax avoidance

The corporations in the oil and gas industry werethe first truly transnational corporations, operatingin different countries around the world. Theyinvented transfer pricing as a strategy to avoid pay-ing taxes. In many countries, like Canada, the oiland gas industry was almost completely dominatedby large foreign-owned oil and gas corporations:the majors and the super majors. (Baistrocchi, 2005;Gresik and Osmundsen, 2004)

Oystein Noreng argues that even today thelarge IOCs have more power and operating discre-tion than the NOCs of the exporting countriesbecause they have such a major presence in therefining and retailing industries. The US govern-ment and its IOCs have significant advantages fromthe fact that spot, term and future transactions inthe oil and gas industry are made in US dollars.Because all of the TNCs engage in cross-subsidiza-tion of activities and projects, Oystein Noreng con-cludes that corporate income tax is “an ineffectivetool to capture economic rent from oil extraction.”(Noreng, 2002: 180.)

In Canada Imperial Oil (majority owned byExxon-Mobil) has always dominated the industryand in most markets has been the price leader at theretail level. The relationship between the headoffice of a large TNC and its branch plant wasexposed during a court case regarding Imperial Oilin Nova Scotia in the mid-1970s. Nova Scotia PowerCorporation sued Imperial Oil for manipulating theprice of oil. The trial showed how branch plants arecontrolled by their head offices. Exxon dictated toImperial Oil where it should purchase oil and whatprices to charge. The case also demonstrated howtransfer pricing works. (One account of this was inOilweek Magazine, May 19, 1975)

The domination of a resource industry by largeTNCs has a major impact on economic develop-ment. Diderik Lund points out that in the case ofsmall countries that operate in a basically openeconomy, attempts by governments to impose taxeson resource rents create a major incentive for TNCsto engage in transfer pricing or income shifting.Weak governments are not in a position to monitorand control this form of tax avoidance. Thus wheneconomists are assessing the impact of an econom-

ic development project, Lund argues that no “wel-fare weight” should be given to profits, as they willflow out of the country to foreign investors. (Lund,2001: 212)

A similar argument was made by LawrenceCopithorne, one of the Canadian pioneers inresearching the impact of transfer pricing by largeforeign-owned corporations. Where you havetransnational corporations operating in the naturalresource extraction industries, there are large leak-ages to foreigners. Windfall profits, extracted fromconsumers as a result of oligopoly, are either trans-ferred to the head office, invested abroad or areheld by the corporations as retained earnings.When these retained earnings are invested inCanada they increase the value of assets held by for-eigners, and more profits flow out of the country.Thus the economic rent from oil and gas windfallprofits is captured by foreigners and may be invest-ed anywhere in the world. (Copithorne, 1979)

Bernard Mommer, a former executive of theVenezuelan NOC, Petroleos de Venezuela, SociedadAnonima (PVDSA), and now fellow at the OxfordEnergy Institute, has described in detail how themanagement of this NOC used transfer pricing. Theoil industry was nationalized in 1976, and for aperiod of time PDVSA captured around 80 percentof every dollar of oil exports. However, the NOCwas completely under the control of its own execu-tives, who shared the same outlook on the industryas the executives of the private major oil corpora-tions. After 1983 PVDSA began expanding overseas,in Germany (VEBA) and in the United States(CITGO). PVDSA sold its oil to its overseas sub-sidiaries at substantially discounted transfer prices,thus shifting profits abroad, outside the reach of theVenezuelan government. Profits earned overseaswere kept overseas and invested overseas. Mommerstates that profits were never paid to the head officeof PDVSA in Venezuela. The executives at PDVSA,independent of control by the government, wishedto reduce the power of the state and promote the re-opening of the industry to private, foreign invest-ment. In this they worked closely with the US gov-ernment, who also wanted to see Venezuela with-draw from OPEC. The push towards privatizationafter 1989 was aided by President Carlos AndresPerez, leader of the social democratic AccionDemocratica (AD), who signed liberalization agree-ments with the IMF and the World Bank. Thuswhen Hugo Chavez was elected president in 1998with very strong majority support, a confrontation


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with the executives of PDVSA was inevitable.(Mommer, 2002a, 2002b)

Collecting revenue from oil corporations hasnot been an easy task for governments. Successdepends on the ability or willingness of govern-ments to monitor and audit the corporations andthen enforce existing tax laws. The corporationsusually have far greater economic resources thanthe governments and have no qualms about engag-ing in litigation to avoid payments. A few exampleswill illustrate the problem:

• In 1996 in Texas a law suit was filed against the13 largest oil corporations for underpaying royal-ties on oil extracted from land owned by the fed-eral government and several Indian nations. Theywere accused of valuing their oil at below marketprices. The corporations settled out of court, pay-ing a $400 million settlement.

• In 1977 the state of Alaska sued all the corpora-tions operating on the North Slope for failing topay their royalties by under pricing their oil. Thecorporations settled out of court, paying a settle-ment of $1 billion.

• In California the state and the city of Long Beachbrought suit against Exxon and other corpora-tions for avoiding royalties by under pricing oilextracted from public lands. This case dragged onfor 20 years, and in 1999 the corporations settledout of court for $325 million.

• The state of Alaska filed an action against Arco in1977 for creating a “fraudulent scheme” for com-puting royalties but again the case was settled outof court without the corporation admitting that ithad done anything wrong. (Tax NotesInternational, March 15, 2004)

Offshore tax havens

For most people the Enron case was the first timethey learned anything about the intrigues withinthe large transnational corporations. Enron was theseventh largest corporation in the United States, anenergy giant that had grown dramatically after theprivatization and deregulation of the natural gasand electricity industries. Of course Enron engagedin the usual transfer pricing. However, the caserevealed the extent to which the large TNCs use off-shore tax havens to avoid paying taxes. Enron cre-ated 2800 subsidiaries, 881 of them abroad, and 692in the Cayman Islands. It had no office in theCayman Islands, but P.O. Box 1350 was the mail

centre for 500 subsidiaries. By creating shell compa-nies in the 55 infamous tax havens (which have noincome taxes on corporations), Enron paid no taxesto the US government for four of the last five yearsbefore it collapsed and actually received $381 mil-lion in refunds from the US Internal RevenueService.

Why did it take so long for the Enron fraud tobecome public? They were supported by top audit-ing firms, including Arthur Andersen, who special-ize in aiding corporations in tax avoidance. Theywere also supported by large, powerful law firms.And they used the top Wall Street banking firms,including Barclays, Citigroup, J.P. Morgan Chase,Deutsche Bank, Credit Suisse First Boston, LehmanBrothers and Merrill Lynch. The Canadian ImperialBank of Commerce was deeply involved. It is clear-ly not a case of “a few bad apples.” (Lerach, 2004;“Update on UC’s Enron Investment and Lawsuit,”University of California, April 8, 2002 atwww.ucop.edu)

The Enron case exposed the techniques used bythe oil corporations and others to hide their profits.They sold oil to a subsidiary in a tax haven for avery high price and re-export it at the market price.They shifted capital to an offshore subsidiary andthey borrowed it back at a high interest rate. Theytransferred the ownership of patents and othermanagement services to the offshore company andthen paid large royalties for their use. They boughtinputs from the offshore company at highly inflat-ed prices. These are all paper transactions, of course.(Lucy Komisar, How Big Business Evades Taxes,Pacific News Service, April 25, 2004; www.taxjus-ticenetwork.org; www.corporatepolicy.org)

These practices are very well known in businesscircles. Martin A. Sullivan, a tax economist for theUS Treasury Department, told the New York Timesthat these practices are becoming common for mostlarge US corporations. In 2003 fifty-eight percent ofcorporate profits were taken in offshore tax havens,“a seismic shift in international taxation.” Hereports that “subsidiaries of US corporations nowgenerate profits mainly in tax havens rather than inlocations in which they conduct most of their busi-ness.” Would this include Canada? Saskatchewan?(David Cay Johnson, New York Times, September 13,2004)

Another widely reported scandal involvedMikhail Khodorkovsky, the Russian billionaire whoschemed to acquire state-owned oil and gas inter-ests when they were privatized. He formed his own


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bank, raised some capital, and bought state assetsfor a song. The oil and gas industry before privati-zation was valued at around $65 billion and wassold to a handful of “entrepreneurs” for $1.5 bil-lion, perhaps the largest theft of public assets inmodern history. Khodorkovsky became presidentand CEO of Yukos Oil, the largest private oil com-pany in now capitalist Russia with a market capital-ization of $6 billion. President Boris Yeltsin had notonly made possible the privatization of state assets,his government also created a number of regionalschemes for the new capitalists to avoid payingtaxes. However, when Vladimir Putin was electedpresident in 2000 that changed. Putin decided itwas time for corporations to pay taxes. Yukos andthe other corporations were audited and presentedwith bills for past unpaid taxes. Yukos was given abill of $8 billion. Khodorkovsky was charged withfraud, brought to trial, convicted and jailed.

The investigations revealed the schemes Yeltsinhad created were used to allow oil companies toavoid taxes amounting to around $25 per tonne, oraround $9 billion annually. There were few westerncompanies involved in this process, but BP was in ajoint project with Tymen Oil (TNK) and wasaccused of failing to pay $774 million in taxes. BPadmitted that it engaged in transfer pricing, butsaid it operated within the 20 percent legal range,above and below market prices. (Gas and Oil News,January 11, 2001; Petroleum Intelligence Weekly,August 15, 2005)

Yukos was guilty of practices similar to those ofEnron. They created dummy corporations abroad intax havens. The favourites were in the Isle of Man,Geneva and Gibraltar. They used transfer pricing toshift capital abroad. They were assisted by the fourlargest audit firms: Deloitte & Touche, Ernst &Young, PricewaterhouseCoopers, and KPMG. Theseauditing firms specialize in creating tax avoidance

shelters for large corporations. Yukos was also aidedby Wall Street investment banks, including MorganStanley, Credit Suisse First Boston and UBS.(Komisar, 2005; New York Times, October 29, 2004)

The most recent major scandal involving theoil and gas industry concerned oil smuggling fromIraq during the period of the UN sponsored boycottand the UN oil-for-food program. The UNIndependent Inquiry Committee, headed by PaulVolcker formerly of the US Federal Reserve Board,released its report on October 27, 2005. It identified138 traders and middlemen who paid illegal kick-backs totaling $1.58 billion to the Iraq government.The traders used paper companies to try to hide thetransactions, “a maze of intermediary companies.”Most of the large oil traders and over 2200 compa-nies were involved in the illegal activities. UStraders Bayoil and Coastal have been indicted bythe US government over strong protests from theoil industry. The smuggling was widely known andthe US government and other members of the UNSecurity Council turned a blind eye to this activity.The scandal became public after the US/UK inva-sion of Iraq in March 2003. (Petroleum IntelligenceWeekly, October 24, 2005; November 7, 2005)

Governments claim that they are doing theirbest to try to make large transnational corporationspay their fair share of taxes. The government ofAlaska adopted the universal taxation policy, wherethe corporations must pay taxes based on theiroverall world wide performance. In 1994 the USgovernment adopted transactional profit-basedrules to try to deal with transfer pricing. In 1995 theOrganization for Economic Co-operation andDevelopment created similar guidelines. TheSaskatchewan government claims to be using simi-lar rules. However, the experience since the mid-1990s would suggest that this approach has failedrather miserably. (Gresik and Osmundsen, 2004)


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All of these developments have had a major impacton the oil and gas industry in Canada. From thebeginning, the industry has been dominated by for-eign-owned corporate giants. In their present formthey are Imperial Oil (Exxon-Mobil), BP Canada,ChevronTexaco Canada, ConocoPhillips Canada,and Shell Canada. Other large U. S. corporations arealso major players in Canada, including AnadarkoPetroleum, Apache Canada, Burlington Resources,Murphy Oil Co., El Paso Corporation, Hunt OilCompany, and Devon Energy. Several largeCanadian firms have emerged, including EnCana,Petro-Canada, Suncor Energy, Nexen, CanadianNatural Resources and Talisman. However, theseCanadian-controlled corporations trade their stockon the New York Stock Exchange, and industry ana-lysts argue that the majority of their stock is nowowned by citizens of the United States. (US EnergyInformation Administration, Canada, February2005.)

It is not possible here to provide a detailed his-tory of the oil and gas industry in Canada.However, there are a number of key facts thatshould be kept in mind. The first Kerosene from oilwas developed by a Canadian, Dr. Abraham Gesner.The world’s first oil company was developed byCharles Nelson Tripp, at Eniskillen, Ontario. In1857 they drilled the first oil well and the firstCanadian refinery was established at Sarnia.However, by the turn of the century the petroleumindustry in Canada was dominated by Imperial Oil,a branch plant of Standard Oil of New Jersey. (Gray,1969)

The Leduc field near Edmonton was not discov-ered until 1947. Prior to that time almost all of theoil consumed in Canada was imported, mostly fromVenezuela and the United States. All of the large oilrefineries were owned and controlled by the for-eign-owned majors, and most were sited in Ontarioand Quebec. They had their own lobby and publicrelations group, the Canadian PetroleumAssociation, which was very influential in Ottawa.

As the petroleum industry developed inAlberta, Canada emerged with two markets. TheAlberta producers served the western Canadianmarket and began exporting to the United States.The larger eastern Canadian market was controlledby the majors using cheap imported oil. The majorsmade most of their income in Canada from refiningrather than extraction.

The Canadian corporations formed their ownorganization, the Independent Canadian PetroleumAssociation, and pressured the Canadian govern-ment to create a national oil policy. They wantedoil from western Canada to replace the imported oilin the eastern market. Alberta oil was more expen-sive to extract than imported oil, and this wouldhave significantly raised the price of petroleumproducts.

The majors convinced the Canadian govern-ment, then headed by Saskatchewan’s PrimeMinister, John Diefenbaker, to reject the proposalfrom the Canadian industry based in Alberta. Theresulting compromise was the National Oil Policyof 1961, which divided the country into two mar-kets along the Ottawa Valley Line. The Seven Sisterswere to control the market east of this line, usingcheaper imported oil. The Canadian companieswould have the market to the west of the line. Thenew oil policy allocated the important Ontario mar-ket to western Canadian corporate interests. Thismeant that consumers west of the Ottawa Valleyline would pay a monopoly price for petroleumproducts. The corporations developing the industryin Alberta and Saskatchewan were instructed to findadditional markets for their increasing productionin the United States. There would be no integratedCanadian market for oil. Today, few people inAlberta choose to remember the first National OilPolicy.

The new policy had the strong support of theUS government, which had as its goal an integratedNorth American resource market. The National OilPolicy would continue the domination of the


V. Canadian Oil Industry

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Canadian industry by the big US oil corporations,keep Canada dependent on imported oil, andexpand the export of western Canadian oil to theUnited States. It wasn’t until 1974 that Canadabecame a net exporter of oil. (Crane, 1982; Foster,1979; Laxer and Martin, 1976; Richards and Pratt,1979)

Canadian opinion on the oil and gas industrychanged radically over the 1960s and 1970s. Severalimportant studies decried the extent of foreignownership and control of Canadian industry ingeneral. The oil and gas industry was the most obvi-ous example, and public concern was expressedwhen it seemed that the majors would also controlthe development of the tar sands and the frontierlands of the Arctic and offshore. Following theOPEC crisis of 1973, the Liberal government underPierre Elliott Trudeau created the ForeignInvestment Review Agency in an effort to halt thetakeover of Canadian firms by foreign corporations.In 1975 they created Petro Canada, a state-ownedcorporation similar to those that existed in westernEuropean countries.

However, the bombshell was dropped onOctober 28, 1980: the new National EnergyProgram. The NEP was a complicated package, butthere were three main objectives. First, policies andprograms would be implemented to allowCanadian control of the industry to rise from 25percent in 1980 to 50 percent by 1990. Second,PetroCanada, and other possible Canadian-ownedoil corporations, would take over a significant num-ber of foreign-owned majors. Third, there would bean increase in the share of the oil and gas industryowned directly by the people of Canada throughCrown corporations. There were other provisions inthe NEP that were not widely known. One goal wasto reduce the use of oil in the non-transportationsector to no more than 10 percent of the total. Oilconsumption would be reduced by 390,000 barrelsper day, roughly the equivalent of imported oil atthe time.

There was fierce opposition from the oil indus-try and business organizations in general. The USgovernment under President Ronald Reagan strong-ly expressed its opposition. The business press wasadamantly opposed. The Wall Street Journal editori-alized that the Canadian government was actinglike a Third World oil producing country and notlike “a key democracy in the industrialized world.”They argued that Canada could not have developedthe oil and gas industry without the support of the

oil majors. Needless to say, there was strong opposi-tion to the NEP in Alberta. Through their regulationof the oil industry by the Alberta PetroleumMarketing Agency, Peter Lougheed, the AlbertaProgressive Conservative Premier, announced thatthe government would cut back production andsales in three steps to 85 percent of their currentlevel.(Crane, 1982; Foster, 1982; Richards and Pratt,1979)

Promoting continental integrationof the oil industry

Canada has always played a supportive role in theAnglo-American alliance to dominate the world.When the greatest imperial and colonial power wasGreat Britain, Canada was there as a whiteDominion, giving strong political, military, eco-nomic and natural resource support. This changedduring World War II. With the United States emerg-ing as the supreme world power, Canada shifted itsallegiances. During the war, military policy wasclosely integrated with that of the United States,and there was deep integration in the developmentof natural resources, manufacturing and the armsindustry. Canada’s overall policy as a supportiveand subordinate ally was continued after the war;the justification was now the Cold War against theSoviet Union and its allies.

During the Korean War (1950-3) PresidentHarry Truman appointed William Paley to head aMaterials Policy Commission to look at the longterm needs of the US government and economy forstrategic natural resources. Many key materials werebeing depleted, and there was the need for a securefuture source of oil and natural gas. The commis-sion concluded that historically the governmenthad relied on a close relationship with major UScorporations, and that relationship should contin-ue. There was no need to develop state-owned cor-porations, as was being done in many Europeancountries, even Great Britain. The US governmentwould actively support investment by US corpora-tions in countries in the Western hemisphere.Canada was singled out as being the most securesource of strategic materials and most receptive toUS needs. (Laux and Molot, 1988; Paley, 1952;Tanzer, 1980)

On several occasions the US government nego-tiated seriously with the Canadian government toestablish a continental energy pact. Liberal govern-ments, with a long history of supporting continen-


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tal integration with the United States, were support-ive. However, they backed off when the existence ofthe negotiations became public. Canadian opinionwas opposed to making any long term commitmentto sharing our oil and gas with the United States.

In the period after the Korean War US policystressed the further development of the US indus-try. Voluntary and mandatory controls were put onoil imports, but Canada was always exempted.During the conflicts in the Middle East in 1956 and1967 Canadian exports to the United Statesincreased, and the pipeline to Chicago was doubledin size. (Shaffer, 1968)

In 1965, as the United States was becomingmore deeply involved in the Vietnam War, theCanadian and US governments released theMerchant-Heeney Report, best known for its pro-posal that the Canadian government not publiclycriticize US foreign and defence policy. The propos-al, which was not well received in Canada, calledfor joint planning for the development of resourcesand “the co-ordination between the two countriesin the production and distribution of energy”(Clause 64). (Crane, 1982)

The Canadian public’s opposition to continen-tal energy integration was again aroused with therelease in 1970 of a study by US Secretary of Labor,George P. Shultz. It proposed that Canada phase outits dependence on oil imported from LatinAmerican and the Middle East and create a singleNorth American market for oil and gas protected bya mutual tariff system. Canada was identified againas the most secure and reliable source of oil for theUS military machine. Joe Greene, the CanadianMinister of Energy, Mines and Resources, created astir when he spoke to the US IndependentPetroleum Association in Denver in 1970. Herevealed that the government of Pierre ElliottTrudeau was seriously studying the proposals by theUS government for an integrated North Americanenergy policy. Greene, repeating the position of theSeven Sisters in Canada, declared that Canada hadoil reserves that represented 923 years of supply,and natural gas reserves that represented 392 yearssupply. Therefore, Canadians should have no con-cern about greatly expanding exports to the UnitedStates. (Crane, 1982; Foster, 1979; Laxer andMartin, 1976)

The election of Brian Mulroney and theProgressive Conservatives in 1984 opened the doorto further continentalism. Shortly after assumingoffice Mulroney went to New York City to speak to

prominent businessmen, to let them know that theera of Canadian nationalism was over. He declaredthat he was going to abolish the National EnergyProgram and the Foreign Investment Review Act assoon as possible. In March 1985 his governmentsigned the Western Accord with the governments ofAlberta, British Columbia and Saskatchewan, whichproclaimed a “free market” approach to the oil andgas industry, phased out the federal Petroleum andGas Revenue Tax, and promised tax incentives forthe oil and gas industry. The new policy directionwas praised by the Canadian PetroleumAssociation.

On October 3, 1987 the Mulroney governmentreleased the draft of the new Canada-US Free TradeAgreement (FTA). Nearly everyone was astonishedto see that the draft included a continental freetrade agreement in energy. Not even the provincialpremiers knew this area had been included in thenegotiations. (Dillon, 1983)

The provisions relating to energy represented adramatic loss of sovereignty for Canada. If there is ashortage of energy in Canada, the federal govern-ment cannot reduce the proportion exported to theUnited States below the level exported to them overthe past three years (Article 904). The Canadiangovernment is specifically denied the right to con-trol intra-corporate transfers of “profits, royalties,fees, interest or other earnings” (Article 1606). TheCanadian government cannot introduce a two pricesystem for energy, charging a higher rate for exports(Article 904). The Agreement also stripped theNational Energy Board of the power to set mini-mum export prices and export taxes (Article 903).No future national energy programs can discrimi-nate in favour of Canadian-owned corporations(Article 904). These basic principles of a continentalenergy program were strengthened in the subse-quent North American Free Trade Agreement(NAFTA), which included Mexico, and came intoeffect in 1994. The government of Mexico wasunwilling to surrender complete control over its oilindustry and was granted an exemption from theproportional sharing clause. (Dillon, 1983; McBrideand Shields, 1997)

Canada and the rise of windfall profits

Everyone is well aware of the rise of oil prices inrecent years. There are different world prices ofcourse, depending on the regional market and thequality of the oil. Heavy crude oil produced in west-


36 |

Some resource economists argue that for the oiland gas industry in particular, retained earnings area good indication of the level of the economic rent(or excess profits) that are accumulated by the largeprivate corporations. (Copithorne, 1979)

Second, most of the large oil and gas corpora-tions have put a very high priority on buying backtheir own stock. Stockholders like this for it increas-es the value of the stock and the returns per share.For example, between 2000 and the middle of 2005the five super majors spent a great deal of their cashbuying back their stock: Exxon, $36 billion; BP, $18billion; Total $17 billion; Shell, $7.5 billion; andChevron, $5 billion. Several of these corporationshave spent more on buying back their own stockthan they have on capital expenditures. (PetroleumIntelligence Weekly, August 8, 2005; October 3, 2005)

Third, they have paid higher dividends to theirinvestors. The Globe and Mail Report on Businessfound that for 2003 the Big 10 Canadian oil compa-nies’ return on capital invested for one year rangedfrom a low of 18 percent (Talisman Energy) to ahigh of 34 percent (Imperial Oil). The five yearreturn was in the same range. The Oil and GasJournal reports that in 2004 the return on stock-holder equity for the large US oil corporations wasconsistently 30 percent or more. In determiningwhat is a fair rate of return on equity (ROE) for cal-culating economic rent in resource extraction,economists commonly use a real rate return of 4.5percent. (Oil and Gas Journal, September 19, 2005;

ern Canada, for example, is discounted significant-ly against light crude oil, usually over $10 per bar-rel. However, on average, oil prices have beensteadily increasing in recent years. For example,North Sea Brent oil went from around $18 per bar-rel in 1999 to $40 per barrel in 2004. In 2005 worldoil prices reached a peak of around $70 per barrelbefore dropping back to around $55 to $60 per bar-rel. However, by the middle of2006 they had again risen to ahigh of $78 per barrel and thendropped off to $60. These priceincreases bear no relationship tothe cost of production. There hasbeen inflation in the cost of pro-duction over recent years, but thishas been far below the priceincreases. The US Department ofEnergy reports that in 2003 theproduction costs (including royal-ties) for oil in Canada averaged$5.57 per barrel. The oil industry in Canada hasbenefited from a rather dramatic increase in “wind-fall profits.” Of course, in the producing countrieswith national oil companies and much higher roy-alties and taxes the governments have largely cap-tured the excess profits (US Energy InformationAdministration, 2003).

The price of natural gas has varied more thancrude petroleum, but the general trend has beentoward higher prices. The average price of naturalgas at the Alberta hub went from around $2 pergigajoule (approximately equal to 1,000 cubic feet)in 1998 to $4 in 2002 to over $6 in 2004. In 2005the price rose to between $8 and $14 and thendeclined because of the unusually warm winter,which lowered demand. This was followed by amild summer and no hurricanes and an increase ofgas in storage. Consequently, by the fall of 2006natural gas prices had fallen to $5 per gigajoule.

Despite these short-term fluctuations as naturalgas supplies in western Canada continue to dimin-ish, and the general market demand continues toincrease, it is inevitable that prices will rise over thelong run. And even the lower prices still exceedcosts - the US Department of Energy reports thatproduction costs for natural gas (including royal-ties) in Canada in 2003 averaged between $2.55 and$3.25 per thousand cubic feet. Again, the privatesector has reaped windfall profits. (SaskEnergy,2005; US Energy Information Administration,2003)

EnCana US$ 12,241 US$ 7,935 64.8Petro-Canada 14,687 5,408 36.8Talisman Energy 9,554 3,316 34.7Canadian Natural Resources 7,547 4,922 65.2Nexen 3,905 2,335 59.8

SOURCE: Corporation Annual Reports, 2005

2005 retained %revenues earnings revenues

Company ($Millions) ($Millions)

The major oil corporations are all reportingwindfall profits. By mid-2005 the six super majorshad reported that their declared profits were up29% over 2004. What have they done with theexcess profits they have accumulated? First, the oiland gas corporations are holding a lot of cash asretained earnings. At the end of 2004 the fivelargest Canadian firms held the following amounts:


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Report on Business, July/August 2004)Fourth, they are adding reserves through merg-

ers and acquisitions. Many industry analysts as wellas political observers have noted that the privatecorporations have not been spending much onexploration. New wells drilled have been largely indeveloped fields, to increase the rate of extraction.For most oil and gas corporations, production hasexceeded the addition of proved reserves. Access tonew prospective drilling sites has been limited; inmany cases prime properties have been snatched upby the large NOCs. One alternative to this situationhas been for larger IOCs to buy out smaller inde-pendents. In 2004 mergers and acquisitions num-bered 251 with a value of $68.3 billion, a level thathad been reached about half way through 2005.There has also been a rash of merg-ers among the larger corporationsover the past 15 years. In 2005many of the large oil corporationssought to increase their provenreserves by purchasing existingassets from other companies, andthe price paid for acquisitions hasrisen significantly. In 2003 the aver-age acquisition price of reserveassets was around $4.81 barrel of oilequivalent (BOE). The value of assets purchased inCanada in 2005 rose to $13/BOE. Outside NorthAmerica reserve assets acquired averaged onlyaround $1.49/BOE in 2004. With so much cash onhand, many large corporations have committedvery large investments (up to $10 billion) in Albertatar sands development projects. (PetroleumIntelligence Weekly, September 12, 2005; October 24,2005; Oligopoly Watch, June 12, 2004 at www.oligopolywatch.com)

Foreign ownership

For Canada there is always the problem of the highdegree of foreign ownership and control. The oiland gas industry is certainly no exception. In 1999US ownership of the oil and gas industry was at 31percent but it had risen to 51 percent by 2003. Withthe large Canadian oil companies all selling shareson the New York Stock exchange, US ownership issteadily increasing. In September 2005 theCanadian Oil Sands Trust reported that its US own-ership had risen to 46 percent. (Globe & Mail,

September 30, 2003; Globe and Mail, September 3,2005)

While the large Canadian oil companies arebased in Canada and run by Canadian citizens,their ownership is changing. The majority of share-holders of three of the major Canadian companies- EnCana, Suncor and Canadian Natural Resources -are US residents. (Globe and Mail, October 7, 2005).

Even the oil and gas trusts, set up to allow cor-porations to avoid paying the federal corporateincome tax, have a very high percentage of US own-ership, many well above the 49 percent ceiling sup-posedly set by the federal government. The generalproblem can be seen in recent years in the growthof the outflow of capital. (Jackson, 2005; Yedlin,2005)3

Statistics Canada also reports that there hasbeen a large and growing outflow of capital to off-shore tax havens. This would certainly include theoil and gas sector of the economy. (StatisticsCanada, The Daily, March 14, 2005)

Inflow 36.8 99.2 42.6 33.0 9.2 8.5Outflow 25.6 66.4 55.9 41.5 30.2 57.5Net Flow 11.2 32.8 -13.3 -8.5 -21.0 -49.0

SOURCE: Statistics Canada.Canada’s Balance of InternationalPayment, 2005.

Net Flow of Foreign Direct Investment in C$billions1999 2000 2001 2002 2003 2004

3 The recent federal proposal to tighten trust taxation rules anticipates a phasing-in period. It remains to be seen whether ener-gy sector lobbying will result in weaker rules for the sector.

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Most oil extracted in Canada comes from theWestern Canadian Sedimentary Basin (WCSB),which lies under Alberta, Saskatchewan, part ofManitoba, British Columbia, and the NorthwestTerritories. This basin is considered “mature” as theextraction of conventional light and medium oilhas been declining for a number of years. TheNational Energy Board projects that only 22 percentwill be recovered over all, and emphasis now is onheavy oil and enhanced oil recovery (EOR), both ofwhich are less profitable than light oil. While theamount of oil extracted by conventional and EOR issteadily declining, it has been offset by theincreased extraction and processing of bitumenfrom the tar sands in Northern Alberta. (NationalEnergy Board, 2005; US Energy InformationAdministration, April 2006)

The recent study by Natural Resources Canadaof our energy future concludes that conventionallight and heavy crude oil in Western Canada hasreached the mature stage and production is startingto decline. The production peak is set for 2006 at1.48 MMb/d and is expected to drop to 0.84 MMb/dby 2020. The potential light and heavy crude oil forSaskatchewan is estimated to be 3.8 billion barrels.(Natural Resources Canada, 2006)

A commercial oil industry began inSaskatchewan in the 1930s, but it was not until themid-1950s that production began on a major level.By 1962 the annual volume extracted had risen to10.2 million cubic metres (64 million barrels).Production first peaked at 14.8 million cubic metres(93 million barrels) in 1966 and then dropped off toa low of 7.4 million cubic metres (47 million bar-rels) in 1981. From that time on there was a steadyincrease in production, which reached its secondpeak in 2000 at 24.3 million cubic metres (153 mil-lion barrels). (For a short history of the oil industryin Saskatchewan see Warnock, 2005)

The increase in production has been made pos-sible by the expanded extraction and processing ofheavy oil, new technologies like horizontal wells

and enhanced oil extraction, plus a general increasein oil prices. However, throughout the WSCB con-ventional oil production peaked around 1971 andhas since been steadily declining. Saskatchewanproduces about 20 percent of the Canadian total. In2004 73 percent of Saskatchewan’s oil was exportedto the United States, 17 percent went to Alberta andOntario, and around 10 percent was consumed inthe province.

The oil industry is important to theSaskatchewan economy, but its value is almostalways overstated. In 1995 the oil and gas industrycontributed 7.6 percent of the provincial grossdomestic product; this fell slowly to 6.0 percent in2002. Employment in the industry has been risingin recent years, from 1,912 in 1995 to 2,289 in2002. However, the share of total employment inthe Saskatchewan economy has remained steady at0.5 percent. (Taylor et al, 2004)

Everyone knows that this industry is very capi-tal intensive. Statistics Canada shows that the fixedcapital per worker for the industry is around$790,000, the highest of any industry. This com-pares to $38,000 for manufacturing and $4,250 forbusiness services. (Stanford, 1999).

In his survey of the oil and gas industry inSaskatchewan, Erin Weir points out that the contri-bution to the Saskatchewan economy is greatlyreduced by the fact that the industry is “over-whelmingly headquartered outside the province.”The linkages to the economy are significantlyreduced because manufactured inputs come fromoutside the province. Weir argues that ifSaskatchewan were interested in job creation, itwould make sense to raise royalties and taxes on theoil industry and invest them in any other sector ofthe economy. This was the rationale used by thegovernment of Allan Blakeney to raise royalties andtaxes. (Weir, 2002)

It should be noted that between 1982 and 2002the consumption of crude oil in Canada increasedby 29 percent while exports to the United States


VI. The Oil Industry in Saskatchewan

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rels; this declined to 2.9 billion barrels in 2003. Thereserve life of this resource at current rates of con-sumption has declined from 11 years to seven years.(Statistics Canada, 2005)

There is no question but conventional oil is dis-appearing in the WCSB. The number of oil wellsdrilled in Alberta peaked at 5304 in 1997; in thatsame year, they peaked in Saskatchewan at 3059.The size of pools discovered peaked in the mid-1980s and has been steadily declining since. TheCanadian Association of Petroleum Producersreports that the remaining established reserves ofconventional crude oil in Canada peaked in 1970 at1,665 million cubic metres (10,490 million barrels)and this declined to 714 million cubic metres(4,498 million barrels) by 2003. The CanadianEnergy Research Institute reports that the averageproductivity of conventional oil wells in the WCSBhas declined from around 33 barrels per day(bbls/d) in 1994 to only 18 bbls/d in 2003. (CAPP,Statistical Handbook 2003; CERI, 2005; Tertzakianand Baynton, 2006)

The recent overview of the industry by theNational Energy Board reveals that most of thedrilling for conventional light oil in the WCSB is“to develop the remaining small undiscoveredpools in selected areas of the basin, revisit the exist-ing larger pools to implement EOR schemes, or infill drilling to a smaller spacing size.” There are newzones being explored for conventional heavy oil,searching for “small undiscovered pools,” but mostof the emphasis is on applying EOR schemes.

Improved “fiscal regimes” (meaninglower royalties and taxes) haveencouraged this development. TheWCSB is “a maturely explored basin,with diminishing finding rates andrelatively high finding and develop-ment (F&D) costs.” In 2004 of theconventional wells drilled in theWCSB, around 3,700 were for expand-ing extraction in oil fields presentlybeing developed and only around 600were for exploratory purposes.(National Energy Board, 2005)

Average recovery rates for conventional oilwells are rather low at 27 percent for light and 15percent for heavy. Improved technology, higher oilprices, and additional state support may improverecovery in the future. Nevertheless, both the oilindustry and governments agree that the future ofoil production in Canada is in the Alberta tar sands.

increased by 590 percent. Exports of oil to theUnited States steadily rose to reach 1.7 million bar-rels per day by 2004. In 1985 Canada exported 33percent of oil extracted to the United States; thisrose to 67 percent in 2004. Today Canada importsalmost one-half of its crude oil requirements, usedprimarily by refiners in Quebec and the Atlanticprovinces. (Saskatchewan Bureau of Statistics, 2005Economic Review, 2006; US Energy InformationAgency, 2005; National Energy Board, 2005)

Established reserves

There are different estimates of the amount of oilthat has been identified and can be extracted usingpresent technology and given the economics of thetime. It is always assumed that the technology forextraction will improve and the extent of availablereserves will increase. It is also assumed that as thismost important fuel source is depleted, or extrac-tion fails to keep up with demand, the price of oilwill increase and reserves that are more costly toexploit will become useful. At some point it will benecessary to examine the issue of energy balance:energy in for energy out. However, given thedependence on oil for transportation, and its cen-tral role in major military systems, it seems likelythat under the present economic system govern-ment subsidies to the industry will rise even furtherthan they are today. Several different estimates forCanada’s established reserves are found in thistable:

Canadian Association of Petroleum Producers 4.4 billionU.S. Energy Information Administration 3.8 billionStatistics Canada 2.9 billion

SOURCE: CAPP at www.capp.ca; US Energy InformationAdministration at www.eia.doe.gov; BP Statistical Review at www.britishpetroleum.com; Statistics Canada, Human Activity and theEnvironment, Annual Statistics 2005, Catalogue No. 15-201-XIE.

Canada’s established conventionaloil reserves in 2004-5 billion barrels

All the major sources of energy statistics reportthat conventional reserves of oil in the WCSB andCanada are in decline. Despite the steady increasein the number of wells drilled, extraction exceedsthe addition of new reserves. Statistics Canadarecords that in 1985 established reserves of conven-tional and offshore oil were around 5 billion bar-

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(National Energy Board, 2005; Woynillowicz, 2005)

Trends in the extraction of oil

Conventional oil flows from the ground or can bepumped from a well without diluting or heating.Oil is classified as light, medium, heavy or extraheavy according to its gravity. This is determined byusing a scale that was created by the AmericanPetroleum Institute, known as the API index.

light crude: higher than 31.1 degrees (lowerthan 870 kg/cubic metre)

medium crude: between 31.1 and 22.3 degrees(870 to 920 kg/cubic metre)

heavy crude: between 22.3 and 10 degrees (920to 10,000 kg/cubic metre)

extra heavy crude (bitumen): less than 10degrees (higher than 1000 kg/cubic metre)

The trends in the extraction of conventional oilin Saskatchewan can be seen in the following table:

The extraction of light crude oil inSaskatchewan peaked at 6.2 million cubic metres(39 million barrels) per year in 1997. Medium oilextraction peaked in 1998 at 7.7 million cubicmetres (48.5 million barrels) in 1998. The future forcrude oil extraction in Saskatchewan depends onthe increased availability of heavy oil, which hasrisen from 9.8 million cubic metres (61.7 millionbarrels) in 1997 to 12.6 million cubic metres (79.4million barrels) in 2005. Overall, total oil extractionin the province has been steady at around 24 mil-lion cubic metres (151.2 million barrels) since 2000.

Around 52 percent of the oil extracted inSaskatchewan today is heavy oil. The oil in theLloydminister region has an API Gravity rating ofbetween nine and 18 degrees. In order for this oil tobe transported by pipeline, it has to be diluted witha condensate. Currently there is a shortage of con-densate (a lighter liquid hydrocarbon), and its priceis also rising. Heavy oil also includes a greater rangeof impurities that must be removed before it can berefined. These impurities include sulphur, heavymetals, waxes and carbon residue. (SaskatchewanBureau of Statistics, 2006; Canadian Centre forEnergy Information www.centreforeenergy.com)

The Canadian Association of PetroleumProducers (CAPP) provides data on the industry col-lected from its members. These data show that mostdrilling in Saskatchewan in recent years has been toincrease extraction from existing pools rather thansearching for new sources (see table next page):

1997 6.2 7.4 9.8 23.41998 6.1 7.7 9.4 23.21999 5.3 7.1 9.2 21.72000 5.5 7.2 11.6 24.22001 5.4 7.1 12.2 24.82002 5.1 6.9 12.3 24.42003 5.1 6.6 12.7 24.32004 5.1 6.4 13.1 24.62005 5.3 6.5 12.6 24.3

SOURCE: Saskatchewan Bureau of Statistics,2005 Economic Review.

Crude Oil Statistics forSaskatchewanExtraction in Millions of Cubic Metres

Light Medium HeavyYear Gravity Gravity Gravity Total

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The general political economy approach of dif-ferent governments is also revealed. During theNDP government of Allan Blakeney (1971-1982)the share of economic rent going to the public wasincreased. The Progressive Conservative govern-ment of Grant Devine (1982-1991) began theprocess of lowering royalties and granting a largershare of the economic rent to private oil and gascorporations. This trend was continued by the NDP

Saskatchewan’s established reserves of conven-tional oil have been estimated to be around 1.2 bil-lion barrels by both the Department of Industryand Resources and the Canadian Association ofPetroleum Producers. At thecurrent annual rate of extrac-tion of 152 million barrels,established reserves would lastfor around eight years. (CAPP,2004 Petroleum ReservesEstimate, www.capp.ca; Sask-atchewan Department ofIndustry and Resources, CrudeOil in Saskatchewan, January2005)

The price of oil variesaccording to its quality forrefinement. The price com-monly reported in the news isWest Texas Intermediate (WTI)at Cushing, Oklahoma. It is ahigh quality light crude oilwith a low sulphur content.However, only a small per-centage of the oil extracted inSaskatchewan meets this qual-ity standard, and thus pricesfor Saskatchewan oil are significantly less. In 2005the average price of Saskatchewan oil was C$35.69per barrel, or only around 70 percent of the price ofWTI Cushing oil.

The exchange rate between the US andCanadian dollar is also a factor. Saskatchewan oilsold in the United States brings an additional pre-mium, as it is sold in US dollars. As the value of theCanadian dollar moves up against the US dollar, the

returns to corporationsextracting oil inSaskatchewan declines.(Saskatchewan BudgetPapers, April 2006)

A quick overview ofthe industry can be seenfrom the followingtable, which reports thevolume of oil extracted,the gross value of sales,and the royaltiesreceived by theprovince. They showthe increase in crude oilproduction, the rise in

value of sales as world prices increase, and thedecline in the share of economic rent going to theprovince in the form of royalties, land bonus bidsand lease rentals.

1972-5 305,537 $1,252,462 $319,730 24.9%1976-8 178,013 $1,712,149 $722,611 42.1%1979-82 215,460 $3,599,512 $2,034,338 56.5%1983-6 275,096 $6,945,576 $2,439,283 35.1%1987-91 382,492 $6,642,140 $2,297,767 19.5%1992-5 405,052 $7,139,066 $1,234,421 17.3%1996-9 562,313 $11,124,547 $1,986,132 17.9%2000-5 923,775 $30,619,560 $4,861,536 15.9%–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––SOURCE: Saskatchewan Industry and Resources, Annual Reports.Saskatchewan Bureau of Statistics, Mineral Statistics Yearbook.Government of Saskatchewan, Budget Estimates for Fiscal Year endingMarch 321, 2006.

NOTE: Since the collection of royalties and taxes is a political decision,years have been grouped according to different elected governments.

Saskatchewan Petroleum ProductionSales and Royalties (>000)

Barrels Values RoyaltiesYears Sold of Sales Royalties /Sales

New Field Wildcats 19 19,552 61 45,422New Pool Wildcats 41 43,833 188 133,930Deeper Pool Tests 1 3,100 - - - - - -Shallower Pool Tests 6 2,334 1 815Outposts 217 193,333 498 296,806Total Exploratory Tests 284 262,142 748 476,973Development Wells 1,339 1,484,812 1,539 896,659Total Completions 1,623 1,746,964 2,287 1,373,632––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––SOURCE: Canadian Association of Petroleum Producers,Statistical Handbook 2003.

Saskatchewan Drilling Activity 2003Oil Wells Metres Gas Wells Metres

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governments of Roy Romanow and Lorne Calvert(1991-present).

Industry profits, royalties and taxes

It is very difficult to determine the profitability ofthe oil industry in Canada. The firms are very secre-tive in their operations. We don’t have state ownedindustries or joint ventures that can provide thepublic with an inside view of how the industryoperates. All of the large oil corporations engage intransfer pricing, and the use of offshore dummycorporations has become a norm.

In addition, there are large subsidies to theindustry from all levels of government. At the federal level subsidies include the CanadianExploration Expense, the Canadian DevelopmentExpense, the Canadian Oil and Gas PropertyExpense, a favourable capital cost allowance/depre-ciation that is accelerated for new oil and gas proj-ects, the Resource Allowance, the MineralExploration Tax Credit and the Flow-throughShares Tax Credit. The federal corporate income taxrate applied to the oil and gas industry is steadilybeing reduced. As a result, the effective tax rate onthe industry is the lowest in Canada aside from theforestry industry. (Canada Department of Finance,March 2003)

A recent study by the Pembina Institute report-ed that in 2002 the industry received $1,446 mil-lion in subsidies from the federal governmentalone. In addition, governments in Canada and inother industrialized countries have been steadilyreducing the royalties and taxes on the petroleumindustry; the foregone rent is a direct subsidy. Thenthere is the fact that the environmental, health andsocial costs of the industry are externalized fromthe corporations, passed on to the general public.(Taylor et al, 2005)

Eric Reguly, business columnist for the Globeand Mail, has chastised provincial and federal gov-ernments. “Why should taxpayers have to subsidizethe world’s most profitable product?” He character-ized the reduction of royalties in Alberta as “one ofthe biggest energy giveaways ever.” (Reguly, 2006)The extensive subsidies, and the decrease in the per-centage of the economic rent that is captured bythe provinces through royalties, combined with therapidly increasing price for oil, has resulted insteadily increasing depreciation, depletion andamortization (DD&A) reported by the oil and gascorporations. The widely-cited report by Benjamin


Financial Solutions in Calgary cites the majorincrease in DD&A in Canada: from $8.58 per barrelof oil equivalent (BOE) at the beginning of 2002 to$12.55 in the third quarter of 2004. DD&A is oneway of hiding excess profits, and this is reflected inthe dramatic increase in retained earnings reportedby the oil and gas corporations. Over the same peri-od of time Benjamin reports that production costshave risen from $5.96 BOE to $7.58 BOE. (ABenjamin Report”, Oilweek, April 2005)

This parallels developments in the industry onthe world wide basis. A study by Honore Le Leuchfor Beicip-Franlab, an IFP Group company, present-ed at an international conference on the oil indus-try in June 2005, found that between 1999 and2004 the average “technical costs” of extracting oilby the major oil corporations had risen from $7BOE to $10 BOE. This includes exploration costs($0.5 to $1), development costs ($3 to $5) and pro-duction costs ($2.5 to $5). Over that same periodthe average North Sea Brent oil price rose from $18BOE to $38 BOE. The rent from the extraction of oil(surplus over costs including a normal return oninvestment) rose from $10 BOE to $28 BOE. Howthis monopoly profit is shared between private cor-porations and governments varies from country tocountry. (Le Leuch, 2005 at www.ifp.fr)

The National Energy Board has produced simi-lar figures. On a world wide basis finding and devel-opment (F&D) costs rose on average from $6 a bar-rel in 1999 to $8.50 in 2003. The cost of extractingoil has risen as the easily accessible fields are beingdepleted. However, these costs are far less than theincrease in the price of oil. (National Energy Board,September 2005)

The highest cost of production in Canada isthat of the Alberta tar sands. In 2003 Syncrude wasreporting that operating costs were around $16 perbarrel. The Canadian Energy Research Institutereported in 2004 that for new tar sands projects “aWTI price of US$25 per barrel would enable an oilsands project developer to cover all costs and earn a10% return on investment.” In 2003 the NationalEnergy Board concluded that a price of “US $22 perbarrel provides adequate returns to support invest-ment in the oil sands and offshore oil develop-ment.” (Globe and Mail, November 4, 2003;Dunbar, 2004; National Energy Board, July 2003)

However, with the dramatic increase in invest-ment in the Alberta tar sands industry, costs beganto rise significantly. Labour shortages emerged.Industrial parts became scarce. Natural gas prices

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Alaska captures rent through royalties, bonusbids, and income taxes, and also has a productiontax that captures additional rent when prices rise.Norway captures the largest share of resource rentsby having an additional “special tax” of 50 percent,designed to capture a major share of excess ormonopoly profits. In addition, Norway has StatOil,a state-owned oil and gas corporation that directlyoperates in the North Sea and around the world, onits own or through joint ventures. Dividends fromthese operations accrue to the citizens of Norwayrather than private investors. (Taylor et al, 2004)

The cost of extraction and processing of oil inSaskatchewan is reported to be higher due to theincreased dependence on lower grade heavy oil.

When the Lloydminister Heavy Oil Upgrader wasbeing constructed, Li Ka-shing, the Hong Kongowner of Husky Oil, often stated that the operationwould be profitable when the price of WTI lightcrude was at $18 per barrel. In 2002 SaskatchewanEnergy and Mines reported that “reasonable levelsof conventional activity can be maintained at theWest Texas Intermediate (WTI) price of $20 US perbarrel.” An expansion of the heavy oil industry inthe province through the use of enhanced oil recov-ery (EOR) would “require a WTI price in excess of$20 US per barrel.” (Saskatchewan Energy andMines, Oil in Saskatchewan, 2002 at www.gov.sk.ca/enermine/facts.semoil.htm)

The Canadian Association of PetroleumProducers collects information from its membersand then publishes data every year in its StatisticalHandbook. Most people doing research rely on CAPPfor basic information on the industry. But howaccurate are these data? CAPP is an industry organ-ization engaged full time in promoting the interestsof its private corporate members. Their cost of pro-duction figures are regularly higher than those fromother sources.

One source of industry profitability comes fromthe US Energy Information Administration. Underprovision of law, the 28 largest oil and gas corpora-tions doing business in the United States arerequired to annually complete a detailed question-naire on all their operations. The corporations mustreport the costs of production and the royalties andtaxes paid. The survey includes most of the majorcorporations operating in Canada including ExxonMobil, BP, Shell, ChevronTexaco, Total,ConocoPhillips, Devon Energy, Sunoco, CITGO,Burlington Resources, Murphy Oil, El PasoCorporation, Unocal, Hunt Oil, Anadarko, Apache,etc. Their report for 2003 finds that Canadian lift-ing (or production) costs are the highest in theworld at $5.34 per barrel, but royalties and taxes areamong the lowest at only $0.23 per barrel.

rose as supply was stretched. As a result ShellCanada announced in 2005 that expansion at theirAthabasca Oil Sands Project would require the priceof oil to rise from $20 to $30 per barrel. Given thatat the time the international price had risen to $65,the investment seemed more than justified. (Globeand Mail, August 10, 2005)

The Pembina Institute recently undertook astudy of the economic rent produced in the oil andgas industry in Canada. The data was provided bythe Canadian Association of Petroleum Producers,voluntarily provided by the oil and gas corpora-tions operating in Canada. Pembina also comparedgovernment royalty and taxation policies inCanada with Norway and Alaska, where frontier oiland gas extraction has higher costs. The conclu-sions are summarized below:


B.C. 1,695 8.1Alberta 9,063 6.8Saskatchewan 1,166 5.9Yukon 11 4.5Northwest Territories 63 4.5Alaska 4,852 10.5Norway 29,396 18.1

SOURCE: Pembina Institute: Amy Taylor et al,When the Government is the Landlord. Calgary,July 2004.

Government Oil and GasRevenues, 2002

GovernmentRevenues 2000$

Region ($ million) /BOE

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A study of the financial status of the Canadianoil and gas industry done by ARC FinancialCorporation of Calgary, an investment manage-ment company focusing exclusively on energy con-cludes, “The oil and gas industry is currently themost profitable sector in Canada.” And this eventhough the study was done for the CanadianAssociation of Petroleum Producers using their sta-tistical data and generally higher cost estimates. Forconventional oil and gas, ARC Financial reportsthat average unit operating costs have risen fromaround $4.00/BOE in 1995 to around $7.00/BOE in2006. These figures do not include general andadministrative costs (G&A), which in 2006 were anadditional $1.95/BOE. For the Alberta tar sands,there is a drop in costs beginning in 1997 and thena steady increase to $17.00/BOE in 2006. Tar sandsoil costs have been greatly affected by the rise innatural gas prices and wages for skilled operators.

ARC Financial stresses that conventional landprices in the WCSB have been “inflating at about 50percent per year over the past three years.Combined with the effects of maturing geology,Canada remains one of the highest cost regions inthe world for oil and gas exploration and develop-

ment.” The higher dependence on heavy oil in theWCSB results in lower average prices. Bow River atHardisty Crude Oil went from an average of$25.07/bbl in 2000 to $45.65/bbl in 2006. Prices forheavy oil reflect a discount of about 35 percentfrom WTI light crude oil. (Terzakian and Baynton,2006)

The high world prices for oil over the past fewyears have been a bonanza for the oil corporationsand their owners. ARC Corporations reports aAtremendous growth in equity capital infusions inthe industry, which hit a record $11.8 billion in2005.” This has resulted in “an elevated level of‘unemployed’ capital in the Canadian upstream oiland gas industry.” Company managers are “havinga difficult time deploying capital due to intensecompetition for land and services paired against adearth of conventional opportunity.”

The result of the recent high prices and lowroyalties and taxes is that the oil and gas industryhas a very high return on equity (ROE). While theweighted cost of borrowing capital (WACC) in 2006is around 4.5 percent, the ROE for the Canadianupstream oil and gas industry has risen from 15.4percent in 2001 to 22.4 percent in 2005 (Terzakianand Baynton, 2006).

Royalties in Saskatchewan

As the provincial government stresses in theirpublic relations pronouncements, Saskatchewanhas many advantages for investors interested in theoil and gas industry. The “easy field access and rel-atively shallow deposits contribute to low drillingcosts,” bringing higher profits. There is easy trans-portation by pipeline to the United States, themajor market. The Saskatchewan government hasthe most complete geological data and support sys-tem of any province in Canada. Government anduniversities provide significant research and expert-ise support. In addition, the province offers a widerange of incentives, including very low royaltyrates. (Saskatchewan Industry and Resources,Energy, June 2006)

Royalties are a cost of production. They are theprice that a private corporation must pay to acquirethe use of a public asset. In Saskatchewan, as almosteverywhere else in the world, natural resources areconsidered common public property. In most coun-tries a high percentage of land has been privatized,primarily for farming, but it is normal practice forgovernments to retain mineral and subsurface

Middle East 3.99 0.15Canada 5.34 0.23Eastern Europe/FSU 4.43 0.75OECD Europe 4.39 0.84Other Eastern Hemisphere 2.97 1.09Total USA 3.77 1.13Africa 3.89 1.32Other Western Hemisphere 2.14 1.45––––––––––––––––––––––––––––––––––––––––SOURCE: U.S. Energy InformationAdministration, Performance Profiles of MajorEnergy Producers 2003. Washington, D.C.:U.S. Department of Energy. Accessed atwww.eia.doe.gov

NOTE: Figures for royalties and taxes for theMiddle East are skewed because almost all oiland gas is extracted by state-owned nationaloil corporations, and most operations withindependent oil companies are productionsharing agreements.

Production Costs by Region forU.S. Based Corporations, 2002-03US$ Per Barrel of Oil Equivalent

Direct RoyaltiesRegion Lifting Costs and Taxes


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Land sales and prices have risen through thefirst half of 2006. The average price per hectare was$376 in the June 2006 sale, up from the $175 aver-age over the past five years. David Pryce of theCanadian Association of Petroleum Producersnoted that this increase was directly related to therising price of oil. He also pointed out that the pricedifferential between light oil and heavy oil was nar-rowing. “We’ve gone from a $20 per barrel differen-tial to somewhere between a $12 and $15 differen-tial.” This has resulted in increased bids in theLloydminister area, the key centre of heavy oil.(Leader-Post, June 16, 2006)

The system of production royalties inSaskatchewan is quite complicated. The generaltrend since the NDP government of Allan Blakeney(1971-82) has been a steady reduction in the rate ofthe royalties and a reduction of the share of thevalue of oil and gas rent (or excess profits) that hasgone to the government. These changes have beenthe result of regular negotiations between the oiland gas industry and the Saskatchewan govern-ment. This process has always excluded the publicor any public input.

During the period when the Saskatchewan gov-ernment was increasing royalty rates and claiminga growing share of rent (1971-1985) the rate of roy-alties in Saskatchewan was always higher than theaverage rate in Alberta. However, this did not resultin capital flight to Alberta. Over the period from1986 to the present, the drop in royalty rates in

rights.In the three prairie provinces some land and

mineral rights were granted by the federal govern-ment before 1930, when control was passed toprovincial governments. The most notable exam-ples were the large land grants to the CanadianPacific Railway and the Hudson’s Bay Company.This comprises around 18 percent of the land inSaskatchewan today. The Crown holds 78 percent,with Indian reserves having two percent and feder-al land 1.5 percent. Those with “freehold rights” toland have traditionally paid a royalty to the govern-ment for oil and gas extraction, but this has been alower rate than is charged on Crown land. Royaltiestake two forms: access royalties and production roy-alties.

Access royalties give corporations land tenurerights to minerals. In Saskatchewan Crown ownedproperty is put up for bids six times a year. Privatecorporations approach the provincial Departmentof Industry and Resources and ask that a particularproperty that it wants to explore be posted for bids.After checking the land to see that it is free of con-straints, it will be posted for bidding. The govern-ment uses different criteria to post specialexploratory permits, exploration licenses, and leas-es. Companies can submit a standard bid for onetract of land or submit a priority bid that lists up tofour parcels of land. The process for granting tenurerights is open competitive bidding.

Over the years the number of postings, thebids, the acreage covered and the total return to theprovince have varied. To a large extent this hasbeen determined by the price of oil and gas, prof-itability of the industry, and the need of the oil cor-porations to restore their depleting reserves. Thusthe number of hectares of land leased, and thereturn to the province as “bonus payments,”peaked in 1994 but dropped significantly in 1998with the Asian economic crisis and the decline inworld oil prices. Listings began to pick up againwith the dramatic increase in the price of oil andgas beginning in 2002.


Crown Land Sales in SaskatchewanYear Hectares Total Sales C$2005 483,605 134,414,2432004 434,228 80,775,9622003 1,064,439 158,744,3132002 653,010 102,914,5392001 372,648 56,208,0972000 283,173 48,334,3671999 398,240 45,672,3111998 403,055 54,029,3881997 933,862 131,001,6231996 1,046,244 122,194,5841995 604,232 65,678,7691994 1,557,112 199,742,2661993 595,481 83,676,494

SOURCE: Saskatchewan Industry andResources, “Summary of Land Sale Results PerCalendar Year,” June 2006.

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Saskatchewan has paralleled the decline in royaltyrates in Alberta. (Weir, 2002)

The royalty structure in Saskatchewan is any-thing but uniform. First, oil deposits are consignedto three categories: Heavy Oil (HOP), which is con-centrated in the Lloydminister-Kindersley areas;Southwest Designated Oil (SOP), which is primarilymedium crude oil; and Non-Heavy Oil Other ThanSouthwest Designated Oil (NOP), primarily fromthe southeast area around Weyburn and Estevan.These three basic categories are assigned differentroyalty rates.

Secondly, there are different rates of royaltiesassessed according to when oil wells were drilled.“Old oil,” the best oil as it is primarily light crude,has been disappearing. It is still assigned the high-est royalty rate. In January 1994 Roy Romanow’sNDP government created a new category called“new oil,” with a lower royalty rate, which nowcovers oil from wells developed between January1, 1994 and October 1, 2002. The 1994 changesby the NDP government created an additional cat-egory, “third tier oil,” with an even lower royaltyrate, oil produced from vertical wells or oil extract-ed from water flood wells after this date.

A new “fourth tier oil” was introduced for con-ventional oil produced from wells that were devel-oped after October 1, 2002. The fourth tier rate isvery low. The industry is now granted large volumeincentives for new wells, where no royalties are paidon base production for each well. For example, afterOctober 1, 2002 new deep vertical oil wells receivean 8,000 cubic metre volume incentive, explorato-ry non-deep vertical oil wells are granted a 4,000cubic metre volume incentive, and vertical deep oilwells are granted a 16,000 cubic metre volumeincentive. A corporation pays no royalties on oilextracted from a well until it has produced theincentive volume. All of these changes were com-plicated methods for reducing royalties, or as thegovernment insists, offering “incentives” to encour-age expanded extraction. (Saskatchewan Industryand Resources, PR-IC01 to PR-IC03, accessed atwww.ir.gov.sk.ca)

Then in March 2005 the NDP governmentintroduced another lower royalty and tax regime,plus other incentives, designed to encourage thedevelopment of oil sands projects and enhanced oilrecovery (EOR). Royalties assessed for freehold oilwere significantly reduced, to between 0 percentand 8 percent. (Saskatchewan Industry andResources, PR-IC11, March 21, 2005, accessed at

The department also calculates a base price on amonthly basis for all the categories of oil. If theactual average market price of the designated oil isabove the base price, then the higher marginal rateis applied to the amount that exceeds the baseprice. The total royalties paid are thus a combina-tion of the base rate and the marginal rate, and rev-enues will increase as the market price increases.This practice is widespread throughout the oil pro-ducing world, but most countries have a signifi-cantly higher marginal rate.

While this looks good at first glance, theprovince has adopted regulations that greatlyreduce the share of this rent that goes to theprovince. The province has a reference rate for oilwells. This is set at 100 cubic metres (or 630 barrels)of oil per month. As we can see from the CrownRoyalty Curve below established by the Ministry,the royalty rates at the reference rate of 100 cubicmetres per month are all below 10 percent. As a wellproduces more oil per month, the rates rise ratherslowly to maximum rates that are very low com-pared to those of other major oil producing coun-tries. To put this in perspective, the CanadianEnergy Research Institute reports that across theWestern Canada Sedimentary Basin the oil produc-tion from an average conventional oil well hasdropped to around 18 barrels per day or 540 barrelsper month. This reflects the average production ofoil wells in Saskatchewan. That would work out to

Fourth tier oil 5.0% 30%HOP, third tier or new oil 10.0% 25%SOP, third tier or new oil 12.5% 35%NOP, third tier or new oil 15.0% 35%Old oil 20.0% 45%

SOURCE: Saskatchewan Industry andResources, at www.ir.gov.sk.ca

Saskatchewan Royalty Rates for OilCategory Base Marginal

Rate Rate

www.ir.gov.sk.ca)The province has a method of acquiring some

additional revenues when production and pricesincrease. On a monthly basis the Ministry ofIndustry and Resources calculates a formula basedon the average market price for each category of oil.Through this process they create a base rate and amarginal rate for each category. They are as follows:


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of Petroleum Producers agreed. This new policy wassupported by the leaders of the Saskatchewan Partyand the Liberal Party. (Leader-Post, March 19, 2005)

an average of 86 cubic metres per month, below thereference rate of 100 cubic metres per month. Theaverage actual royalty rate would thus be less thansix percent. Furthermore, these royalty rates areonly applied after the well has produced the “incen-tive volume”. (Canadian Energy Research Institute,2005; Lerner, 2006)

The decision of the NDP governments of RoyRomanow and Lorne Calvert to introduce new“third tier” and “fourth tier” rates has meant amajor shift in the royalty rate away from the high-er marginal rate to the lower base rate. As the wellsproducing “old oil” and “new oil” play out, theprovince will receive a declining percentage of eco-nomic rent from oil extraction. The new enhancedoil recovery (EOR) rates and incentives introducedby the Calvert government in March 2005 wenteven further. The premier argued that by not givingmore breaks to the oil corporations, “we are literal-ly foregoing billions of dollars of economic poten-tial.” It would be “better to take a smaller cut thanto leave everything in the ground and receive noth-ing.” Apache Canada Ltd., which operates an EORproject near Estevan, and the Canadian Association


Saskatchewan Crown Royalty Rates for Crude Produced from Wells Drilledon or after October 1, 2002 (December 2004 Production Month)

0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750

Monthly Oil Production Per Well (cubic metres per month)

Non-Heavy Oil

Southwest Designated Oil

Heavy Oil

35

30

25

20

15

10

5

0

Cro

wn

Roya

lty R

ate

(%)

NOTE: Royalty curves are applicable only after the well has produced its incentive volume.Depending on the type of well, incentive volumes range from 0 to 16,000 cubic metres.

48 |

Natural gas is a fossil fuel that is composedalmost entirely of methane gas. When extractedfrom underground reservoirs it often contains otherhydrocarbons including propane, butane, ethaneand pentane. It is also known to contain sulphur, inthe form of hydrogen sulphide, that is very toxic. Ingeneral, the Saskatchewan natural gas extracted bydrilling wells is relatively “dry” meaning it has alow content of the liquid hydrocarbons and is“sweet” meaning that it is relatively low in sulphur.Most of the conventional wells are relatively shal-low (e.g., 300 to 800 metres). Thus the natural gaspresent in Saskatchewan requires less processingand is more profitable for the corporations doingthe extracting.

The first well was drilled in 1943, but produc-tion was rather slow to develop. It was not until1987 that production equalled Saskatchewan’sannual consumption, about 3.1 billion cubic metres(or 109.5 billion cubic feet). The expansion of theindustry required the general shift from coal to nat-ural gas to heat homes and buildings. A number oflarge industries in the province have been majorconsumers of natural gas, including the Co-opUpgrader, the Millar Western pulp mill, theWeyerhaeuser paper mill, the Saskferco fertilizerplant and the Husky Lloydminister Upgrader. Mostof the gas wells are located in the west side of theprovince, close to the major fields that are inAlberta.

North American gas production

Conventional natural gas production peaked in theUnited States around 1973, just two years after thepeak in the production of oil. The decline in theproduction of conventional gas was masked for anumber of years by the increase in the productionof gas from offshore areas. There was an increase ingas production after 1984, but this has all beenaccounted for by the development of methane gasfrom coal, also known as coal-bed methane (CBM),

which is an unconventional source. While thenumber of wells drilled has continued to increase,the volume of reserves has steadily declined. USreserves in 2003 were 40 percent below the reservesof 1990. To make up for the shortfall, imports fromCanada have risen. Nevertheless, despite the steadyincrease in the number of gas wells drilled in boththe United States and Canada, North American gasproduction has been flat since 1997. (Simmons,2006; Stark, 2005)

The gas industry in the United States has beenon a “production treadmill” since 1973. This term,coined by Matt Simmons, a well known energyinvestment banker in Texas, describes a situationwhere more wells have to be drilled every year justto try to maintain a flat production rate. Theamount of gas coming from new wells starts tosteadily decline. The major producing areas in theUnited States - Oklahoma, Texas, and the Louisianadrilling in the Gulf of Mexico - have all peaked, andnew wells are providing less and less gas. Between1995 and 2000 the United States added 34,000 wellsbut production did not increase. A new well nowhas a first year decline of around 56 percent, whichis a dramatic change from the past. Tight sand gaswells, where the flow of gas is much slower andmore drilling is required, deplete by 50 percent inthe first six months. (Darley, 2004; Duffin, 2004;Powers, 2003; Udall, 2000)

The proven reserves in the United States areonly around eight years’ supply at the current rateof consumption, which is over 22 trillion cubic feet(tcf) per year. The US Department of Energy projectsthat US demand will increase by 50 percent over thenext 20 years. However, total natural gas produc-tion in the United States, Canada and Mexicodeclined by three percent in 2003 and three percentin 2004. The future hope for natural gas has beenAlaska, but it has only 10 tcf of proven reserves, lessthan half a year’s annual consumption. (Duffin,2004; Gaul, 2004)

The lack of supply in the United States has

VII. The Natural Gas Industry


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stimulated the natural gas industry in Canada. In2004 over 50 percent of Canadian natural gas pro-duction was exported to the United States, supply-ing 15 percent of US consumption and accountingfor 87 percent of US natural gas imports. The num-ber of natural gas wells being drilled in Canada hasbeen rising rapidly, from less than 2,000 in 1992 toaround 15,100 in 2003. Gas production increasedin Western Canada with the development of thelarge Ladyfern field in British Columbia; in 1999, itsfirst year of production, the field produced 665 mil-lion cubic feet per day (the industry uses the abbre-viation MMcf/d), but by 2003 this had dropped to120 MMcf/d.

Canada’s extraction of natural gas peaked in2001 and declined by 5.3 percent in 2003.Furthermore, as the National Energy Board reports,the general trend in Western Canada is for lowerinitial productivity from new wells. The average ini-tial production from gas wells has fallen from 1.0MMcf/d in the early 1990s to 350 Mcf/d in 2004.Canada is also on the treadmill. By 2003 over 3.5Bcf/d of new production capacity had to be devel-oped just to offset the growing decline in well pro-duction. (Eynon, 2005; Flint and Dixon, 2004;National Energy Board, 2003, 2004; Stringham,2004)

The National Energy Board (2003) has calculat-ed the rate of decline of conventional natural gasproduction in the Western Canada SedimentaryBasin and made projections according to the trends.At the end of 2004 there were 104,000 producingnatural gas wells:

2004 462 million cubic metres per day(16.3 Bcf/d)




The US Federal Energy Information Agencyconcludes that a “natural gas crisis” started aroundJune 2000. Between this date and November 2003natural gas prices in the United States rose by 83percent. In June 2000 the average price was aroundUS$3 for a thousand cubic feet (Mcf) and rose toover US$6 Mcf in 2004. By January 2005 it was overUS$7 Mcf and expected to average over US$8 Mcffor the year. The Canadian Energy Research

Institute estimates that natural gas prices in Canadawill triple over the next 13 years due to thedemands of the Alberta tar sands extraction process,to say nothing of increased US demand. TheNational Energy Board argues that the bright spotin all this is that while there are the “escalatingcosts” of drilling, operations, land and materials,“thus far, increases in gas prices have more than off-set these higher costs.” (Gaul, 2004; NationalEnergy Board, 2003; Yedlin, 2005) (Industry figuresare often measured as British thermal units, whereone million British thermal units [1MMBtu] is equalto about 975 cubic feet of natural gas.)

The most recent assessment of the industryoffers a slightly different picture. Natural ResourcesCanada argues that total natural gas production willnot peak until 2011 at 6.6 trillion cubic feet (Tcf)and then decline to 5.3 Tcf by 2020. They expectgreater production from coal bed methane gas andthe introduction of natural gas from the MackenzieDelta, but it will not make up for the decline fromconventional sources. They expect Canadiandemand for natural gas to rise from 2.7 Tcf in 2005to 3.9 Tcf by 2020. The decline in production andthe increase in Canadian demand can only be metby a major reduction in exports to the UnitedStates, from 3.7 Tcf in 2005 to 1.3 Tcf in 2020.(Natural Resources Canada, 2006)

New sources of natural gas

As a result of the depletion of natural gas from con-ventional and offshore reserves, the United Stateshas been forced to look for other sources of supply.There has been a shift to coal bed methane gas(CBM) being developed in Wyoming, Montana,Colorado and New Mexico. This source now pro-vides around 10 percent of US demand. However, itis an expensive process, requiring many more wellsto extract the gas, and causes serious environmen-tal problems. US reserves of CBM are estimated at18 tcf, less than one year of annual consumption.(Darley, 2004; Udall, 2000)

The National Energy Board is predicting that inthe WCSB the production of natural gas from coalwill rise from 8 million cubic metres per day (0.3Bcf/d) in 2005 to 25 million cubic metres per day(0.9 Bdf/d) by 2007. The two main sources areHorseshoe Canyon and the Mannville sites in theAlberta foothills. Horseshoe coal deposits are shal-low and dry. In contrast, the Manneville coals, thelarger resource, are deeper and contain extensive


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quantities of saline water. In 2005 around 3,100new wells were drilled in the Horseshoe Canyonarea. (National Energy Board, October 2005)

There are significant problems associated withextraction of methane gas from coal deposits. First,the gas is “tight” which means that many morewells have to be drilled to extract the gas. Drillingcosts are higher, and the industry argues that a priceof $6/Mcf is required to make a profit. Normally,provincial regulation limits companies to drillingone well per section (640 acres). In the PowderBasin field in Wyoming, EnCana Corporation islimited to one well per 40 acres. They are pushingfor one well for every ten acres, arguing that theadditional wells are necessary for extracting the gasbefore it depletes. In Alberta the oil and gas compa-nies are asking for the right to drill a well on everyfive acres. The land cleared and used for drilling awell (the well pad) is around four acres; thus the“ecological footprint” for CBM gas is very large.

Extraction of natural gas from coal requires“fracturing”, the breaking up of the coal deposits bythe pressure injection of air, water, sand and a vari-ety of chemicals. The injections also include chem-ical gelling agents that improve the fracturing andability to transport the gas.

Where the coal beds contain saline water, it isnecessary to drain off the water before the fractur-ing process can begin. This has been a serious envi-ronmental problem in the Powder River Basin inWyoming and Montana, and it will be a problem atthe Mannville site in Alberta. In the United Statesthere is fierce opposition from ranchers, farmersand rural residents, who insist that their groundwater sources, and wells, are being polluted by theextraction process. A high percentage of the gellingchemicals are not retrieved in the extractionprocess. Opposition is also building in Albertaamong rural residents, even in the HorseshoeCanyon area. Residents insist that the water in theirwells is being contaminated by the drilling andextraction process. (Duckworth, 2005; Griffiths andSeverson-Baker, 2003; Lorenz, 2005; NaturalResources Defence Council, 2002; Nikiforuk, 2006;Saskatchewan Industry and Resources, May 9, 2006)

The other major source of future gas for the USmarket is projected to come from the importationof liquefied natural gas (LNG). The US EnergyInformation Administration expects that by 2010the United States will be importing 2.2 Tcf of LNGevery year. Imports of conventional natural gasfrom Canada are expected to remain near the pres-

ent level until 2010 when they are projecting amajor decline. This shortfall can only be replacedby a dramatic increase in LNG imports. Imports ofnatural gas from Canada will decline at a slowerpace if the resources in the Arctic are exploited andexported. (US Energy Information Administration,December 2003)

Most of the LNG will come from areas that are“stranded,” far from major markets and not servedby pipelines. The US Department of Energy arguesthat when a source of natural gas is more than2,000 kilometres from a market, it is cheaper to sup-ply the market by an LNG train than a pipeline. TheLNG trains include pipelines to the exporting port,a liquification plant, special tanker ships, animporting port with a regasification plant, andpipelines to markets.

The world’s major remaining natural gasreserves are concentrated: Russia (30.5%), Iran(14.8%), Qatar (9.2%), and Saudi Arabia (4.1%). Theprimary consumers of the world trade in LNG areJapan (68%), South Korea (25%), France (4%),Taiwan (3%) and the United Kingdom (3%). U. S.imports account for around one percent of the LNGmarket, mostly from Trinidad and Tobago.Cambridge Energy Research Associates project amajor expansion of LNG imports for the UnitedStates and argue that the price will be lower thanhigher cost unconventional North American sup-plies. They expect both the United States andCanada to increasingly rely on LNG, up to 10Bcf/dby 2010. In March 2006 the price of natural gas inNorth America was around $7 per million BTUs(roughly the same as one thousand cubic feet). Theindustry argued that within the existing LNG trainsit was able to make a profit when prices were $5 permillion BTUs. (CERA, September 14, 2005 atwww.cera.com; Globe and Mail, March 14, 2006; USEnergy Information Agency, December 2003)

At present there are obstacles to a major expan-sion of this new source. There is a shortage of thespecial ships used to transport liquefied natural gas,a limited capacity for building them, and they areexpensive. At the overseas natural gas sources, theliquefaction terminals and pipelines must be built.The United States (using Mexico and Canada aswell) is planning to build a string of regasificationterminals. The capital costs for an LNG terminal areclose to $5 billion. The gas-to-liquid (GTL) terminalbeing considered for possible natural gas extractionon Melville Island in the Canadian Arctic is project-ed to cost $6.3 billion. Each of these liquid natural


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gas trains can cost as much as $10 billion. (Chan,2005)

Furthermore, the process of freezing and com-pressing gas for transport in special ships is danger-ous and accidents happen. In January 2004 therewas an explosion at an LNG terminal in Skikda,Algeria, which destroyed three of the six operations.Many people were killed and injured in these explo-sions, and the resulting firesdid enormous damage. Thusin the United States localpopular coalitions havefought and defeated propos-als to build terminals inCalifornia and Alabama, somore have been planned forMexico. Four are nowplanned for Canada: PortTupper, N.S. (US VentureEnergy /France), St. John,N.B. (Irving Oil and RepsolYPF/Spain), Goldsboro, N.S.(Maple LNG/ Netherlands and Suntera/Russia) andGros-Cacouna, Quebec (PetroCanada andGazprom/ Russia). All these projects were expectingto import LNG from Russia. However, in October2006 the Russian government announced thatGazprom was not going to build LNG terminals butwould instead concentrate on exporting natural gasto Europe through pipelines. (Darley, 2004; Duffin,2004; Eynon, 2005; Gaul, 2004; Globe and Mail, July11, 2006; October 10, 2006)

Canadian natural gas production

The demand for natural gas continues to rise. In theUnited States many new gas-fired power plants arecoming on line. The share of Canadian gas going tothe United States continues to rise. Can Canada fillthe US demand? The Canadian Association ofPetroleum Producers presents the optimistic view offuture natural gas sources. The Mackenzie Delta willprovide 64 Tcf. The Arctic Islands have a potentialfor 94 Tcf. The NWT and the Yukon could produce17 Tcf. Drilling offshore in British Columbia couldproduce 35 Tcf. The offshore gas drilling in theAtlantic area has been very expensive and very dis-appointing, but it is believed to have a futurepotential. Coal bed methane gas in the CanadianRockies could produce up to 80 Tcf. The industryargues that if these potential sources are not devel-oped, natural gas production in Canada will seri-

Alberta 145 61 207British Columbia 23 27 51Saskatchewan 8 1 9Southern Territories 1 6 7Total 178 96 274

SOURCE: National Energy Board, April 2004.Figures in trillion cubic feet (Tcf).

Natural Gas ReservesWestern Canadian UltimateSedimentary Basin Discovered Undiscovered Potential

The total potential for the rest of Canadaincludes the East Coast (offshore) 91 Tcf, WestCoast 17 Tcf, and Northern Canada 116 Tcf for anoverall potential total of 501 Tcf. In this picture ofactual discovered resources and those estimated,Saskatchewan represents a very small part.However, natural gas is extremely important, forthe province depends almost entirely on natural gasfor home and business heating. (National EnergyBoard, 2004)

Proven or proved reserves (abbreviated by theindustry as 1P) is another matter. These are reservesthat by geological data and technology are com-mercially recoverable under current economic con-ditions and regulations. In 2003 the CanadianAssociation of Petroleum Producers noted thatthese reserves for the WCSB peaked in 1984 andhave been declining since. Gas reserves were esti-mated to be 56.6 Tcf, down 2.5 Tcf from 2002. InSaskatchewan the government estimated theprovince’s natural gas reserves at 83 billion cubicmetres (2.9 Tcf) in 1995, which declined to 76.8 bil-lion cubic metres (2.7 Tcf) in 2002. (SaskatchewanDepartment of Industry and Resources, AnnualReport, 2003; Leader-Post, November 26, 2004)

Natural Resources Canada projects that naturalgas production in Saskatchewan will peak in 2005at around 261 billion cubic feet (Bcf) per year to 70Bcf by the year 2020. This is a dramatic drop in pro-duction and a cause for alarm, given the very cold

ously begin to decline around 2010. (Stringham,2004)

To date almost all of the natural gas extractedand consumed in Canada or exported to the UnitedStates has come from the Western CanadaSedimentary Basin (WCSB). The National EnergyBoard has estimated the natural gas discovered andwhat might expect to be discovered:


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and Saskatchewan agreed to deregulate the naturalgas industry. No longer would the provinces try toregulate the price of natural gas. It was hoped thatbuyers and sellers in Canada would set a marketprice. This followed similar developments in theUnited States.

The main purpose, however, was to help pro-mote exports to the United States, reduce govern-ment involvement in the industry, and promoteprivate corporate ownership and control. The pub-lic was told that deregulation and privatizationwould provide increased efficiency, choice for cus-tomers, greater security of supply, and reducedcosts. In 1988 the Mulroney government signed theCanada-US Free Trade Agreement that created acontinental energy market and gave the UnitedStates guaranteed access to Canada’s oil and gas.(Banks, 2005; Cohen, 2002; Goodale, 1999;WillowBridge, 2001)

In 1988 the provincial Conservative govern-ment of Grant Devine split off the natural gas oper-ation from SaskPower, creating SaskEnergy, expect-ing that it would be privatized. This has not hap-pened yet, but subsequent NDP governments didnot rejoin SaskEnergy with SaskPower. The conser-vative, pro-business politicians in North Americapushed to “unbundle” public utilities. SaskEnergy’stransmission pipelines were broken off into a sepa-rate company, TransGas, which has remained a sub-sidiary. But it was also set up to be privatized.SaskEnergy would no longer be in the business ofsecuring supply; it would buy all its natural gasfrom private extracting companies on the openmarket.

Further deregulation took place under NDPgovernments. In November 1998 the NDP abol-ished SaskEnergy’s monopoly on selling gas.Customers could now buy from any supplier. Themajor high-volume industrial customers signed sep-arate contracts and got favourable prices. Homeowners and small businesses were left to pay higherprices. SaskEnergy was no longer able to averagerates across the province to provide a subsidy topeople living in rural and remote areas.

In the late 1990s new natural gas pipelines werecompleted allowing a major increase in the exportof natural gas to the United States. At the sametime, peak oil and gas reduced the supply in NorthAmerica. As SaskEnergy has pointed out, the rise inprice of natural gas in western Canada generally fol-lowed these developments. In the 1993-8 period theaverage price of natural gas at Alberta Hub AECO

climate and the dependence on natural gas forheating. There is no indication that SaskEnergy orthe provincial government are making plans to dealwith this problem. (Natural Resources Canada,2006)

Saskatchewan gas productionand royalties

As natural gas discovery and extraction hasdeclined in the United States and Alberta, drillinghas increased in Saskatchewan, most dramaticallyin recent years. In 2000 there were 1209 gas wellsdrilled, and this rose to 2314 in 2003, dropping offto 1938 in 2004. The volume of gas extracted andsold has also risen rapidly since the mid-1980s andexceeded 9 billion cubic metres (318 Bcf) in 2003.

Historically, SaskPower, a provincial CrownCorporation, controlled natural gas within theprovince. It had the responsibility of providing gasto all customers. It progressively extended naturalgas pipelines across the province. It actively partic-ipated in the upstream market, bidding on proper-ties, obtaining leases and hiring service companiesto develop fields. Storage facilities were created.SaskPower owned and controlled large natural gasfields in Alberta. The goal was to provide a securesource of natural gas for all Saskatchewan for someyears into the future. In the mid-1980s it held own-ership to gas that would have supplied theprovince’s needs for fifteen years. In this periodpublic utilities were considered to be a “naturalmonopoly” and it was more practical and more effi-cient to have the services delivered by a regulatedgovernment monopoly than a private profit-orient-ed monopoly. Following a similar path, the AlbertaEnergy Conservation Board originally mandatedthat the oil and gas industry retain a 30 year provensupply for the people of that province before anycould be exported.

However, this commitment to service and secu-rity of supply changed. President Ronald Reagan’sadministration in the United States began to pushhard for deregulation and privatization, includingthe electricity and natural gas industries. US admin-istrations also strongly supported a continentalenergy agreement between the United States andCanada. The door was opened with the election ofBrian Mulroney’s Progressive Conservative govern-ment in 1984.

On October 31, 1985 the federal governmentand the governments of Alberta, British Columbia


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was $1.70/gigajoule (GJ). It rose to $4.35/GJ in theperiod 1999-2002 as the natural gas pipelines to theUnited States were completed and demandincreased with new US gas-fired generation plants.As the peak in North American natural gas produc-tion was realized in 2003-2005, the average pricerose to $6.40/GJ. SaskEnergy no longer has the abil-ity to protect its customers from rapidly risingprices and high economic rent captured by privateoil and gas corporations. (SaskEnergy measures nat-ural gas in joules, an energy unit.) (SaskEnergy,2005)

Today corporations extracting natural gas inSaskatchewean do not have to sell to SaskEnergy. In2002 about 8.3 Bcf of natural gas was extracted andsold, and only 27.3 percent went to SaskEnergy. Theremainder went to marketers and bro-kers (47.7 percent), direct sales to indus-trial and commercial users in theprovince (19.1 percent), and direct salesto consumers out of province (5.9 per-cent). Because it created the infrastruc-ture, all the natural gas in Saskatchewanis transported by TransGas Ltd., a sub-sidiary of SaskEnergy. They are requiredto allow private natural gas companiesto use their infrastructure for a nominalfee. Public infrastructure, created by allthe people of Saskatchewan, is now usedto help private companies maximizeprofits. (Saskatchewan Industry andResources, January 2006)

Despite the overall trend of declineof supply, there have been some positivedevelopments in Saskatchewan inrecent years. The Shackleton area dis-covery north of Swift Current was the biggest findin 10 years. Hundreds of wells are now being drilledin this area. By 2003 it was estimated that this fieldaccounted for around 20 percent of the province’sreserves. TransGas has claimed that this new discov-ery reversed the treadmill and that new drilling isproducing reserves that exceed the extraction rate.Royalties are increasing to the province as the vol-ume of extraction increases and the price for natu-ral gas is steadily rising. (TransGas Link, Issue 49,July 2004)

Nevertheless, conventional natural gas is disap-pearing in Saskatchewan. Wells in the province areonly around one-fifth as productive as convention-al natural gas wells in Alberta. Across the prairiesregulations have traditionally limited drilling to


one well per section of land (640 acres). However,with the increase in demand, the falling supply,and the excess profits being accumulated by the oiland gas corporations, drilling is on the increase. Inthe Hatton area in Southwest Saskatchewan thegovernment now permits the drilling of up to eightwells per section. Some permits have allowed asmany as 16 per section. (Lerner, 2006)

The relatively low cost of extracting conven-tional natural gas in the WCSB allows the industryto capture a very high level of economic rent (sur-plus profits), ranging from 27 percent to 53 percentof the market price. The following data from the USEnergy Information Agency is based on financialdata supplied by the large oil and gas corporationsoperating in western Canada:

Costs of Conventional Natural Gas in theWestern Canada Sedimentary Basin One thousand cubic feet ($US - Mcf)Production costs:

Finding and development $0.80 - $1.50Operations, General and Administration $1.30Royalties and taxes $0.45Range: $2.55 - $3.25

Transportation: $0.35 - $1.30Delivered to Market: $2.90 - $4.55Market price (winter 2004) $6.20Economic rent

Range: $3.30 - $1.6053% - 27%

SOURCE: U.S. Department of Energy, Energy InformationAdministration, December 2004. Accessed at www.eia.doe.gov

This survey is a good representative sample ofnatural gas production in the WCSB. In 2003 thelarge oil and gas corporations surveyed by the USDepartment of Energy drilled 3,399 natural gaswells and reported having 41,586 producing wells.Direct lifting costs have steadily declined between1985 and 2003 because of technological improve-ments. The success rate for new wells drilled hasgreatly increased over the years, again due toimproved technology. The DOE notes that one ofthe major contributions to the decline in liftingcosts was the “decline in both domestic and foreignproduction taxes [royalties].” (US EnergyInformation Administration, 2004)

Historically, royalties on the extraction of nat-ural gas in Saskatchewan have been quite low. As a

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and gas industry would have to accept joint ven-tures where YPFB would hold 51 percent of theassets. Almost all of the large foreign corporationsagreed to work with the government to make thenecessary changes. (Ballve, 2005; “Chavez LaudsBolivia’s Offensive on Gas,” Globe and Mail, May 5,2006, B-8; Hester, 2006)

However, Canada is not Bolivia, Russia orQatar. The political atmosphere here is different.The people of Saskatchewan have always receivedless than 18 percent of sales for their natural gas.From 1992 through 2003 the government ofSaskatchewan received royalties and fees equivalentto 13.8 percent of sales of this non-renewableresource. Many countries get 50 percent or more.(Table II; Powers, 2003)

As with the oil industry, Saskatchewan govern-ments have been steadily reducing the royalties onnatural gas extraction. They have done this throughvarious indirect methods that generally hide thechanges from the general public. The royaltyregime differentiates between gas wells according tothe year they began producing, whether they wereassociated (combined with oil extraction) or non-associated wells, and whether they were explorato-ry or development wells. Wells developed on “free-hold lands” have paid very low royalties. The gov-ernment has also introduced “volume incentives”,where initial volumes extracted from each well areexempted from the regular royalty rate. The overallresult is that natural gas companies pay royaltiesthat are significantly lower than those in Alberta orBritish Columbia.

Given the declining supply of natural gas, thesteady increase in prices, and the large profits thatthe oil and gas corporations are making, it is sur-prising that the NDP government lowered the natu-ral gas royalties in October 2002 creating a new“fourth tier” rate.

Then in March 2004 the Calvert governmentannounced an even lower rate for “exploratory gaswells” where the rate is only 2.5 percent for wells onCrown land and 0 percent for wells on freeholdland. Even this royalty is not applied until a wellhas produced 25 million cubic metres (883 MMcf),the “royalty/tax incentive volume”. The currentrates are summarized in the following table (seenext page):

percentage of sales, royalties were well under 10percent until 1986. During the second term ofGrant Devine’s government (1987-91) the averagereturn to the province was 13.1 percent. This fell to12.6 percent during the first two terms of the cur-rent NDP government (1992-1999). The returnshave risen to 14.6 percent during the third term ofthe NDP government (2000-3). As the data from theUS Department of Energy reveals, the bulk of eco-nomic rent from natural gas extraction is going tothe owners of the oil and gas corporations. (SeeTable II)

On a world wide basis Saskatchewan’s royaltiesand fees from natural gas extraction are quite low.The trend in the major producing countries, likeRussia, is to increase royalties. This trend is also truein the Americas, e.g. Bolivia. In 2003 a mass move-ment of Indigenous people, backed by the tradeunion movement, rose up and forced the Presidentto resign. They strongly objected to a deal the gov-ernment had made with large foreign oil and gascorporations to extract and ship their natural gas tothe United States via LNG tankers. They rejectedthe “low royalty rate” of 18 percent included in theagreement and demanded 50 percent of the valueof the sales of the gas. The Bolivian legislature, con-trolled by parties of the right, subsequently passednew legislation that nevertheless included the re-establishment of the partially privatized stateowned oil and gas corporation (YPFB), required anindependent financial audit of all oil and gas corpo-rations operating in the country, proclaimed thatnatural gas was a national treasure for the benefit ofall Bolivians and required that royalties beincreased to 50 percent of sales.

At this point the US government and the 46foreign oil and gas corporations intervened to putpressure on the new president, Carlos Mesa, and herefused to sign the legislation. In mid-March 2005the broad opposition coalition took to the streetsagain and shut down all transportation. Mesaresigned, but the legislature refused to accept hisresignation, insisting that he sign the legislation.An impasse was reached. In a special December2005 general election, Evo Morales and the broadleft won the Presidency and control of the legisla-ture. In May 2006 the new populist governmentformally declared that the oil and gas resources arenational assets, and royalties on natural gas wouldrise to 50 to 82 percent; in the two largest naturalgas fields, the royalty rate would rise to 82 percent.Furthermore all corporations operating in the oil


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Royalties also include the bonusbids that a province receives for grant-ing permits and leases. While landsales are going up, the return to theprovince is lower than elsewhere inthe WCSB. In 2004 the average bonusbid return for British Columbia was$423 per ha, for Alberta, $343 per ha,and for Saskatchewan, $171 per ha.The provincial government identifiesthis as “The REAL SaskatchewanAdvantage” on their web site.(Saskatchewan Industry andResources, PR-IC04, March 2004 atwww.ir.gov.sk.ca; SaskatchewanIndustry and Resources, Land Price

Comparisons, January 2005)The people in Saskatchewan should be con-

cerned about developments in the area of naturalgas. Saskatchewan heavily depends on natural gasto heat homes and provide energy for business andindustrial developments. Reserves are limited andare being rapidly depleted. The corporationsextracting the natural gas have absolutely no loyal-ty to the people of the province and are exportingit to Eastern Canada and the United States as fast as

In reality, the royalty rate actually paid is con-siderably lower because of the existence of the vol-ume incentives. Thus as the following figure forassociated natural gas demonstrates, corporationsdo not pay any royalties until the incentive hasbeen extracted. This is a major factor explainingwhy the royalties received by the people ofSaskatchewan for the extraction of natural gas arelower than those collected in Alberta and BritishColumbia. (Alberta, 2003)

Fourth Tier (2002 to present) 11.69 11.31Third Tier (1998 to 2002) 14.40 14.40New Gas (1976 to 2002) 16.75 16.75Old Gas (prior to 1976) 21.89 21.89–––––––––––––––––––––––––––––––––––––––––––––––––––––––SOURCE: Saskatchewan Industry and Resources, June 2006.www.ir.gov.sk.ca

NOTE: These figures are based on the production level of anaverage well in Saskatchewan, between 100 and 120 thousandcubic metres per month.

Natural Gas Royalty Rate CalculatorClassification Non Associated Associated

Gas (%) Gas (%)

Associated Gas Royalty Structure@ $200/103m3 Average Natural Gas Price ($5.46/GJ)

Monthly Gas Production from an Oil Well 103m3

SOURCE: Saskatchewan Industry and Resources, www.ir.gov.sk.ca

40

35

30

25

20

15

10

5

0

Cro

wn

Roya

lty R

ate

(%)

25 64.7 10.5

Alberta

British Columbia

Saskatchewan

AverageSaskatchewan

Well56 |


they can. Allowing for seasonal fluctuations, pricesin general have been going up substantially everyyear. SaskEnergy seems to have no plan for thefuture. What will Saskatchewan do as the naturalgas starts to run out, production starts to seriouslydecline, and prices start rising even more rapidly?This is not far off. Natural gas will be rationedaccording to ability to pay. The only programpresently offered by SaskEnergy to deal with thislooming crisis is a loan to homeowners to buy amore efficient natural gas furnace. The royaltiesthat the people of Saskatchewan receive for theextraction of this valuable natural resource areamong the lowest in the world. The provincial gov-ernment and the opposition parties are silent onthese issues. Saskatchewan’s political leaders arecommitted to the “business as usual” approach.

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In assessing Saskatchewan’s oil and gas policy andproposing alternatives to the business as usualapproach now in place it is necessary to rememberthe key aspects of the international political econo-my of the industry.

The oil industry has never been characterizedby a free market. It has always been dominated by asmall number of very large transnational corpora-tions, working together as an oligopoly with strongsupport from governments. In 2004 Saudi Arabiadrilled 373 oil wells; there were 40,824 drilled in theUnited States. The average US well in 2004 pro-duced 11 barrels of oil per day; the average Saudiwell produced 5,680 barrels per day. Without highprices supported by the industry and governments,there would be a very small oil industry in NorthAmerica. (Lynch, 2006)

Oil has been the most important internationalcommodity. As it is found primarily in the lessdeveloped areas of the world, the industry has beenclosely linked to colonialism, imperialism and dom-ination by the countries and private corporationsfrom the industrialized north. The United Statesmaintains over 254,000 military personnel in 153countries, excluding the armed forces in Iraq andAfghanistan There are also 725 acknowledged mili-tary bases in thirty-eight countries plus five aircraftcarrier battle fleets. The overseas US military isstrategically placed to protect access to sources ofoil. (Johnson, 2004)

Oil is the crucial energy that supports the USworld military system. US national security policyhas always placed the highest priority on security ofsupply. At least from the earliest period of the ColdWar, US political-military strategy has emphasizedcontrol of oil coming from the Middle East.

US policy in the Americas has been to controlthe oil and gas industries in Venezuela, Mexico andCanada. This has been done through close co-oper-ation with the US oil industry and direct and indi-rect intervention in the internal affairs of theexporting countries.

The world is running out of conventional oiland gas supply, and there is far greater competitiontoday for the remaining resources. The large privatefirms, which have historically dominated the indus-try, are excluded from much of the remainingmajor reserves. The less developed producing coun-tries have been re-developing their national oilcompanies and are assuming greater political con-trol over their natural resources. The United Statesand Europe are being challenged by China, Indiaand Japan for control over the remaining oil andgas resources.

Climate change is a very serious problem andrequires a major reduction in the burning of fossilfuels. Only a few small steps have been made toreach the UN Intergovernmental Panel on ClimateChange’s goal of a 70 percent reduction. Withincreasing demand for energy and greater competi-tion for the remaining oil and gas reserves, few gov-ernments have been willing to take any action tohinder the development of the oil and gas industry.

The Canadian oil and gas industry has histori-cally been dominated by large foreign-ownedtransnational corporations. There are now a num-ber of large Canadian controlled corporations andoil and gas trusts, but they are increasingly comingunder US share ownership. The industry as a wholestrongly supports the present policy of extractingand selling oil and gas to the United States as fast aspossible. They are strongly opposed to any govern-mental actions on climate change that wouldadversely affect their profits.

All the existing governments in Canada, andthe major political parties, support the Canada USFree Trade Agreement, the North American FreeTrade Agreement and the existence of a continentalenergy agreement. None oppose US guaranteedaccess to Canada’s oil and gas resources. This fol-lows the direction advocated by the organizationsrepresenting big business who see “deeper integra-tion” with the United States.

The other major reality is the disappearance of


VIII. Summary and Conclusion

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conventional oil and gas in the Western CanadaSedimentary Basin. Because of the extraction andshipping of these non-renewable resources to theUnited States, accelerated under the free tradeagreements, the people of Saskatchewan face thereality of steadily increasing prices for oil and gasand a shortage of supply. No oil and gas is beingheld for future generations.

The business as usual approach to the develop-ment and consumption of oil and gas dominatesthe political elite in Saskatchewan. None of themajor political parties oppose any of the generaltrends in the industry. The NDP government underLorne Calvert has supported the call by PresidentGeorge W. Bush for a new continental energy agree-ment that would send even more energy to theUnited States. The Saskatchewan Party and theprovincial Liberal Party agree. So do all of the majorSaskatchewan business organizations.

Since 1982 provincial governments havesteadily reduced the royalties and taxes paid by theoil and gas industry. All the major parties agree withthis policy. Since 1997 all three political partieshave opposed any mandatory regulations on the oiland gas industry that would force them to complywith the principal goals of the Kyoto Accord ongreenhouse gas emissions.

However, this consensus among the politicaland business elite in Saskatchewan is not reflectedin broader public opinion. Numerous public opin-ion polls show that Canadians want our govern-ments to act on climate change. Public opinionsupports conserving energy for our own use firstand for future generations. A Leger Marketing pollin August 2005 found that 43 percent of Canadianswould like to see the entire oil and gas industrynationalized. Only in Alberta did a majority opposenationalization. (Leader-Post, September 6, 2005)

The NDP government of Allan Blakeney (1971-82) began implementing a democratic policytowards natural resource extraction. Naturalresources are a free gift from nature, and democrat-ic rent theory argues that the proceeds of their useshould go to the population as a whole. Liberal renttheory was developed during the period of the riseof western European imperialism and colonialismwhen only men with property had a voice in gov-ernment. The classic liberal rent theory held thatthe benefits from resource exploitation should go toindividuals and corporations and not the public atlarge. This conflict over who should benefit fromresource exploitation remains central to policy

development. Today in Saskatchewan the liberal theory of

economic rent from resources is in command. Analternative policy would necessarily change priori-ties. A different government would have to decideto put the interests of the general population aheadof the interests of the owners of the oil and gas cor-porations. It would place a high priority on tryingto provide security of supply for present and futuregenerations. It would choose to try to maximizereturns on the sale of these non renewable resourcesfor the general population. A new approach wouldrecognize the threat to Saskatchewan posed bygreenhouse gas emissions, global warming and cli-mate change. This would require a new provincialenergy program that would include the seriousdevelopment of our alternate energy potential. Itwould also recognize that to export more energy tothe United States, where five percent of the world’spopulation consumes 25 percent of the world’senergy, is wrong. This policy helps the United Statesmaintain its dominant military presence aroundthe world. It also helps them avoid any responsibil-ity for the catastrophe that awaits the world as itrushes to the “dangerous anthropogenic interfer-ence” (DAI) level where global warming begins tofeed on itself and becomes irreversible.

What can be done? Here are a few suggestions.They are not radical. They involve a return to thepolicies that we have had in the not-too-distantpast.

• Create a provincial energy conservation boardto cover these industries. All sales would haveto be made to this agency. This would be mod-eled after the Alberta Energy ConservationBoard and marketing boards like Canpotex,which has controlled production and sales bythe potash industry. The creation of such aboard would allow government to controlsales, prices, profits and resource rents. By set-ting a level of proven reserve to be held for thepeople of Saskatchewan (e.g., 30 years as inAlberta), exports to the United States would becut back.

• Raise royalties up to the average level that theywere during the government of Allan Blakeney,which was around 50 percent of sales. This is acommon rate around the world today.Royalties on natural gas would also be raised sothat most of the economic rent (excess profit)would go to the general public.


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• Implement an excess profits tax. A number ofcountries around the world have implementedsuch a tax in the last few years. During therapid increase in prices after 1973, the govern-ment of Saskatchewan introduced a “royaltysurcharge” to capture some of the windfallprofits going to the private corporations. InAlberta, Peter Lougheed’s government aban-doned the fixed royalty system so that theshare captured by the government would risewith international prices. (See Richards andPratt, 1979)

• Merge SaskEnergy with SaskPower and give itcontrol over natural gas development and dis-tribution within the province. The prioritywould be to conserve natural gas for the use ofpresent and future generations. This wouldrequire phasing out exports to the UnitedStates.

• Re-establish the Saskatchewan Heritage Fund,allocate at least 50 percent of the royalties fromthe depletion of oil and gas to the Fund, andinvest in renewable energy development. Thisprogram worked well in the past inSaskatchewan and works well today in Alaskaand Norway.

• Re-create SaskOil as a Crown corporation withthe goal of gaining ownership and control overthe remaining provincial oil reserves. Revivethe principles of the Saskatchewan Mining andDevelopment Corporation Act, which wouldrequire all future developments to include theright of SaskOil to 50 percent ownership. Thispolicy worked well for the uranium industry inSaskatchewan and has worked well in the oilindustry in Norway.

There is a logical alternative to the present busi-ness as usual policy. Many people support this alter-native. What is needed is a political movement thatis committed to changing government policy. Atone time that could be found in the Co-operativeCommonwealth Federation (CCF) and the NewDemocratic Party (NDP). However, that is no longerthe case. The past two NDP governments have beenmore committed to a policy of putting the interestsof the owners of private corporations first than theProgressive Conservative government of GrantDevine.


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Mexico. All the revenues from the exploitation ofoil and gas go to the government following thenationalization of the industry in 1938.Development is limited to PEMEX, the state ownedcompany that also has a monopoly over wholesaleand retail distribution. This is the best example ofthe democratic rent regime, where all returns fromthe exploitation of a natural resource go to the peo-ple as a whole. (Laguna, 2004)

Venezuela. The oil and gas industry was originallynationalized in 1936 and PDVSA (its NOC) is one ofthe world’s largest. The government of HugoChavez has re-asserted control over the industryand PVDSA. Production Sharing Agreements withIOCs have been transformed into joint ventures,where PVDSA holds a minimum of 60 percent equi-ty. Royalties were increased from one to sixteen per-cent. Corporate taxes were raised from 34 to 50 per-cent. (www.venezuelanalysis.com, 2006)

Russia. While the immediate post-Soviet govern-ments privatized almost all state assets, PresidentVladimir Putin’s government has established OAORosneft as a major oil NOC and OAO Gazprom asthe monopoly firm in the gas industry. A newSubsoil Law limits foreign ownership in this indus-try to less than 50 percent of any development proj-ect. Oil exports are subject to an excise tax of up to$27 per barrel depending on grade. The govern-ment now takes about 90 percent of the value ofsales above $25 per barrel. (Petroleum IntelligenceWeekly, various issues, 2005-6)

OPEC countries. All OPEC countries in the MiddleEast have NOCs. The private sector companies werenationalized in the 1970s. The industry is con-trolled by the NOCs and the central governments.All engage in joint ventures and production sharingagreements with IOCs. Exports are controlled bythe government. All have term contracts that spec-ify that when international oil prices increase, theshare going to the government increases. Thus theyare able to capture almost all of the increases in eco-nomic rent (excess profits) that come with theincrease in international prices. (PetroleumIntelligence Weekly, various issues, 2005-6)

Saudi Arabia. Saudi Aramco is one of the largest oilcorporations in the world, now a completely stateowned enterprise. The government maintains com-plete control over the industry. Aramco develops itsown fields, hires service companies, and engages injoint ventures with western IOCs. By controllingexports and prices through contracts, it capturesmost of economic rent. (Petroleum IntelligenceWeekly, various issues, 2005-6)

China. While the Chinese government has priva-tized around 80 percent of the economy, it hasmaintained almost complete control over the ener-gy sector, including development, sales, importsand pricing. It does permit joint ventures withIOCs. Its three major oil NOCs are among theworld’s largest, engaging in development projectsaround the world. To secure supply, China regular-ly provides exporting countries with a range ofinfrastructure and other solidarity programs.Chinese policy prefers joint ventures with otherNOCs and government-to-government agreements.(Globe and Mail, May 2, 2006; Walton, 2005)

Fiscal Regimes

ANNEX


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India. India is a major importer of oil and gas and afree market economy. Nevertheless, the state ownedOil and Natural Gas Corporation (ONGC) is one ofthe largest oil and gas corporations in the world,operates on a world-wide basis, and is a partner injoint ventures in India and elsewhere. RelianceIndustries (RIL), an Indian-owned IOC, is a majorworld oil company. There are other smaller NOCs aswell. India is known for having relatively low royal-ty rates, but the state controls retail prices, whichlimits profits. (Petroleum Intelligence Weekly, 2005-6;Kjemperud, 2004)Indonesia. In OPEC member Indonesia the govern-ment controls the oil and gas industry throughPertamina, its NOC. Pertamina regularly engages injoint ventures and production sharing agreementswith IOCs and aggressively operates around theworld. The government imposes a higher profit taxon the petroleum industry. The royalty systemrequires that all companies pay a share of the oilextracted to the government; this is 6.7 percentwhen the price of a barrel of oil is below $45 and13.5 percent when above. The industry has beenhurt by the government, which has artificially heldthe price of products low to subsidize consumers.(Petroleum Intelligence Weekly, 2005-6)

Libya. Like all of the OPEC countries, Libya nation-alized the oil industry in the early 1970s.Production fell during the US imposed boycott.However, this has lifted, and Moammar Gadhafihas opened up development to foreign corpora-tions. The government has introduced a new sys-tem of production sharing, which accompanies bidsfor developing areas. In addition to the price of thebonus bid, companies also have to bid on the “X-factor”, the share of the oil and gas extracted thatwill go to the Libyan National Oil Corporation. Inthe October 2005 bidding, 50 oil companies from27 countries participated. The 17 winners agreed toprovide LNOC with between 70 and 94 percent oftheir production. (Petroleum Intelligence Weekly,October 10, 2005)

Abu Dhabi - United Arab Emirates. The oil industryin this OPEC country is managed by its national oilcompany, Abu Dhabi National Oil Co. (ADNOC). Itemphasizes joint ventures and production sharingagreements with the major oil corporations, bothIOCs and NOCs. It imposes three different taxes onforeign oil corporations: a royalty of 20 percent, acorporation tax of 55 percent, and what is known asthe “make-up tax.” The latter limits the margin ofthe companies to $1 per barrel. This ensures thatthe bulk of the economic rent goes to the exportingcountry. (Petroleum Intelligence Weekly, May 1 andMay 29, 2006)

Kazakhstan. One of the last large oil deposits in theworld is around the Caspian Sea. In 2005 the gov-ernment of Kazakhstan changed its rules on the oiland gas industries. All new development projectsmust provide for at least 50 percent ownership bystate-owned Kazmuniagas (KMG). Furthermore, 80percent of the oil will go to the state under new pro-duction sharing agreements. (Petroleum IntelligenceWeekly, October 17, 2005)

Brazil. From its beginning in 1953 the oil industryhas been under the control of Petrobras, the state-owned company. After 1995 private companieswere permitted and private investors were allowedto purchase 45 percent of Petrobras stock. It has 11refineries and dominates the wholesale and retailindustries. It has become one of the strongest inter-national oil companies, operating around theworld, specializing in offshore oil and gas extrac-tion. Through royalties and taxes, it is the largestcontributor of revenues to the Brazilian govern-ment. (Palacios, 2002; Petroleum Intelligence Weekly,various issues, 2005-6)

Bolivia. In the past two years the Bolivian govern-ment has moved to increase control over the oiland gas industry. In 2005 basic royalty rates wereraised to 32 percent. State-owned YPFB was revivedand all of the private natural gas industry wasnationalized. On May 1, 2006 the new governmentof Evo Morales decreed that 82 percent of all therevenues from natural gas in the two largest fieldswould now go to the government. The price ofexported gas was raised by 40 percent. New produc-tion sharing agreements and joint ventures arebeing negotiated. (Petroleum Intelligence Weekly, var-ious issues, 2005-6)


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Ecuador. In 2005-6 the government moved to takegreater control over the oil and gas industry. State-owned Petroecuador took over OccidentalPetroleum’s assets. An excess profits tax wasimposed on company profits covering 2001-2005. Anew hydrocarbon law grants the government 50percent of all gross income where the internationalprice of oil rises higher than a threshold level set bythe state. (Petroleum Intelligence Weekly, variousissues, 2005-6)

Norway. Government ownership in Statoil (84%)and Norsk Hydro (44%) provides a return to thepublic. The State Direct Financial Interest maintainsequity positions in offshore developments. Otherrevenues are from the corporate tax, a special petro-leum tax and various duties. There is also a carbondioxide tax. Revenues are also paid into theNorwegian Government Petroleum Fund, a form ofHeritage Fund. Royalties are reduced for corpora-tions developing older fields where production isdeclining. (Petroleum Intelligence Weekly, variousissues, 2005-6; Norwegian Finance Department,2005)

Alaska. Alaska uses several fiscal tools to obtain rev-enues from private development of the oil and gasindustry. First, there is a royalty of 12.5 percent onthe value of production. In addition, there is a pro-duction tax (called a severance tax in the USA),which is 12.25 to 15 percent. There is a stateincome tax of 9.4 percent of net profits, and a stateproperty tax of two percent. There is also the AlaskaPermanent Fund and the Public School Fund,which accumulate a share of royalties and makeinvestments. The APF pays an annual dividend toevery Alaskan citizen. Numerous court actionsagainst the oil corporations for tax evasion haveresulted in payments that are put into theConstitution Budget Reserve Fund. The federal gov-ernment shares royalties from offshore develop-ment with Alaska. (Alaska Finance atwww.tax.state.ak.us)


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nnnnnnnnnnnnnnnnnnnnnnnnnn




















1972 13,767,993 213,780,984 27,953,000 13.11973 13,625,605 263,734.307 38,045,000 14.41974 11,725,945 396,675,848 50,519,400 12.61975 9,379,084 406,273,743 203.213,800 50.0

1976 8,888,577 443,698,639 196,178,900 44.21977 9,741,666 579,132,726 232,478,600 40.11978 9,624,550 689,316,965 293.953,000 42.6

1979 9,371,831 726,709,636 415,252,500 57.11980 9,330,839 862,401,640 468,973,500 54.41981 7,392,815 821,032,271 375,273,300 45.71982 8,103,947 1,189,368,427 774,840,400 65.1

1983 9,543,427 1,650,760,643 680,021,500 40.51984 10,812,499 1,867,839,459 730,878,800 39.11985 11,612,728 2,252,081,638 766,913,600 34.11986 11,698,239 1,173,895,539 261,471,900 22.3

1987 12,074,616 1,514,653,876 356,223,700 23.51988 12,269,110 1,044,243,396 207,807,800 19.91989 11,695,613 1,251,252,794 220.902,600 17.71990 12,253,452 1,627,112,509 280,353,000 17.21991 12,420,084 1,204,847,851 232,480,700 19.3

1992 13,369,511 1,422,593,036 232,052,800 16.31993 14,973,383 1,495,966,211 317,563,500 21.21994 17,203,619 1,900,047,745 463,873,800 24.41995 18,747,271 2,320,458,559 420,929,500 18.1

1996 20,935,843 3,139,575,577 598,362,100 19.11997 23,456,769 2,909,543,750 619,311,800 21.31998 23,154,231 1,980,356,363 305,725,000 15.41999 21,709,071 3,095,071,424 462,733,000 14.9

2000 24,245,040 5,078,410,022 826,439,800 16.32001 24,747,979 3,748,086,857 625,941,200 16.72002 24,415,468 4,715,064,265 682,555,100 14.52003 24,330,000 4,755,000,000 709,400,000 14.9


Table I: Petroleum Production, Sales and RoyaltiesVolume Produced Value of Sales Royalties Royalties as a

Year (Cubic metres) $C $C percent/sales

SOURCE: Saskatchewan Bureau of Statistics, Mineral Statistics Yearbook 2002. Regina, 2004.Saskatchewan Industry and Resources, Annual Report, 2003-4. Regina, 2004.

NOTE: Royalties includes royalties/production taxes, land bonus bids, lease rentals.

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1972 1,657,002 7,219,640 410,170 5.71973 1,645,187 7,535,998 623,348 8.31974 1,507,692 7,730,420 805,342 10.41975 1,588,951 9,032,826 838,910 9.3

1976 1,530,871 10,666,729 849,751 8.01977 1,268,982 12,957,162 697,511 5.41978 1,189,035 16,882,426 693,389 4.1

1979 1,177,957 17,231,180 619,264 3.61980 1,196,895 19,628,096 678,359 3.51981 1,191,312 19,719,924 711,711 3.61982 1,272,434 24,257,490 714,801 2.9

1983 1,314,291 50,170,734 2,611,203 5.21984 1,744,178 88,589,999 7,157,163 8.11985 1,990,529 119,689,387 10,192,860 8.51986 2,367,995 170,445,630 19,264,442 11.3

1987 2,711,985 166,597,713 24,192,441 14.51988 3,991,768 206,956,329 26,760,206 12.91989 5,586,647 294,219,070 39,915,133 13.61990 6,318,503 359,616,942 43,264,939 12.01991 6,632,955 380,549,166 50,299,752 13.2

1992 6,790,428 349,548,768 32,586,899 9.31993 6,881,195 387,831,245 38,998,528 10.11994 7,891,892 528,412,324 69,331,321 13.11995 7,787,540 373,513,079 40,715,848 10.9

1996 8,071,000 354,000,000 53,000,000 14.91997 7,820,000 406,000,000 44,000,000 10.81998 7,696,000 435,000,000 65,900,000 15.11999 7,911,000 623,000,000 91,800,000 14.7

2000 8,152,000 1,128,000,000 239,300,000 21.22001 8,290,000 1,307,000,000 129,100,000 9.02002 8,278,000 942,000,000 152,700,000 16.22003 9,050,000 1,577,000,000 205,400,000 13.0

Table II: Natural Gas Production, Sales and RoyaltiesVolume Produced Value of Sales Royalties Royalties as a

Year (Thousand Cubic metres) $C $C percent/sales

SOURCE: Saskatchewan Bureau of Statistics, Mineral Statistics Yearbook 2002. Regina, 2004.Saskatchewan Industry and Resources, Annual Report, 2003-4. Regina, 2004.


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Natural gas:

Mcf = thousand cubic feetMMcf = million cubic feetTcf = trillion cubic feetMMBtu = million Btu or British Thermal Units= around 975 cubic feet of natural gas

1 cubic metre = 35.315 cubic feet of natural gas

Crude oil:

bbl = barrelsb/d = barrels per dayMb/d = thousand barrels per day1 cubic metre = 6.292 barrels1 barrel = 34.92 imperial gallons1 barrel = 0.15889 cubic metre1 barrel = 0.136 tonne

Barrel of oil equivalent (BOE):

1 barrel of oil = 6 thousand cubic feet of natural gas

Energy units:

1 gigajoule (GJ) = one billion joules1 gigajoule = 0.95 million Btu1 gigajoule = 0.95 thousand cubic feet of natural gas1 gigajoule = 165 barrels of oil1 thousand cubic feet of natural gas = 1.05 gigajoules1 cubic metre of light crude oil = 38.51 gigajoules


Common Measurementsand Conversions

66 |

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Parkland Institute

Parkland Institute is an Alberta research network thatexamines public policy issues. We are based in the Facultyof Arts at the University of Alberta and our research net-work includes members from most of Alberta’s Academicinstitutions as well as other organizations involved inpublic policy research. Parkland Institute was founded in1996 and its mandate is to:• conduct research on economic, social, cultural and

political issues facing Albertans and Canadians.• publish research and provide informed comment on

current policy issues to the media and the public.• sponsor conferences and public forums on issues facing

Albertans.• bring together academic and non-academic

communities.

Parkland InstituteUniversity of Alberta11045 Saskatchewan DriveEdmonton, Alberta T6G 2E1Phone: (780) 492-8558 • Fax: (780) 492-8738Web site: www.ualberta.ca/parklandE-mail: [email protected]

Canadian Centre for Policy Alternatives

The Canadian Centre for Policy Alternatives is one ofCanada's leading progressive policy research organiza-tions. Founded in 1980, the CCPA is supported by its8,000 individual and organizational members. TheCentre, through its work, seeks to promote economic andsocial literacy among Canadians on important issuesaffecting their lives. The CCPA publishes reports, booksand other publications, including a monthly magazine.

Canadian Centre for Policy Alternatives (CCPA) –Saskatchewan Office#105 – 2505, 11th Avenue Regina, Saskatchewan S4P 0K6 Phone: (306) 924-3372 • Fax: (306) 586-5177 E-mail: [email protected]

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