ErinWeir.Ca

As one who is employed in the energy industry in Saskatchewan, I am deeply troubled by the point of view on oil and gas royalties offered by Erin Weir in his April 6 letter.

He contends that the impact on our oil and gas industry would be negligible if the province were to arbitrarily increase royalties. Nothing could be further from the truth.

The primary reason Saskatchewan has experienced a doubling of its oil production from about 200,000 barrels per day in 1990, to approximately 400,000 barrels per day today is that successive governments of the day, both left and right wing, have had the common sense to take heed of the recommendations of its professional bureaucracy and make the royalty and overall fiscal regime attractive for those who invest in new drilling.

In the early 1990s, the province of Saskatchewan implemented a royalty regime for new horizontal wells that has been responsible for the majority of the incremental 200,000 barrels per day of production that the province has enjoyed during a time period when Alberta's conventional oil production (non oil sands) has declined by about 30 per cent. The scheme did nothing to alter existing oil revenues, but provided an incentive to create new oil revenues from new horizontal wells. It is clear from the results over the past 10 plus years that this approach has worked.

Attractive is one thing, however, and Saskatchewan's royalty and taxation regime must also continue to be competitive with the royalty and fiscal regimes in Alberta so that investment capital for oil and gas drilling continues to move eastward into Saskatchewan.

Nothing would turn the taps off faster than the government of Saskatchewan increasing royalty rates on either existing production, or for wells slated for new drilling.

The average well productivity is substantially lower in Saskatchewan than it is in Alberta, and for Weir, and those who think like him, to ignore this fact is to ignore the fundamentals of oil and gas economics.

This combined with the other fundamental which drives oil economics the quality of the product that we produce, a largely heavier, lower valued crude oil stream than that of our neighbour to the west requires a bit more thought than the sophomoric approach to economic rents that Weir demonstrates in his letter.

Implicit in Weir's letter is the premise that this province has only a revenue problem and not a spending problem, and by arbitrarily increasing oil revenues through higher royalties or taxation, the province will flourish.

A fundamental premise of macroeconomics is that there are two ends of the curve in which a government will exact a revenue base of zero: the first is the point at which tax rates are zero, and the other is the point at which tax rates are 100 per cent. Perhaps the middle ground where we are presently at is that magical combination of government taxation and industry investment where government revenues can continue to grow organically through industry re investment.

JOHN A. STYLES
Styles is a professional engineer employed in Saskatchewan's petroleum industry. The views are his own, and not those of his employers.
Regina