Value-Added for Whom?An Assessment of Alberta’s

Bitumen Royalty-in-Kind (BRIK) Program

Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) ProgramAllison Robins, School of Public Policy (University of Calgary)

2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

Research Question

• Why the Government of Alberta attempted to force downstream (value-added) activity through the BRIK program, despite this approach’s economic shortcomings

• Assessment used the following lenses:– Neo-Classical Economic Theory: Governments should

maximize economic surplus– Public Choice Theory: Just because governments should

doesn’t mean they will (Downs, 1957)

Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) ProgramAllison Robins, School of Public Policy (University of Calgary)

2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

What is Bitumen?

Heavy crude oil extracted from oilsands

High viscosity (Ultra-heavy)

High sulfur content(Sour)

Credit: CAPPValue-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) Program

Allison Robins, School of Public Policy (University of Calgary)2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

What is Royalty-in-Kind?

• The Government of Alberta (GOA) is entitled to a share of production volumes (royalty) of the oil and gas extracted from Crown land

• GOA can choose to receive this royalty in-kind or as cash

In-Kind: Taking physical custody of the royalty volumes

$ Cash: Receiving a cash payment in lieu of royalty volumes

Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) ProgramAllison Robins, School of Public Policy (University of Calgary)

2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

Why BRIK?• In Alberta, natural resource revenues comprise a significant

portion of total government revenues

• Alberta’s economic specialization in upstream activity leaves the province vulnerable to price shocks

• BRIK is a policy of incentivizing downstream activity to hedge commodity risk

29%

Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) ProgramAllison Robins, School of Public Policy (University of Calgary)

2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

(Alberta Treasury Board & Finance,

2015)

The North West Upgrader

• By taking bitumen royalties in-kind, GOA has a supply of bitumen it can commit to strategic projects

• GOA has committed 75,000 barrels per day to the North West Upgrader

• 30 Year Processing Agreement that guarantees the project’s capital costs

• If the cost of bitumen and the upgrading toll > revenues, GOA is on the hook

(Alberta Petroleum Marketing Commission, 2011)Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) Program

Allison Robins, School of Public Policy (University of Calgary)2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

Economic Diversification & Deadweight Loss• Neo-classical economic

theory: Perfect markets result in efficient outcomes

• The presence of market imperfections may result in inefficient outcomes

• Diversification strategies should not go beyond correcting market imperfections

(Mansell, 1990)

S

D1 D2 Q

P

Q1 Q2

Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) ProgramAllison Robins, School of Public Policy (University of Calgary)

2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

Alleged Market Imperfections• Supporters of BRIK argue that private markets fail to make

socially desirable investments in Alberta’s downstream oilsands sector

• Socially desirable investments = investments that maximize economic surplus

More Jobs

$ Greater Revenue

Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) ProgramAllison Robins, School of Public Policy (University of Calgary)

2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

Does BRIK Address Market Imperfections?• No, because market imperfections that justified the policy did

not exist:• Capital Rationing: Reduced capital investment post-2008

was not due to excessive risk aversion, it was due to the inadequate ROI of downstream projects (IHS CERA, 2013)

• Positive Externalities: Due to labor constraints, increasing downstream activity comes at the expense of upstream activity, which reduces:• The number of long-term jobs• Royalty revenue• Corporate income tax payments (IHS CERA, 2013)

Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) ProgramAllison Robins, School of Public Policy (University of Calgary)

2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

So Why Do It?

Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) ProgramAllison Robins, School of Public Policy (University of Calgary)

2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

Politics

• BRIK used as a tool to build electoral coalitions

• Specifically appealed to the Alberta Industrial Heartland:

• Original source of support for Premier Stelmach’s leadership bid for the Progressive Conservatives

• Historically a geographical source of weakness for the Progressive Conservatives in provincial elections

Conclusion

Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) ProgramAllison Robins, School of Public Policy (University of Calgary)

2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

• Many reports have examined the economic shortcomings of forcing additional downstream activity

• However, none have examined the political motivations behind the policy

• By combining an economic critique and political analysis, this research contributes a new perspective to the ongoing value-added debate in Alberta

Presentation References

Value-Added for Whom? An Assessment of Alberta’s Bitumen Royalty-in-Kind (BRIK) ProgramAllison Robins, School of Public Policy (University of Calgary)

2015 National Student Thought Leadership Award 67th IPAC National Annual Conference, Halifax, NS

Agreement to Process Crown Royalty Bitumen. Alberta Petroleum Marketing Commission, North West Upgrading Inc., and Canadian Natural Upgrading Limited, February 16, 2011.

Backgrounder on Alberta's Fiscal Situation, Alberta Treasury Board and Finance, January 15, 2015.

Downs, Anthony. “An Economic Theory of Political Action in a Democracy.” Journal of Political Economy 65, no. 2 (April 1957): 135–50.

Extracting Economic Value From the Canadian Oil Sands, IHS CERA, 2013.

Mansell, Robert. Strength in Adversity: a Study of the Alberta Economy, University of Alberta Press, 1990.