Premier Rachel Notley and her NDP government just had their "come to Jesus" moment.
Others have discussed the economic impact of the royalty review, but I want to discuss the politics.
Royalty reviews are always controversial in Alberta.
When Peter Lougheed raised royalty rates in the early 1970s, there was a high profile exodus of rigs from the province. Although soon after, under much less profile, the rigs all returned to Alberta.
Similarly, when Ed Stelmach announced changes to the royalty review it led to the rise of the Wildrose Party. Two PC MLAs and some party volunteers crossed the floor to Wildrose and donours from the oil and gas sector also switched allegiances. Ultimately, Stelmach's ill-fated royalty review was a defining factor in his resignation in 2011.
While in opposition, the NDP, for decades, wanted to fundamentally alter the royalty regime in Alberta.
As its 2015 election platform put it, "the PCs failed to earn Albertans' full and fair value for their oil and gas by maintaining one of the world's lowest oil royalty rate structures."
Therefore, when Notley created the royalty review soon after being elected, it was not just to understand the oil and gas sector and its complex royalty regime, but to raise revenue from oil and gas companies either in the short run or the long run.
But that didn't happen.
Instead, the NDP government endorsed the panel's assertion that the royalty regime "provides Albertans an appropriate share of value." It accepted all of the panel's recommendations, including grandfathering all wells drilled before 2017 from royalty changes for 10 years. New rates will only kick in for wells drilled after 2017.
What explains this reversal?
According to Notley it was due to the continuing decline in the price of oil combined with the fundamental altering of the oil and gas market. As the panel wrote, "Alberta's biggest customer is now our biggest competitor."
This referred to the shale revolution in the U.S., which has dramatically increased U.S. supplies of oil and gas and subsequently reduced their demand for Alberta crude. But all of this was easily apparent before the May, 2015 election. What really explains the NDP's reversal?
The only option
It was the NDP's ideological perspective running head on into the political realities of governing; what Jeffrey Simpson has called the "Discipline of Power."
This reversal could not have been easy for the NDP to swallow.
I believe the panel's report was ready prior to the December 31, 2015 deadline.
The month delay in releasing the report's contents, I speculate, was due to the NDP government trying to handle its recommendations. It would have been politically difficult to release the report of a non-partisan expert panel chosen by the NDP and then ignore its major recommendations.
Similarly, it would have created an even bigger political crisis if the government had tried to get the panel to revise its report behind the scenes and, in protest, panel members resigned.
In both of these situations, how could the NDP government so blatantly ignore evidence-informed decision making about Alberta's key economic sector? Endorsing the data-rich panel's report, despite the NDP's ideological perspective, was really its only option.
The oil and gas sector welcomed the government's royalty decision. Tim McMillan, President of the Canadian Association of Petroleum Producers, said "the new royalty framework is principle-based and provides a foundation to build the predictability industry needs for future investment."
However, the NDP's political opponents were not as kind.
PC Leader Ric McIver tweeted that "after costing Alberta billions in investment & thousands of jobs #abndp say whoops. PC's had it right. #ableg #PCAA #cryinshame."
Wildrose Leader Brian Jean said the royalty review should never have been launched in the first place. Jean claimed that "it's totally a waste of time, and even worse than that…it actually punished Albertans."
Arguing that the review should never have occurred is unfair.
There is value in regularly reviewing Alberta's royalty regime. Especially for a new government that was highly suspicious of the old framework.
At the very least, a comprehensive analysis of royalties from other jurisdictions was important. Royalties are very complex and I believe there should be regular reviews of the framework. Regularizing the process would reduce industry uncertainty and get rid of the political brinksmanship every time a government announces a new review. Legislating a regular review (say every seven to 10 years) of the royalty regime should be done.
Notley's royalty decision was also criticized from the left.
'Captured by industry'
The NDP had already implemented a fairly progressive agenda (raising personal/corporate taxes, banning corporate/union political donations, increasing the minimum wage, instituting a carbon tax, etc) in the short time that it's been in office.
The party probably felt that this immunized them from severe criticism from the left. They were wrong.
The Alberta Federation of Labour, like other environmental and union groups, submitted documents to the panel calling for a fundamental restructuring of the royalty regime including, especially, a raise in rates. The AFL was highly disappointed that its former political allies, the NDP, abandoned it.
In a scathing interview with Calgary Sun columnist Rick Bell, AFL president Gil McGowan claimed the decision could have been made by either "a PC or Wildrose government." McGowan also asserted the NDP has been "captured by industry." It will be interesting to see if the Alberta Union of Provincial Employees or the Pembina Institute take a similar position as McGowan.
The NDP is learning that you can align with interest groups in opposition, but you need to represent all Albertans while in government. But interest groups, who do not run for elective office, don't need to do so and can remain pure to an ideological position.
The royalty review decision marked the first major reversal from the NDP.
It has discovered, like many parties before, that one is freer to pursue ideological goals while in opposition than in government. Government requires balancing and judgement, not dogma.
The next challenge will be the Spring 2016 budget. Will the NDP continue with its ideological agenda and raise taxes, increase spending, and run a large budget deficit? Or will it assume the "Discipline of Power" and introduce a more moderate budget?
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