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) Program
Allison 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) 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 Bitumen?
Heavy crude oil extracted from oilsands
High viscosity
(Ultra-heavy)
High sulfur content
(Sour)
Credit: CAPP
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
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) Program
Allison 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
29%
(Alberta Treasury
Board & Finance,
2015)
• 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
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
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
P
S
• The presence of market
imperfections may result in
inefficient outcomes
• Diversification strategies
should not go beyond
correcting market
imperfections
(Mansell, 1990)
Q 1 Q2
D1
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
D2
Q
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) Program
Allison 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) Program
Allison 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?
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
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
Conclusion
• 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 valueadded debate in Alberta
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
Presentation References
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.
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