Canada, We Need to Talk About Managing our Natural Resources

Prime Minister Harper recently approved the sale of Nexen Inc. – a Calgary-based oil company – by the China National Offshore Oil Company (CNOOC) as well as Progress Energy by the Malaysian firm Petronas. It’s easy enough to make fun of the government’s decision, due to both their hypocritical criticism of “foreign environmental interests” in the oil sands and also the unclear and seemingly arbitrary rules surrounding foreign takeovers. But regardless of what one thinks about these two recent deals, there’s a larger issue at play.

The issue is the way that natural resources are governed in Canada. The free-market system essentially hands over all power and wealth to the highest bidder. In Alberta, companies are able to extract oil with relative ease, giving only a small royalty to the provincial government. The result has been less than spectacular. Alberta, blessed with the second largest deposit of oil in the entire world (in a country where natural resources are provincial jurisdiction), has very little to show for its immense geological good fortune. It has relatively low taxes, low unemployment and higher-than-average salaries. But that’s about it. And when you think of what places like the United Arab Emirates or Norway have done with their respective oil fortunes, it’s downright embarrassing.

Canada/Alberta’s model of giving companies nearly all of the oil revenue is short-sighted and inefficient. Alberta’s population of 3.5 million people have been given the second largest deposit of the world’s most important resource, and yet Albertans have very little to show for it. The benefits have simply not been given to the people; companies have retained most of the wealth.

There’s a better way to manage resources. Canada flirted previously with a national oil company (Petro-Canada), which was eventually privatized. I understand the political impossibility of suggesting the need for a publicly run oil company, but I believe the argument has its merits. Part of Petro-Canada’s problem was that it competed alongside every other oil company, which of course didn’t solve the main issue – that corporations control too much of our country’s natural resources. All Petro-Canada did was give Canadians some ownership of the country’s natural resources, when really citizens should own it all.

Let’s look to Norway in order to see a system that effectively manages its oil resources.

Norway abandoned a royalty system because oil companies regulated their production to keep royalties at a minimum. The country maintains the philosophy that oil ultimately belongs to the nation. Companies, including Statoil (which is primarily owned by the Norwegian government), can help in harnessing natural resources, but the oil is still owned by the country. Norway’s high taxation rate (78% on oil companies’ net profits) has allowed the country to put its oil revenues into a robust sovereign wealth fund.

Norway puts 100% of its oil revenues into this Government Pension Fund. The fund is now worth more than $664 billion (US). Alberta’s Heritage Savings Trust Fund sits at an embarrassing $16 billion (and shrinking).

And yet despite putting every penny of oil revenue into this pension fund, the government is able to provide immense government services to its citizens by using the interest made from the fund. Norway is ranked #1 in the world on the Human Development Index, has zero debt and is a highly generous welfare state.

Norway understands that it can benefit greatly from oil if its system of governance is set up in a certain way. And it also understands that oil does not last forever, which is why it is investing so heavily into its pension (rainy day) fund. To top it all off, Norway is a world leader in alternative energy production, using hydroelectricity (98.5%) as its main source of electricity as well as wind and solar.

Canada can surely take a lesson from Norway’s oil management. We too need our system of natural resource governance to benefit citizens, not just a handful of powerful oil companies.

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