Monday, October 25, 2010

Getting Over Brad’s Wall of Potash

Posted by Erin Weir
Progressive Economics Forum
October 25th, 2010

On Thursday, Saskatchewan Premier Brad Wall said “No” to BHP:

Do we want to add PotashCorp to that list of once-proud Canadian companies that are now under foreign control? . . . It’s our government’s belief that the people of Saskatchewan deserve nothing less than a potash industry unequivocally managed, operated and marketed for the benefit of Canada and Saskatchewan.

Of course, it is still possible that his Conservative counterparts in Ottawa will approve BHP’s bid. That approach would allow the Premier to play to his home crowd without ultimately offending prospective foreign investors. In any case, Wall’s rhetoric leaves essentially no room for the opposition NDP to position itself as tougher or more patriotic regarding Potash Corp.

However, a different opening was apparent on Thursday. Wall quite rightly referred to “the owners of the resource, the people of the Province of Saskatchewan” and “the rent you should be getting for the resource that you own.” But he ruled out actually doing anything to collect a fairer share of potash rents for Saskatchewan people:

We know the affect [sic] on business and the investment climate, on your economy when you’re having royalty shock. When there is a bunch of changes in your royalty structure. We don’t want to do that. Right next door we saw what happened as a result of that.

“Royalty shock” is apparently the hypothesis that Alberta’s energy industry slowed in 2009 not because the price of oil plummeted from $147 to $34 and the price of natural gas dropped from $11 to $3, but because the Alberta government modestly increased the royalty rates that would have applied at the higher prices. It might be worth noting that Saskatchewan potash production also contracted sharply in 2009 when the price of potash collapsed, despite an unchanged royalty regime.

Wall’s position is to maintain the status quo on royalties. Rejecting BHP’s takeover bid would prevent it from writing off Jansen Lake development against Potash Corp profits. Wall’s other scheme, not discussed on Thursday, to extract a one-time “resource transfer tax” from BHP in the event of a takeover would (partially) offset this writeoff.
But just upholding the status quo is not good enough. As I pointed out in The Leader-Post and StarPhoenix, Saskatchewan produced the same amount of potash in 2008 as in 2005. But higher prices increased the value of that production by $4.7 billion. The province’s current royalty regime collected only $1.1 billion of this windfall for the resource owners and then refunded much of that to potash companies in the following year.

The 2009-2010 refund occurred because potash royalties are calculated on a calendar-year basis but reported on a fiscal-year basis. Payments in 2008-09 reflected overly optimistic projections for the 2009 calendar year. Averaging the two calendar years (2008 and 2009), the industry sold seven million tons of K2O for $5.2 billion. That’s $3.0 billion more than the industry got for eight million tons in 2006.

Averaging the two fiscal years (2008-09 and 2009-10), the government collected $590 million in potash royalties, which is $428 million more than it collected in 2006. So, higher prices gave the potash companies an extra $3 billion and the potash owners got one-seventh of it: $428 million.

However you slice it, Saskatchewan could collect substantially more. And lefties like me are not the only people making this point. Murray Mandryk has done so in several columns.

Even the Conference Board made a couple of positive, albeit timid, suggestions to collect more royalty revenue. Jack Mintz, who panned Alberta’s last attempt to raise oil and gas royalties, wrote the following about Saskatchewan’s potash regime: “special treatments enable producers to pay fewer royalties than they would under a better-designed royalty.”

Saskatchewan has ample economic space to increase potash royalties. Since Premier Wall refuses to do so, there is ample political space for the NDP to advocate higher royalties.

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