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By owning a large stake in the business, Norway has more control over safety and the bottom line. Fourth in a series.
Instead of charging royalties as Canadian provinces do, Norway makes its money by taxing profits of both foreign and Norwegian owned oil companies. Image by April Alayon.
Alberta's atrocious record of pipeline leaks a strong warning to British Columbia.
The facts, now out, are detailed here. The moral reckoning has yet to begin.
Oil corporations downplay risk, then duck responsibility. Maybe this catastrophe will finally sink in.
Find more energy reporting on The Tyee.
The University of Stavanger boasts something that is absent from most other college campuses: a 30-story oil rig. Of course no one is expecting to find oil in the barren granite under the cafeteria. It was a gift from Shell Oil in 1985 and has been used for the last 28 years to train Norwegian petroleum engineers.
So why would an oil company do such a thing? The same reason that a teenager would bring a bouquet of flowers for his prom date's protective mother -- to buy some goodwill.
The so-called Goodwill Agreements in the 1980s required that foreign oil companies transfer proprietary knowledge to Norwegians and fund training facilities like the simulation drill rig on the Stavanger campus. In return they received not oil concessions or money, but "goodwill" from the Norwegian government.
Far from fleeing Norway after the country's hard bargaining in the 1970s, the oil industry 10 years later was lining up to do business there. Why? Because they knew the Norwegian government had the same motivation that they did: to make money from Norwegian oil.
Instead of charging royalties as Canadian provinces do, Norway makes their money by taxing the profits of both foreign- and Norwegian-owned oil companies. Norway also has an equity stake in about 30 per cent of Norwegian oil production through their state-owned oil companies like Statoil providing another significant source of revenue and control.
Oversight, transparency drilled in
Ottawa and the provinces have virtually no ownership share of our oil production. Canada is the only country besides the U.S. of the world's top 10 oil producers without a state-owned petroleum company.
While oil profits in Norway are taxed at close to 80 per cent, legitimate business expenses are also tax deductible at a similar rate. Through this lens, the oil rig on the Stavanger campus was mostly paid for by the Norwegian taxpayer. Likewise, exploration and development costs are largely written off with an important caveat: all deductions are carefully scrutinized by Norwegian authorities who have a high degree of technical knowledge.
Experts employed by the Norwegian Petroleum Directorate (NPD) review almost every exploration and production decision made by foreign and domestic oil companies. They do this not merely as a regulator, but as a full business partner.
This public oversight extends into even private technical meetings between foreign oil companies. If Shell and ConocoPhillips were planning how to develop a jointly held Norwegian oil lease, representatives of the NPD would be allowed by law to be in the room.
So committed is Norway to transparency that they also require that expensive and typically secret drilling and seismic data collected by private companies to be made public after a certain number of years. This ensures that Norwegian or foreign companies looking for new deposits have access to all existing information, even if they didn't pay for it.
'Radical' safety protocols
The end goal of these policies is to closely align the interests of Norwegians and oil companies as much as possible. Put another way, Norway wants companies to make large profits from their oil because the Norwegian taxpayer will make four times as much.
Likewise, both companies and the government want to avoid needless exploration and production expenses since they cost shareholders, and Norwegians, since they are tax-deductible.
Oil companies are expected to justify their technical and budget proposals to experts employed by the NPD, whose role is not so much as a regulator but a senior business partner. There is a strong incentive to maintain good relations with Norwegian regulators since this will affect future access to promising oil concessions.
And while it can be a challenge for the NPD to attract top technical talent when private industry offers significantly higher wages, Norwegian public servants seem to relish the satisfaction of working on behalf of their own country. The two senior engineers I met with in Stavanger seemed happily employed and well paid by the NPD for more than 50 years between them.
Monument to a partnership: Training oil rig at International Research Institute, Stavanger, Norway.
This collaborative model is also seen in the unique system of safety pioneered in Norway. Rather than itemizing and enforcing rules, Norwegian regulators work together with industry and unionized workers in a "tripartite" system where all players have a responsibility to improve safety practices.
In contrast to the top-down management style seen elsewhere in the oil industry, safety delegates elected by unionized workers are empowered to shut down any practice that they deem to be dangerous. While this model was deemed "radical" by American oil companies when they arrived in Norway, it was non-negotiable and has since resulted in a superb safety record.
Once a year representatives from regulators, companies and workers come together to share ideas on improving safety practices. I crashed this annual meeting when in Stavanger and noticed a surprising lack of animosity that often defines North American labour relations. As a casual observer it seemed impossible to guess the affiliation of participants based on where they were sitting in the room or how they behaved to each other.
This unique Norwegian approach might well have prevented the Deepwater Horizon accident in 2010 where 11 workers lost their lives and almost five million barrels of oil spewed in the Gulf of Mexico.
Assessments done on the disaster showed that senior rig managers were preoccupied giving a safety tour to four visiting VIPs during a critical drill test just prior to the blowout. Numerous red flags were seen in the control room before the explosion and the VIPs were themselves drilling experts, but whatever safety protocols were in place failed completely. On a Norwegian rig, workers would be expected to halt the cascading catastrophe even if their bosses were absent.
Canada's spotty record
Here in Canada, our record of safety and oversight is far from perfect. The Enbridge pipeline rupture in Kalamazoo Michigan was effectively ignored for 17 hours in the Edmonton control room. U.S. regulators compared the company's bumbling non-response to the "Keystone Cops."
A recent study itemized 1,647 pipeline failures in Alberta between 2006 and 2010. Last year saw the largest spill in 35 years when 28,000 barrels poured from a ruptured pipeline near Little Buffalo. The provincial Environment Minister dismissed public criticism, stating "sure there are incidents from time to time, but I would put our record up against any other."
Canada's record on revenue oversight is similarly spotty. The Alberta government has steadfastly refused to raise petroleum royalties in spite of several independent calls to do so. Former premier Ralph Klein famously said he didn't give a "tinker's damn" about such expert recommendations or whether Alberta was getting its fair share of oil revenues.
An Auditor General report from 2007 found that Alberta was failing to collect about $1 billion in royalties annually that were owed to the provincial taxpayer.
Rather than aligning interests, our system of resource management seems to create conflicting motivations for Canadian regulators. Governments are often highly dependent on short-term revenues from provincial resource sales, forcing ministry staff into the undignified role of industry cheerleader even when the facts point elsewhere.
Norway instead acts as a senior business partner. And if you are going to do business there, you better make sure you bring flowers, or an oil rig.
Next Wednesday: How Norway's approach to managing oil wealth put it $1.2 trillion ahead of Canada. (Find the whole series so far here. ) ![[Tyee]](http://thetyee.cachefly.net/ui/img/ico_fishie.png){kind=small}
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Fiat lux
43 weeks ago
Expecting "wealth creating"
Expecting "wealth creating" businesses to pay taxes is not "business friendly" at all and what they need is a good Conservative government to teach them the lesson on how to run a country.
By the way, how many homeless people are there and how many are lining up at the foodbanks in Norway, every day ?
Their leftwing politicians should note that here in Canada we now only have about a million in foodbank lines, because our governments are real "conservatives" who are "business friendly" and are welcoming "wealth creating foreign investment", which brings us "free trade", "jobs, jobs, jobs" and "prosperity" .
Ed Deak.
rangerkim
43 weeks ago
excellent article
... as is normally the case with this site.
and Ed, do you notice that lately these 'temporary' food bank services are also going broke and running out of food?
I have some experience of the Alberta regulatory business. This article points out the very stark differences in operations and mind-set. Aside from the very obvious observation that the Norwegian petro regulators are just way smarter than those in Alberta (not the smartest, mind you, not rocket scientist smarter, just way smarter. In other words, Alberta regulators are stupid, ignorant and cowardly) in Alberta it's the gov't that tries (and fails) to curry goodwill with the petrocorps.
Alberta allows resource corps (including petrocorps) to keep all its operating data secret forever. Even road construction plans are corporate secrets; so much for access plans. Even road use agreements between corps are a secret, so much for limited cumulative development. Even, if you can believe this, the provincial timber inventory (admittedly small potatoes compared to big oil, but nonetheless a "public" resource) is a proprietary asset of the timber company and the Crown (a term not recognised in Alberta, they call it 'the gumint') can only review these data under authority of a legal non-disclosure agreement. Therefore the AAC for the timbercorp is what the timbercorp says it is.
Non-negotiable union authority! ... absolute heresy in Alberta, completely unthinkable! Obviously not so unthinkable by the petrocorps because many of those operating (successfully) in Norway are operating in Alberta. But completely off the radar of the Alberta gov't, again too stupid to read a calandar and too cowardly to change their ways.
cyberclark
43 weeks ago
Alberta's problems -only a change in Government can fix it!
Auditor Fred Dunn pointed out to the public and the Alberta Government they were only collecting 16% at that time; far away from their stated 19%. Hence the billions left behind.
The Conservatives went into a Hate Fred Dunn program and cut the Auditor Generals Budget!
http://albertathedetails.blogspot.com/2012/02/alberta-royalty-explained.html
If Alberta continues with this Government they will loose 46 billion dollars by 2020! I am asking Conservatives if this is what they signed up for. (enough money to fund several mars rover programs)
http://albertathedetails.blogspot.com/2012/07/the-politics-and-finance-of-alberta-and.html
and
http://albertathedetails.blogspot.com/2012/08/alberta-putting-aside-fear-what-do-we.html
I am all for fighting every pipeline;every mode of oil transport until we get a different Government installed!
Fiat lux
43 weeks ago
Ramger.... The sooner those
Ramger.... The sooner those foodbanks run out of food the better, because it may wake people up to force governments to work for the interests of people and not only for a 1% criminal sector.
I don't want to see any violence, but there must be a revolution of minds to force people in power to accept the responsibilites they're elected for or go to hell.
Even if they hide behind fancy names, imaginary monetary figures and ideologies to cover their criminal actions.
Ed Deak.
Hakuin
43 weeks ago
what happens to an Alberta politician
who bucks Big Oil?
Tankenka
43 weeks ago
I like the juxtaposition with
I like the juxtaposition with Norway, because they seem to be doing things well with their oil industry.
However, it doesn't translate smoothly.
Norway is a very homogenous country with a population of only 5 million. Quick, simple research shows, to the best of my understanding, that county governments don't have any pull in the matter, so essentially the federal government has no opposition to how it handles oil.
Here, we have 32 or so million, with provinces that have conflicting jurisdiction with the feds, and a variety of interest groups, most notably, and rightly, First Nations. The Canadian situation at its root is far, far more complex than Norway.
That said, I am pleased that people are looking at better models, and hopefully Norway, or any other country's superior methods which CAN be translated to the Canadian oil climate will be. Especially the cooperative safety model described in this article.
This commend should NOT be taken as my advocacy for more pipelines, if done right. I am against them completely. I just acknowledge that there is an oil industry, and will continue to be for some time, and that it can and must be greatly improved.
Finally, can someone clearly explain how oil royalties work? Cheers.
dorothy
43 weeks ago
excuses?
So, if I understand the article right, this list of reasons why we can't just do as the Norwegians is not to be taken as excuses, but rather inspiration to what we could change. I am from a Scandinavian country myself, and seeing that Canada is not that different population-wise, it is making me goggle-eyed to see the cumbersome apparatus of regional powers in action. Let us get rid of sopme of our 'orders of government, so that we can see things happen and get a more direct bigger picture. As far as the FNP, I believe they should have a right to veto any 'progress' that we would effect over their heads, when in fact they are the only ones here who can't 'go home if they don't like it'.
Hakuin
43 weeks ago
posting
glitch?
rangerkim
43 weeks ago
Royalties
Tankenka, the subject of royalties is not a simple matter and does not lend itself to a clear explanantion. That said ...
Royalties are a share of profits (usually) paid to the state (or Crown in Canada, hence the royal moniker) from the use or manufacture of state owned or public resource. Some economists call royalties a form of rent, for the use of state-owned or public resources. In BC the royalty on timber resources is called stumpage.
How the actual cash value of the royalty is derived is where things get confusing. Often the state will charge a very low rate or allow development costs to be offset to encourage development of an unused or uneconomic resource. For instance the tarsands royalties were or are (no one really knows in Alberta what any particular rate is) 1% to encourage development of this unknown (at one time) resource compared to the suppossed 25% royalty on conventional oil resources. In BC the royalty or stumpage on timber varies with the market price of lumber and can be as high as $50-60 or as low as $0.25 for the salvage of the uneconomic beetle-killed Pine timber. Historically, royalties were that amount that was left over after legitimate costs and a profit ratio were taken out. Some states (Norway, but not Alberta) also increase the royalty rate to capture windfall profits.
You can appreciate that there is always tension between the state and the corp, except in bananna republics like Alberta where the state is a paid servant of the corp. Business always prefers a known and stable rate for it's costs; business can then work to reduce costs and increase sales or prices and hence increase profits. As Norway demonstrates the state desires to maintain the power and control over its reources as long as possible, except of course, in places like Alberta. In Norways case the state prefers to consider the corp as a type of contractor who performs a service for the state more cheaply and efficiently than the state could.
There are 2 main systems, 1. concessionary and 2. contractual. The difference is mainly when transfer of ownership occurs, but there is virtually no financial difference between systems. In the modern world competition and risk is recognised and royalties are often calculated as a return on investment by the state for services they provide the corporate sector.
Royalty rates for petroleum run from the high 80% in some African states to the 1% or less in the Alberta tarsands.
Hope this very brief post helps
Jeffrey J.
43 weeks ago
Democratic Socialsim
Democratic socialism has always been the best economic system for the 99%. When it is allowed to happen. Northern Europe has been the best example in all of history. Which is why North American elites and media have spent SO much time pretending it doesn't exist.
High wages, long vacations, free education, top notch medical care. All things to make a greedy industrialist shudder. Talk about too much democracy! It's outrageous.
Sadly, even progressive democratic socialism hasn't been able to grapple (yet) with environmental destruction, peak oil and global warming. Its forte was to share the wealth of society with the 99%.
Now, even that noble goal, still totally unattainable in the US (and more and more, Canada), will pale with the monster we have unleashed by burning the planet's oil and gas reserves.
Life was very complicated before. Not it is worse.
Such is our fate.
Great article as always.
Hakuin
43 weeks ago
Insights into Norwegian national character
http://satwcomic.com/the-world/norway
OwlRol
43 weeks ago
We had our chance
Seems to me that PM Trudeau's, National Energy Policy (NEP, not NES, and so hated by Alberta and big oil) would have taken us down a similar path as Norway, notably with the state oil, Petro Canada organization.
Might have worked if FTA promoter, PM Mulroney, in cahoots with "smiling Irish eyes", US Pres. Rayguns and Star Wars enthusiast, hadn't canned it and made sure it couldn't rise back up like an endangered phoenix. No senior Canadian politician would touch it after that.
Too close to the US, a fact that Norway never had to deal with in their smart oil and gas developments, as well as so many other social benefits.
Still hearing today the small government, deregulation, anti-union Harper feds, repeated ad nauseum by our MSM and poorly labelled, right wing "think tanks".
This all seems to resonate with that past "harmonization" and SPP agenda, pushed since Mulroney, regardless of senior political stripe.
Just another, lesser version of the Koch brothers, Tea Party political manipulations south of the line.
Seems Canadian "consumers" are not so different from their American couterparts. Don't think most Norwegian "citizens" would ever want to follow the North American, blind/"invisible, hand of the market" lead.
Recent Mitt Romney rhetoric clearly states that Obama is following European socialism and that the US shouldn't go there. Meanwhile, the Harperites are carefully pushing the same, harmonized policies, regardless of the Keystone XL dispute or trade agreements with the EU.
OwlRol
43 weeks ago
Evidence?
Forgot, the "evidence" shows a considerable benefit for Norwegians, far beyond that to average Canadians, despite much greater and varied resources here than there. But with the Harper government, ideology and rhetoric supercede evidence. Canadian citizens, you are surely being suckered.
So where is the Canadian version of Norway's less resource rich neighbour, Sweden's Ikea? As if we didn't have the capacity.
Vox.Pop
43 weeks ago
salary penalties
Instead of self-awarded bonuses, politicians must be penalized for their incompetence. They keep telling us that they have to pay 'top-dollar' to get the best; well, we've been paying top-dollar & look at the disappointing results. It's this high income that attracts these misfits. Time to only attract those whose want to help the public.
So, let's set the top rate for all BC politicians at $75K per year plus fully audited expenses, published on a government website within 30 days of being paid. If these clowns don't like it then resign.
bhglennie
43 weeks ago
Third World $billions
Countries of Latin America, Africa and the Middle East get $Billions in royalties for their oil. Canada subsidizes the Natural gas for tar sands production to make it 'Profitable'. And get ? for royalties?
Time to hire a Saudi prince to negotiate for us to get royalties!