An op-ed, short for “opposite the editorial page”, is a written prose piece, which expresses the opinion of an author usually not affiliated with the publication’s editorial board.
Directional drilling tools like this mean nearly every well now drilled is a horizontal well. So why does Saskatchewan still have a horizontal well incentive program, if it is the norm and has been for a long time? Photo by Brian Zinchuk
This op-ed was originally published by the Leader-Post and StarPhoenix, and is reproduced with permission of the author.
The recent provincial budget was framed as “protecting Saskatchewan” from “geopolitical turmoil.” In fact, this turmoil has increased the prices of commodities that Saskatchewan sells.
Why does a province so rich in mineral resources keep running deficits? The obvious answer is that Saskatchewan does not collect enough revenue from these minerals that belong to the province.
The budget projected over $10 billion of oil production and $10 billion of potash sales. Uranium and other minerals will put the total over $23 billion. Yet the budget projects only $2.6 billion of nonrenewable resource revenue – little more than 10 per cent of the value extracted from Saskatchewan.
Erin Weir. Photo submitted
Due to the Iran war, both oil sales and oil revenues may well come in above budget. But the province is clearly receiving a much smaller fraction than it should collect.
It’s understandable for the government to offer temporary royalty holidays and tax credits to encourage new developments such as the McIlvenna Bay copper and Thor alumina projects. But Saskatchewan has a bad habit of allowing such incentives to fester for decades into gaping loopholes for mature, profitable industries.
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Saskatchewan’s first horizontal oil well was drilled in 1987. The province provided incentives to promote this new technique, which has been widely adopted. Since 2002, the horizontal incentive has been a 2.5 per cent royalty rate on the first 38,000 barrels. Oil wells also pay a 1.7 per cent resource surcharge on their sales.
At least 95 per cent of the wells drilled each year since 2015 have been horizontal. For the past decade, virtually every oil well in Saskatchewan has paid the province just four cents on the dollar for the first 38,000 barrels extracted.
Recent incentives for multilateral drilling did not replace this old incentive for horizontal drilling. They were simply layered on top, enlarging the drain on provincial revenues even as oil companies reap windfall profits from US$100 prices.
When potash sales and prices were flat in 2003, the province exempted future sales above the 2001-02 average from the profit portion of the potash production tax. Potash prices have tripled since then Production has increased, with 40 per cent now perpetually exempt from profit tax. Without royalty reform, this percentage will only grow as output expands.
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The 2015 provincial budget promised, “a review of the entire potash royalty and taxation regime.” But it never happened.
Given this year’s budget projections for potash sales and prices, the ongoing profit tax exemption’s cost will nearly equal the projected provincial deficit of $819 million.
With royalty holidays and tax writeoffs, BHP will initially pay only a three-per-cent resource surcharge on potash when its Jansen mine opens next year. To the extent this new supply undercuts potash prices for existing mines, it could lower provincial revenues. This prospect should prompt a long overdue review of royalties and taxes.
The budget speech cited Cameco’s new uranium supply agreement with India as providing “more revenue for the province.” But the budget documents project lower uranium revenues than in last year’s budget.
Rising prices have boosted Saskatchewan’s annual uranium sales from under $1 billion for the previous decade to $2.6 billion in 2024 and $3.2 billion in 2025. Yet the provincial government has kept uranium royalties low and projects below $300 million of uranium revenue, not even 10 per cent of sales.
The provincial government appears to be asleep at the switch. For almost 40 years, it has continued costly incentives for horizontal oil drilling even as this technique became the norm. For over 20 years, it has left in place an ever-expanding profit tax holiday as potash prices tripled. It is maintaining rock-bottom uranium royalties as uranium prices have now tripled.
Saskatchewan’s top minerals – oil, potash and uranium – are in demand.
The industries extracting them are well established and hugely profitable. This extraction will leave remediation costs for the province.
It is time to close royalty and tax loopholes to collect a fair provincial return from nonrenewable resources that belong to the people of Saskatchewan.
Erin Weir is a consulting economist and the former NDP Member of Parliament for Regina–Lewvan. This spring, the Johnson Shoyama Graduate School of Public Policy will publish his policy paper, “Saskatchewan Potash at a Crossroads.”
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