Brian Zinchuk is editor and owner of Pipeline Online
In late March, 2024, Eric Cline released his book Squandered: Canada’s Potash Legacy. Part 2 spoke about a royalty review that never happened, one merger that didn’t and another that did. Squandered is published by University of Regina Press. It is available on Amazon.ca here.
Here’s Part 3:
Windfall profits
The last two decades have seen potash prices and demand grow, with occasional windfall profits that were unforeseen, according to Cline. “Where profit is made not as a result of risk, investment or innovation but simply from higher market price, such profits should belong to the owner of the resource and not simply be kept by the mining industry,” he writes.
Though a series of charts extracting gross potash profits for the various potash companies, using publicly available data, Cline writes, “This table accurately presents two sets of figures for illustrative purposes: gross profits exclusive of basic Crown royalty and taxes paid includes of basic Crown royalty. Notwithstanding that overlap, it validly portrays a pattern over periods of time, one of escalating gross profits with no exponential rise in payments to the public treasury.”
Essentially, the provincial treasury does not capture windfall profits.
“These tables illustrate that as gross profit has increased to very high levels, the percentage collected by the Saskatchewan Treasury Board did not change appreciably or according to any coherent pattern.”
“…taking into account increased production to 2022, it seems clear there is a gigantic windfall profit involved in the business of potash mining in Saskatchewan.”
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Economic rent
He continues, “The theory of economic rent is that the mining company should receive an adequate return on investment, and I doubt that anyone would be too upset if it was even a bit more than an adequate return. The rest should go to the owners of the resources. Revenue from increased price is a windfall to the industry. If not captured by government, (which it hasn’t been), the industry has a windfall, and the people of the province are short-changed.
“The reverse is also true: If there is a severe downturn and less money is made by the companies, then the public gets less in that instance. The point is that payments to both the industry and the public are tied to profit levels.”
He said the Saskatchewan government celebrated it had more resource revenue in 2023, but noted, “However, it should have been a lot higher. New revenue to the companies of close to $10 billion resulted in an increased revenue to the public treasury of $1.6 billion, while the balance (84 per cent) went to the potash companies.
“It is surprising that no one in government seemed to take notice of record profits as a reason to take steps to increase the benefit to the Saskatchewan treasury, notwithstanding a government press release in March 2022, referring to decade-high price levels, strong market conditions, and an all-time high level of production.”
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Wars and windfalls
Cline makes minimal reference to the fact prices were so high as the war in Ukraine disrupted potash sales from Russia and Belarus, Saskatchewan’s two principle competitors.
In an email to Pipeline Online, he offers context, explaining, “I think it’s convenient for some people to say that everything happening with profits from potash is a temporary thing brought by that invasion and war. In my opinion, the numbers speak for themselves and clearly show that windfall profits began in 2008 and occurred in many of the years between then and now. I think that’s an important point because if it truly had begun with the invasion of Ukraine, one could understand that we had to wait and see whether it continued for any length of time. The war in Ukraine certainly exacerbated the problem, but it was in no way the Genesis for the problem. I think it would be more accurate to describe it as a situation where untaxed windfall profits began in 2008 and that the invasion probably caused the discrepancies to be even higher for a period.”
The Yom Kippur war had a similar impact on oil in the 1970s, and in the next paragraph Cline speaks of that. “When similar situation occurred into the early 1970s with very steep increases to oil prices and profits not due to any decisions, investments, or risk-taking by the oil companies, both the Progressive Conservative premier of Alberta, Peter Lougheed, and the NDP premier of Saskatchewan, Allan Blakeney, took the position the government should take the windfall profits for the public to receive payment commensurate with the value of the resources. The oil companies had drilled wells and made investments based on oil and gas leases that entitled them to pay royalties at a certain rate. The governments of Alberta and Saskatchewan confiscated those legal rights of the oil companies because dramatically changed circumstances dictated it was in the public interest that the wealth from public non-renewable resources should benefit the public first and foremost. Both premiers made changes to oil companies’ rights to achieve that purpose – they did not hesitate. They did not worry whether they would be viewed favourably by oil companies and wealthy shareholders. They were more concerned about the public interest.”
He continued, “In the early 1970s, ‘Alberta was also moving (along with Saskatchewan) to recover a larger share of the returns generated from oil production. Standard Crown leases in Alberta allowed the province to take a variable royalty rate up to a ceiling of 16.6 per cent of production.’ However, faced with oil prices rapidly rising after the ‘energy crisis,’ the Alberta government ‘enacted section 142.1 of the Mines and Minerals Act declaring all maximum royalty provisions to be void. It then implemented the new royalty scheme which boosted royalties substantially higher than 16.6 per cent.’ Saskatchewan took similar action.”
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Bill 42
It is here that Cline soft-pedals the NDP’s action during the time, not providing detail of that “similar action,” but rather returning to the potash argument. What did happen is the Saskatchewan NDP government created SaskOil, a Crown corporation oil company mentioned earlier in this series. It also enacted Bill 42, legislation much-reviled within the Saskatchewan oilpatch. Its enactment led to an almost total stop of oil and gas activity in the province, devastating the industry.
In 1977, the Supreme Court of Canada overturned Bill 42.
University of Regina geography professor Dr. Emily Eaton, one of Saskatchewan’s harshest critics of oil and gas, wrote about it in the Briarpatch, published April 30, 2018. She wrote, “By the end of 1973, the NDP government passed Bill 42, which allowed for a 100 per cent tax on the windfall profits of oil companies operating in the province. The bill also granted the province power to expropriate private mineral rights by buying out private oil holdings and transferring them to public hands. The lone Waffle representative in the Saskatchewan legislature, Richards, who by this time had left the NDP to sit as an independent socialist, voted against Bill 42, arguing that it accommodated capitalists and oil companies’ interests because it did not fully nationalize the industry as a whole, and it compensated capitalists for their lost mineral rights.”
She added, “The government expropriation of the mineral rights of 24 companies, using Bill 42, provided SaskOil with the assets for a modest oil exploration program.”
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Back to potash
When it comes to windfall profits, Cline doesn’t suggest the 100 per cent hit that Bill 42 enacted. Indeed, he provides no number, but rather says, “It is clear from readily available figures that profits exceed what is reasonable. Examination of financing and other costs that could be used to calculate a reasonable return on investment is required. The issue is sufficiently important that financial experts and government officials with access to all the information needed for a full analysis should be engaged to conduct a transparent and objective review in a manner seen to promote the public interest.”
He also says it’s clear potash profits “have risen dramatically in this century with no corresponding increase in the proportionate size of the public share, at a time when a large increase would be warranted.”
Cline says the people of Saskatchewan are being shortchanged hundreds of millions to billions of dollars each year as a result.
In 2022, he says the windfall came in at US$5.39 billion, the equivalent of CDN$7 billion. “Needless to say, $7 billion is a staggering amount of money. It should be mind-boggling to anyone how this could escape notice. This latest windfall is on top of the excess profits that already existed. Arguably, this entire increase should be going to the owners of the resources, on top of additional amounts from the profit levels through 2021.”
He argues that the province should have “taken $7 billion, or $5.4 billion more than it did.”
It could have been a “game-changer,” he says.
Legacy fund
“The rulers of Saudi Arabia would capture that kind of largess for themselves. The people of Norway, through their government, would capture it for Norway. Leaving that amount of money, or even half of it, on the table, is depriving the Saskatchewan people of the quality of life and level of revenue they should have. It represents a failure to prepare the province and its people for the best future possibly by creating a legacy fund,” Cline says. “These numbers are hard to fathom as why Saskatchewan is failing to obtain maximum benefit from potash. They are astonishing.”
He argues tens of billions of dollars could be going into a legacy fund.
“You don’t see potash companies entering into supply agreements that guarantee a low price for potash for decades at a time. So why would a province do so in the case of its most valuable resource?”
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Left and right
He notes that both Erin Weir, on the left, and Jack Mintz, on the right, have identified issues with the potash royalty structure.
As noted above, a potash royalty review was mentioned by the Saskatchewan Party government in its 2015 budget, but nothing came of it. Cline notes contentment from both the government and the potash companies from that time onward, but contends that shouldn’t be the case. If businesses are happy with how government is treating them, the government essentially isn’t pushing hard enough in the public interest, he asserts.
Potash companies are known to spend millions of dollars on “community investment,” from naming rights of the Riders’ stadium to smaller affairs. Cline writes, “If community investment at close to one per cent of profit creates enough goodwill that Saskatchewan continues to allow the potash companies to take billions of dollars, which should belong to the people of the province, then it surely must be the best investment potash producers ever made.”
For his solution, Cline cites Jack Mintz, saying, “He has repeatedly pointed out what is needed: a system that charges royalties and taxes based on profit and ensure the lion’s share of profits over and above a reasonable return on investment goes to the resource owner. It is difficult to imagine. anything simpler and more reasonable than that.”
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A different place
Cline notes that although the province has had strong economic growth for most of the previous 15 years, the provincial government still ran deficits most of those years. And if it hadn’t left so much on the table with respect to potash, “it would be a much different place.”
It might not have needed to expand the PST as it has, or cut services, for instance.
In the second-last chapter, Cline spells out many social issues, from homelessness to cutting STC and school supplies benefits. He speaks of the impact of many forms of poverty. He expresses all of which would likely be much less of an issue if the province had more money from its potash. “… there is no reason for poverty to exist in Saskatchewan. It can actually be eradicated, given the natural resource wealth the province has. What it takes is the political will to do so.”
He adds, “So that there is no misunderstanding, as people I have worked with know, I am not a bleeding-heart liberal. I believe people need to work hard to take advantage of the opportunities before them. For people to succeed, however, we need to recognised we don’t all come out of the same starting gate. We need to take steps to give all people the tools required to succeed, to enable them to put in the work they need to do to make it on their way. It isn’t easy, and it takes time. That’s no reason not to start. It’s a reason to get going.”
Conclusion
“Saskatchewan has enough potash reserves to supply the world for a thousand years. It is not going to run out of it anytime soon, and it should have a strong industry bringing jobs, economic spinoffs, and public benefit through contributions to the public treasury.
“It is abundantly clear that the division of profits from potash is grossly unbalanced. The province is shortchanging its own treasury and people. A significant change is urgently needed and long overdue,” he concludes.
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https://pipelineonline.ca/eric-clines-squandered-canadas-potash-legacy-about-that-royalty-review-part-2/