The federal government's move last week to limit state ownership of Canadian oil sands developers won't be the last challenge to domestic natural resources policy. Natural gas could be next, but a bigger issue will be the inevitable showdown over Saskatchewan potash.
If you thought the debate was settled when Ottawa nixed BHP Billiton PLC's bid for Potash Corp. of Saskatchewan two years ago, think again. BHP, the world's largest mining company, is still very much on the scene, and will influence government industrial policy decisions over the coming decade.
Saskatchewan's massive deposits of the fertilizer are now mined by Potash, Agrium Inc. and U.S.-based Mosaic Co. They sell the product overseas through a joint marketing organization called Canpotex, which, along with Belarus Potash, a similar organization representing Russian and Belarussian miners, control 70 per cent of the world's supply. The two keep prices high by controlling output and holding the line on prices, particularly with Chinese and Indian buyers. They don't like being called "cartels," but act much like them.
BHP doesn't operate that way, and threw a Molotov cocktail into Saskatchewan two years ago when it launched a hostile bid for Potash, saying it would pull the firm out of Canpotex. That earned a fierce rebuke from Saskatchewan premier Brad Wall over the fear that potash royalties – which account for 8 per cent of provincial revenues in a good year – would collapse with the arrival of a so-called undisciplined market player. Ottawa agreed that a takeover would contravene the country's interests.
IF BHP can't buy, it will build. It's in the early stages of investing a staggering $14-billion to develop the world's largest potash mine in Saskatchewan. Final approval from its board isn't expected before 2014, but if the mine proceeds, it will greatly increase the available supply in an industry whose established players are already expanding capacity by an average of 4 per cent per year through 2020 – faster than demand is predicted to rise. That follows eight years of flat demand, since producers started jacking up prices. Add in a big upstart uninterested in playing the cartel game, and the result is likely to be falling prices and collapsing revenues for Saskatchewan under its existing potash royalty scheme.
Governments understandably want to maximize returns from the exploitation of their natural resources. Protecting an uncompetitive regime that keeps prices high is one option, but only so long as the conditions of the grand bargain remain. That means Canpotex's days as a dominant force are numbered, unless Ottawa and Saskatchewan throw an exceptional ring-fence around the industry and protect the three existing players at the expense of all others who won't join.
That isn't likely, so Saskatchewan will likely have to overhaul its complicated royalty regime to be based more on volumes than prices (as it is now). That's a change Mr. Wall described as "crazy" and a "job killer" nearly two years ago; more recently, however, he's been open to the idea, if taxpayers are kept whole.
That would be no small shift. Moving to a volume-based system would gradually remove any reasons to protect the potash patch from market forces, including takeovers. As long as the suitors aren't state-owned enterprises, Ottawa will be hard-pressed to say no again; after all, Prime Minister Stephen Harper last week promised to "maintain an open, market-based approach to foreign investment in Canada."