Dear Ed,
We have a small oilfield rental business in Grande Prairie; we've been in business for 5 years. We have 3 children and are very concerned with your recent decision on raising the royalties. We lived through the national energy program nightmare in the early 80's and witnessed many devastating consequences to the federal decision and feel that you have done exactly the wrong thing at the wrong time. Allow me to explain my side of the story.
The dollar is too high to attract US investment; the commodity price is too low and unstable as natural gas is all over the map. The storage reserves are too high to stimulate new gas drilling along the foothills. The price of labor and services is through the roof as the last seven year flurry of activity has driven costs up dramatically. The US lumber exports are dropping and will continue to stay down as the "Baby Boomers" retire and sell out/downsize their living accommodations.
Weyerhaeuser is shutting down the OSB side and will lay off 130 employees. Ainsworth in GP is also shutting down for a period. Calf prices are in the toilet over the US dollar and feed prices are rising, thus we can kiss the Ag industry goodbye for a while longer. In summation, our diverse and boisterous economy is losing ground in the Ag, Forestry, and now the oil & gas exploration/production industry due to your recent push for "Alberta’s Future".
The opportunity to ask the oil & gas sector for a raise is not when they are handing you your lay off notice, the time was 2 years ago when natural gas was $14, oil was $60 and the dollar was $.80. My point is, when the farmer was being beaten down, at least he could get a job working a rig, pipelining, driving cement truck to rigs, seismic work, service rigs, endless service companies, maintenance, lease construction, hotshot driver, mechanic, Kal Tire… hopefully your getting this. When the log truck driver needed a job due to soft wood lumber disputes with the US, he too could find employment in any number of the aforementioned fields. The reason I know this is not from a book or study or any review panel, but from personal experience as a farmer /rancher, class 1 driver, derrick man of 11 years (that’s on a drilling rig in case you don't know), environmental consultant, production tester, small business owner that used to employ 4 people. I know this as I've laid off the guys that did work here before you were so bold as to take on the big bad oil companies.
Your timing could not have been worse, the mishandling of the decision making process was unbelievable, why were the decisions not made behind closed doors before getting the entire industry ready to bolt out of the province, did I mention that CNRL shut down 10 rigs in GP in a single phone call, or the 7 in one day in Edson. I understand that Ralphy gave too much for too long and that sucked for all of us, but now wait... we are debt free, lots of money in the account, jobs galore (3% Unemployment) Canada's golden goose that gives lots in transfer payments to other provinces because we seem to have an excess of cash, some of the largest and newest finds in the oil sector throughout the world, let alone what could have happened in Peace River if you would have stayed the course, or did I mention the activity that was planned for Grande Cache south to Rocky Mtn House....not so much now.
In second summation, you say Alberta's future is your priority; my future consists of the 3 kids I have to take care of. The bank will let me miss 3 payments, Daimler Chrysler has a thing about there money as well and there's $3000/mth that they want consistently. After that short future, I'm pretty much done as are the rest of the service companies, car dealerships, drilling contractors...etc, all in the name of Alberta = having more money 3, 4, 5 years from now, or maybe not even then.
By the way, what is the plan with this windfall you were hoping to get from royalties? Should we use it to bail out the farmer/rancher going down or the lumber industry, certainly it won't go to the oil & gas worker or maybe it will be in the form of a UI cheque. No that’s the Fed's problem. Maybe we can build an 80 million dollar aquatics center in GP that mayor wanted so bad, and we can all go for a swim at $15 admission per adult $12/ teen and $10/youth.
I hope through my snide comments that you, your staff, your buddies (advisors), review committee members, professors of economics and party members, etc will realize you've made a grave error in how you went about handling the affairs of the public which you represent. That’s right, did you forget, you work for me as a public official not the other way around! We now are looking at refinancing everything and moving to Colorado or Wyoming for work now as GP is going down. Please advise me on this issue of where the future money is going, and if you say it's for the teachers union, bleeding heart lobbyists, cabinet member raises, campaign expenses, or anything of that nature, you should probably watch your "political back".
Where the hell is Ralph anyway?
Wednesday, October 31, 2007
Marshall Abbot, CEO of Sabretooth's Letter
As a born and bred Albertan, I am embarrassed by the royalty review panel's recommendation to change existing agreements. I have been raised in this business and instilled in me over 25 years has been the credo that a "deal is a deal". Having spent $14 million at Alberta Crown land sales in the last two years, do I get to apply to the Crown for refunds? The economics we ran to justify our bid levels will be changed drastically. Three-quarters of our recently bought acreage is now uneconomical and will not be drilled.
Over 25 years, I have endured the NEP, $10 oil, $1 gas, 100-per-cent increases in service costs year to year and broken federal promises on the taxtation of income trusts. Our a small company is overwhelmed by challenges from mother nature, both above ground and below. Pools are smaller, costs are higher and access to capital has dried up in the past year since the income-trust ruling. Penalizing high volume gas wells removes incentive to pursue prospects of value in Alberta.
British Columbia, here we come. A record land sale in Saskatchewan earlier this month is a sign of capital redistribution that is occurrin now as company budgets are designed for 2008.
I was marketing my company in Eastern Canada and the Northeastern U.S. when the panel's report was made public. I had meetings cancelled with four well-heeled institutions in the U.S. who have been shareholders for upwards of 15 years. Capital flight occurred before my eyes and will not return anytime soon.
The panel's report was flawed and full of erroneous assumptions as pointed out by numerous institutions and even admitted to by one of the panel's members. It is quite apparent that none of the panel members has ever had to make a capital investment decision in the oil and gas business. Brandishing PhD's of panel members as any kind of justification for a flawed analysis is insulting. I do not know of many PhD's who have been successful in the business that is the main economic engine of the province. (Jim Buckee of Talisman is an exception, and his view of the report is well known.) They are fine teachers and should stick to what they are good at and what they are trained for.
I have operated in foreign jurisdictions (Indonesia, Trinidad and Australia) during my career. Fiscal regime contracts in these jurisdictions are treated as unbreakable. During an intense round of negotiations with the Indonesian National Oil Company (Pertamina) in 1997 it was emphasized to me that once a contract is signed, the rules will not change. They pointed out our ill-conceived national energy program as an example of how flawed our contracts were. I defended Alberta's regime at the time because it was competitive, incentive-based and stimulated entrepreneurship. Sadly, that will no longer be the case and, unfortunately, they were right.
Hopefully, in two years Albertans will understand why we have returned to deficit budgets, why home values have dropped materially, why bankrupted junior oil and gas companies are dominating the headlines, why land sale revenues are a fraction of what they were, why service company unemployment is at an all time high, why charitable groups are drastically underfunded. Hopefully, in two years, the panel members will have the fortitude to finally admit that perhaps they were off the mark and in over their head, as it were.
Marshall Abbott, CEO, Sabretooth Energy Ltd
Over 25 years, I have endured the NEP, $10 oil, $1 gas, 100-per-cent increases in service costs year to year and broken federal promises on the taxtation of income trusts. Our a small company is overwhelmed by challenges from mother nature, both above ground and below. Pools are smaller, costs are higher and access to capital has dried up in the past year since the income-trust ruling. Penalizing high volume gas wells removes incentive to pursue prospects of value in Alberta.
British Columbia, here we come. A record land sale in Saskatchewan earlier this month is a sign of capital redistribution that is occurrin now as company budgets are designed for 2008.
I was marketing my company in Eastern Canada and the Northeastern U.S. when the panel's report was made public. I had meetings cancelled with four well-heeled institutions in the U.S. who have been shareholders for upwards of 15 years. Capital flight occurred before my eyes and will not return anytime soon.
The panel's report was flawed and full of erroneous assumptions as pointed out by numerous institutions and even admitted to by one of the panel's members. It is quite apparent that none of the panel members has ever had to make a capital investment decision in the oil and gas business. Brandishing PhD's of panel members as any kind of justification for a flawed analysis is insulting. I do not know of many PhD's who have been successful in the business that is the main economic engine of the province. (Jim Buckee of Talisman is an exception, and his view of the report is well known.) They are fine teachers and should stick to what they are good at and what they are trained for.
I have operated in foreign jurisdictions (Indonesia, Trinidad and Australia) during my career. Fiscal regime contracts in these jurisdictions are treated as unbreakable. During an intense round of negotiations with the Indonesian National Oil Company (Pertamina) in 1997 it was emphasized to me that once a contract is signed, the rules will not change. They pointed out our ill-conceived national energy program as an example of how flawed our contracts were. I defended Alberta's regime at the time because it was competitive, incentive-based and stimulated entrepreneurship. Sadly, that will no longer be the case and, unfortunately, they were right.
Hopefully, in two years Albertans will understand why we have returned to deficit budgets, why home values have dropped materially, why bankrupted junior oil and gas companies are dominating the headlines, why land sale revenues are a fraction of what they were, why service company unemployment is at an all time high, why charitable groups are drastically underfunded. Hopefully, in two years, the panel members will have the fortitude to finally admit that perhaps they were off the mark and in over their head, as it were.
Marshall Abbott, CEO, Sabretooth Energy Ltd
Montana woos disgruntled Alberta oil companies
Last Updated: Tuesday, October 30, 2007 | 1:02 PM MT
CBC News
'Come on to Montana. You'll be welcome.'—Brian Schweitzer, governor of Montana
The governor of Montana is marketing his state as an alternative for energy companies unhappy with the recent royalty increase in bordering Alberta.
"Our tax rate and regulatory environment is better in Montana than Alberta," Gov. Brian Schweitzer told the Calgary Chamber of Commerce Tuesday morning.
"When you drill in Montana, you don't even pay the tax for the first 12, 18 months. We have a tax holiday."
Schweitzer's pitch comes less than a week after the Alberta government announced it plans to charge energy companies $1.4 billion more in royalties for the right to develop the province's oil, gas and oilsands.
"So if some of you considered that with this new additional tax, you may move some of your dollars someplace else, come on to Montana," the governor said. "You'll be welcome."
In his speech, Schweitzer also suggested to the audience of energy executives that new refineries could be built south of the border.
Tuesday, October 30, 2007
US$/C$ exchange rate impacts
US investors have been scoring some big wins with the relative devaluation of their currency.
For example, the one year return of Encana on the NYSE is 40%. One year return of Encana on the TSE is 20%. US investors have done VERY well; Canadian investors OK.
If American investment guru Dennis Gartmann actually did as he said in this newsletter and sold out of Canada after the Hunter report he may have lost out; for example note that ECA is up 10% in the period in US dollar terms.
The runup in the
The runup of the Canadian dollar has been great for Canadians going south, and Canadians who have debt denominated in US. I can't find any figures but believe I've seen the federal government's debt was 50% denominated in US$. If this is true the federal debt has gone down dramatically.
Those are the winners. The benefits are not showing up for consumers and it is placing a lot of strain on all kinds of exporters, especially low margin manufacturers. I feel for them (at least the legal exporters LOL); we've got to get to grips with how to keep our exporters in business or Canada will soon be following the US into a currency abyss relative to other countries in the world.
Open question: where should Canadians be putting their investments now? Leave comments please. I'm wondering if there are other companies listed on the NYSE who have most of their revenue in sectors that will remain insulated by the US$ drop; much as ECA did. Remember, the C$ will at some point start to track the US $; we can only get so high relative to the US $ and our industries will not be able to function.
For example, the one year return of Encana on the NYSE is 40%. One year return of Encana on the TSE is 20%. US investors have done VERY well; Canadian investors OK.
If American investment guru Dennis Gartmann actually did as he said in this newsletter and sold out of Canada after the Hunter report he may have lost out; for example note that ECA is up 10% in the period in US dollar terms.
The runup in the
The runup of the Canadian dollar has been great for Canadians going south, and Canadians who have debt denominated in US. I can't find any figures but believe I've seen the federal government's debt was 50% denominated in US$. If this is true the federal debt has gone down dramatically.
Those are the winners. The benefits are not showing up for consumers and it is placing a lot of strain on all kinds of exporters, especially low margin manufacturers. I feel for them (at least the legal exporters LOL); we've got to get to grips with how to keep our exporters in business or Canada will soon be following the US into a currency abyss relative to other countries in the world.
Open question: where should Canadians be putting their investments now? Leave comments please. I'm wondering if there are other companies listed on the NYSE who have most of their revenue in sectors that will remain insulated by the US$ drop; much as ECA did. Remember, the C$ will at some point start to track the US $; we can only get so high relative to the US $ and our industries will not be able to function.
This was a surprise find; Kenneth J. McKenzie, Hunter Royalty Review panel member, is a fellow of the Fraser Institute.
Looking at his bio for the review panel this fact is not mentioned. Curious. The report the panel produced seems a world away from the philosophies of the Fraser Institute. He was also silent after the report was released; unlike Dwarkin who repudiated the conclusions on natural gas. I wonder if the panel had more dissension within it than became public? There was certainly the possibility for either McKenzin, Dwarkin, or both to have written a dissenting report. Why didn't that happen? And why the is prestigious Senior Fellowship in the Fraser Institute omitted from his Royalty Review Panel biography?
Kenneth J. McKenzie
Ken McKenzie specializes in public finance, in particular tax policy and political economy. He has published widely in these areas, and has won several awards for his research, including the Harry Johnson award for the best article in the Canadian Journal of Economics, the Doug Purvis Prize for research in public policy, and the Faculty of Social Sciences Research Achievement Award at the U of C. He is a fellow of both the Fraser Institute and the C.D. Howe Institute (where he will deliver the 2001 Benefactor's Lecture in November).
Looking at his bio for the review panel this fact is not mentioned. Curious. The report the panel produced seems a world away from the philosophies of the Fraser Institute. He was also silent after the report was released; unlike Dwarkin who repudiated the conclusions on natural gas. I wonder if the panel had more dissension within it than became public? There was certainly the possibility for either McKenzin, Dwarkin, or both to have written a dissenting report. Why didn't that happen? And why the is prestigious Senior Fellowship in the Fraser Institute omitted from his Royalty Review Panel biography?
Kenneth J. McKenzie
Kenneth J. McKenzie is a professor in the Department of Economics, University of Calgary. He received his BComm from the University of Saskatchewan, his MA from the University of Calgary, and his PhD from Queen’s University.
From 1984 to 1986, McKenzie was an economist in the Tax Policy Branch of the federal Department of Finance. His first academic appointment was at the University of Toronto in 1990 and he has been at the University of Calgary since 1992. His principal area of research is public economics, with an emphasis on taxation and political economy. McKenzie is also the EnCana Scholar at the C.D. Howe Institute and has been a visiting fellow at research institutes in both Germany and Australia.
He is on the Panel of Experts for the International Monetary Fund and the World Bank, and has provided analysis and advice on tax policy to several developing countries. At the provincial level, McKenzie sat on the Taxation and Finance Committee of the Alberta Economic Development Authority and was a member of the Alberta Business Tax Review Committee in 2000. He was also an expert advisor to Alberta’s Financial Review Commission in 2002 and involved in the research for the federal government’s Technical Committee on Business Taxation in 1997.
The Feds Get One Right
After so many government fiascos, they get one right. This goes a long way to the making the business environment post "Fair Share" more palatable.
Personally, I'd think it is better for a company to pay higher income taxes than get dinged with higher royalties but what the heck.
I really hope the feds don't do as they did in 1974; where they dropped the deductibility of royalties as a business expense after Lougheed raised royalties. This was the first battle of the Alberta/Ottawa energy wars.
I hope we don't see those again. I have a fear that if the province sees 40% royalty rates on bitumen production they will be looking for their "fair share" too. No doubt and as in the past, the companies will be the ones to suffer in future provincial/federal energy wars should they happen.
On the provincial front; there should also be serious thought to cutting personal and corporate income taxes as well. Personally, I'd sooner have a provincial sales tax and ultra low personal income taxes. That'd be a boost for the whole economy, and those guys driving the Porsches would pay their fair share.
Maybe the lesson of Iceland is being learned?
I thought that with the runup in the Canadian dollar, governments had better be doing something to help out beleaguered businesses, manufacturers in particular. I thought a tax cut would be a great step towards that end and can hardly believe that it has happened.
Doesn't entirely make up for the trust fiasco, but it is some help.
Bloomberg says exactly what I'm thinking:
The federal government is accelerating and deepening its corporate tax cuts, in an attempt to make Canada the most competitive tax regime in the Group of Seven rich countries.
In a surprise move, Finance Minister Jim Flaherty is proposing an immediate reduction of the corporate tax rate, to be followed by further cuts in coming years, to bring the federal corporate tax rate down to 15 per cent by 2012.
The existing rate for 2007 is 22.12 per cent. That will drop to 19.5 per cent in 2008 under the new plan. Mr. Flaherty had originally planned to reduce it more gradually, to 18.5 per cent by 2012.
The cuts amount to $14.3-billion in savings for business over six years.
Personally, I'd think it is better for a company to pay higher income taxes than get dinged with higher royalties but what the heck.
I really hope the feds don't do as they did in 1974; where they dropped the deductibility of royalties as a business expense after Lougheed raised royalties. This was the first battle of the Alberta/Ottawa energy wars.
I hope we don't see those again. I have a fear that if the province sees 40% royalty rates on bitumen production they will be looking for their "fair share" too. No doubt and as in the past, the companies will be the ones to suffer in future provincial/federal energy wars should they happen.
On the provincial front; there should also be serious thought to cutting personal and corporate income taxes as well. Personally, I'd sooner have a provincial sales tax and ultra low personal income taxes. That'd be a boost for the whole economy, and those guys driving the Porsches would pay their fair share.
Maybe the lesson of Iceland is being learned?
I thought that with the runup in the Canadian dollar, governments had better be doing something to help out beleaguered businesses, manufacturers in particular. I thought a tax cut would be a great step towards that end and can hardly believe that it has happened.
Doesn't entirely make up for the trust fiasco, but it is some help.
Bloomberg says exactly what I'm thinking:
Canadian Tax Cuts May Help Shield Economy From U.S. Slump
By Theophilos Argitis and Greg Quinn
Oct. 31 (Bloomberg) -- Canadian Finance Minister Jim Flaherty's C$60 billion ($63 billion) tax-cut package announced yesterday will help protect the world's eighth-largest economy from a U.S. slowdown and a surging currency, economists said.
New threats on the horizon, at least for oilsands producers who may have dodged the royalty bullet (for now):
Of course everyone wants a clean environment; however in the light of the possibility that the planet may be at peak energy production we must also think about where future energy supplies will be coming from.
Canadian oil sands producers should brace for further bad news - this time from south of the border, as the U.S. government moves toward a national climate change policy that could target dirtier fossil fuels such as the oil sands bitumen, a former U.S. energy official said yesterday.
His warning was issued yesterday at a conference on Canada as an energy superpower, and came as a new poll suggests Canadians want to protect the country's natural resources from voracious U.S. demand for energy.
David Pumphrey, a former official in the Department of Energy and now a senior fellow at the Centre for Strategic and International Studies, said that prominent U.S. environmental groups have identified the oil sands as "threat No. 1" in North America's growing battle against greenhouse gas emissions.
Of course everyone wants a clean environment; however in the light of the possibility that the planet may be at peak energy production we must also think about where future energy supplies will be coming from.
Change in Tone
When the "New Royalty Framework" was announced, it sounded pretty clear to me that Suncor and Syncrude would be forced into the new regime despite having seperate, signed contracts. This statement by Mel Knight during his road show to Washington:
I hope small indication is on the mark for what the government is now thinking. The intention of breaking signed contracts was one of the most egregious features of the "New Royalty Framework".
About 49 per cent of Alberta's oil sands production is covered by separate agreements that won't be covered by the new regime.
"We are in very constructive discussions with the people that have the Crown agreements currently," he said. "What we are looking forward to is to bilaterally open the agreements. We are not looking at voiding any agreements the government of Alberta made with any producers."
Without providing specifics, there may be advantages for both the province and the producers to reopen the contracts as they near maturity, he said.
I hope small indication is on the mark for what the government is now thinking. The intention of breaking signed contracts was one of the most egregious features of the "New Royalty Framework".
Saturday, October 27, 2007
New Brunswick Tries To Charm Albertan Oil and Gas Companies From Alberta
New Brunswick is aggressively courting companies to come to their jurisdiction. Note the royalty numbers quoted; considerably lower than the Klein era royalties that turned Alberta into an economic juggernaut.
See short clip on time 0:30 and a longer clip at 4:28 which runs to 7:00
http://www.cbc.ca/video/popup.html?http://www.cbc.ca/ondemand/newsatsix/fredericton.asx
See short clip on time 0:30 and a longer clip at 4:28 which runs to 7:00
http://www.cbc.ca/video/popup.html?http://www.cbc.ca/ondemand/newsatsix/fredericton.asx
The Smoky Pork Development
Now that the government has "fair shared" the oil and gas industry, the intruding problem is what to do with the loot? We've seen in the past ill concieved industrial and financial pork barrel fiascos which cost the taxpayers untold billions; Novatel, Magcan, ALPAC........
What's the new pork barrel projects? Bullet train? Maybe. Suddenly, there is a lot of talk about biofuel. Biofuel and the royalty shakedown seems to be the focus of the department of energy, see bottom. News items from the site. For a province sitting on the largest hydrocarbon deposits on earth the focus on biofuel seems a trite odd. I noted this on another posting.
Biofuel has been synonomous with pork-barrel politics wherever it has been deployed.
So with that in mind, isn't the naming of this plant eerie or what? You just can't make this shit up:
Here's another one, with some details what they are spending the money on. Note, the Government is GIVING THESE GUYS MONEY to build the plants. It says below $239 million has been allocated for such uses. The $1.4 billion shaken out of the oil patch will line a lot of pockets indeed.
Alberta Energy website news - note the alarming under representation of petroleum related news not related to the royalty shakedown.
What's the new pork barrel projects? Bullet train? Maybe. Suddenly, there is a lot of talk about biofuel. Biofuel and the royalty shakedown seems to be the focus of the department of energy, see bottom. News items from the site. For a province sitting on the largest hydrocarbon deposits on earth the focus on biofuel seems a trite odd. I noted this on another posting.
Biofuel has been synonomous with pork-barrel politics wherever it has been deployed.
So with that in mind, isn't the naming of this plant eerie or what? You just can't make this shit up:
Provincial bio-energy grant spurs growth near Falher
October 19, 2007
The Smoky Pork Development Ltd. plant near Falher will receive more than $900,000 in support from the Government of Alberta as part of the province’s ongoing commitment to alternative and renewable energy sources.
Here's another one, with some details what they are spending the money on. Note, the Government is GIVING THESE GUYS MONEY to build the plants. It says below $239 million has been allocated for such uses. The $1.4 billion shaken out of the oil patch will line a lot of pockets indeed.
Building a stronger Alberta
October 16, 2007
REVISED ***Provincial bio-energy grant spurs growth near Fort Saskatchewan***
***Fort Saskatchewan... More than $4 million has been approved for Canadian Bioenergy Corporation biodiesel plant near Fort Saskatchewan. This plant will be one of the largest biodiesel plants to be constructed in Western Canada and will provide feedstock opportunities for rural Alberta and the agricultural industry.***
“Opportunities to involve communities throughout Alberta in bio-energy projects show that Albertans, as well as businesses, are aware of the benefits of bio-energy,” said Mel Knight, Minister of Energy. “These grants will increase investment and help offset some of the start-up costs companies may face.”
The funding was allocated through the Bio-refining Commercialization and Market Development Program and the Bio-energy Infrastructure Development Program. Both grant programs are part of the Alberta government’s $239 million Nine-Point Bio-energy Plan designed to encourage the growth of a clean, renewable fuel industry in Alberta.
Alberta Energy website news - note the alarming under representation of petroleum related news not related to the royalty shakedown.
Thursday, October 25, 2007
Ed Stelmach: "This isn't a compromise!"
On that point, I agree with Ed Stelmach.
Ed Stelmach: "Please don't say this is a compromise!"
OK, I won't. How about I call it a shakedown then? Or a mugging? Along with a guarantee of riches beyond belief to the Alberta Treasury?
"Steal a little and they throw you in jail;
steal a lot and they make you King"
Bob Dylan
Overall, a very clever bit of maneuvering. I've heard all kinds of speculation that Stelmach and the post-Klein Tories are bumbling fools. I can assure you that they are not. This was masterful. Immoral, wrong, and plain old mean to private interests, but clever as all hell. You'll have to read this whole post to really understand how clever the "New Royalty Framework" is.
I know all the talk will be "he wimped out and didn't do what the panel said to do"; actually he hit industry really hard. Much harder than people think on first glace. You know the old adage that an iceburg is so damned dangerous because 88 percent of it is below water? Same with the new recommendations. Something flying under the radar right now called "shallow rights reversion". And, perversely, the delay of implementation by a year. The biggest of all is the oilsands peak royalty of 40%.
I haven't looked and thought extensively about the bitumen regime. It looks better than Pedro's concept; as at low prices the regime that brought development to the oilsands would essentially be intact. And frankly, no one was building oilsands mines and SAGD operations with $90/bbl WTI prices in mind. Let alone $120/bbl. So there is some "fairness" in the fiscal regime.
On the oilsands front, what was outrageous is the decision to force Suncor and Syncrude into the new regime. There was much discussion about grandfathering, but even the panel didn't dare to propose such an outrageous action as to essentially tear up existing, negotiated and legally binding contracts.
No doubt the Premier will get his way on this matter. Perhaps now the unprecedented seizure of the OSUM leases makes sense. It may have been a warning shot across the bow of Suncor and Syncrude to play ball, or else.....
Heavy handed and unlawful. The OSUM lease seizure also had no basis of law, but it didn't stop the PC's. They'll just write the law to fit their fancy after the fact. Any Canadian should be extremely alarmed at this development; where a provincial government decides to not honour contracts it has entered into. Perhaps Alberta has a lesson for Newfoundland? Hint Danny, think hydro........
On gas, perhaps Judith Dwarkin's piece about the basin not being able to afford the economic rent the panel was proposing made some difference. Moving the price point was required, and it may be something that will keep industry alive. I haven't seen the curves yet. I haven't got details on the royalty being sensitive to depth drilled. This may make some major emerging plays like the Mannville CBM still viable.
On oil, we got absolutely nailed. The panel's recommendations were accepted, point blank. Ths impact of this is enormous.
From the original panel recommendations, estimated royalty rates under the current fiscal regime in 2010 were:
Gas: $4670mm (65% of total)
Oil: $ 807mm (11% of total)
Bitumen: $1739mm (24% of total)
Total $7216MM
The additional revenue dollars from the "New Royalty Framework" are as follows:
Gas $ 470mm (33% of additional)
Conventional Oil $ 460mm (33% of additional)
Oil Sands $ 470mm (33% of additional)
Total $1400mm
"Fair Share", eh? Each commodity pays the same extra. Lord knows this can't be a coincidence. Certainly an odd way to allocate royalties however. The problem is the increases in burden on each commodity are as follows:
Gas: 10%
Oil: 57%
Bitumen: 27%
Conventional oil has been taken out behind the woodshed and whacked HARD.
Any company that has been following a light oil strategy is being punitively hit by the "New Royalty Framework". Ouch.
Now, why did I say the policy is clever?
Well, to adopt the panel's recommendations as the Hunter Gang recommended would have instantly tanked the provincial economy. No question. That was what the hysterics from the oil patch were all about. Anyone who looked into individual petroleum economics decision cases knew that.
The Stelmachistas avoided this by two measures. First, by delay until the beginning of 2009, there may indeed be a bit of a development rush to get as much resource as possible out of the ground before the new regime strikes. This may be particularly true for small oil pools that may still benefit from the oil exploration royalty holiday.
I know this because I've got a lot of them and will have to make some damned difficult economic decisions about what to do with the darned things.
Secondly, the shallow rights reversion. I haven't seen any timing details on this item. I suspect it is being put into place now to force operators to drill wells to retain shallow rights for land retention, and should they fail to do so it will open up a vast new inventory of petroleum and natural gas rights that will be subject to land sale bonuses.
Got to love that, eh? The province takes the up hole leases away arbitrarily and to my knowledge without consultation, and will put industry in the position of being compelled to buy them back. No estimate has been provided for the additional revenue the government will accrue for this act, but trust me I'm fairly sure it will put the combined increase in government revenues far above the values the Hunter Gang cooked up.
"Dang Martha! That dude mugged me, and then damned if he didn't con me into buying him dinner afterwards!"
Operators in many cases will be compelled to either drill new wells to tap known production zones that are uphole of currently producing wells, or plug the current zone and move uphole. Reserves will be lost, unnecessary wells drilled, unnecessary human and financial capital will be wasted. Sigh. It will open up a pretty big inventory of primarily niche investment opportunities for small oil and gas producers who don't currently have access to the uphole formations. Small companies and "cornershooters" may actually do pretty well out of the situation.
Now here's the clever bit the Tories pulled off.
Stelmach shook at least a couple of billion dollars a year out of the industry, broke signed contracts, implemented a massive change in every companies leaseholdings, but activity won't immediately slow. Drilling will still go on at a decent pace, and landsales will too.
Everyone will say, "See the industry was bluffing! Shake them down for more!"
The reason I expect business to remain relatively steady though is that on individual projects it may make sense to accelerate oil or gas production by drilling additional wells into established pools, and drilling small exploration bumps of 3D seismic surveys. It may make sense to drill new wells to tap into uphole zones to retain the land rights. It may be necessary to buy back uphole rights that were seized.
All this will mean a continued steady level of activity, even after the rapacious royalty shakedown. And the Stelmachistas and their friends even further to the left will say "told you they were bluffing" and probably try another and deeper shakedown. Are you hearing this, CAPP? Get ready for it.
If industry slows down after adjusting to the "New Royalty Framework" shakeup in 2009, Stelmach will just blame it on commodity prices.
Priceless. I wish I'd have thought of that move.
Now the final stroke of genius is pure numbers. Even at oil prices of say $60 WTI, the oilsands projects will proceed at a good pace, and they will pay out too.
Let's assume that oilsands production in say 15 years is five million barrels per day, the projects are paid out, and the oil price is US$120/bbl WTI. I'm assuming they upgrade the royalty portion.
This would be - get ready for it:
- US$88 BILLION per year bitumen revenue to the Alberta Treasury
- US$29,000 per year per Albertan assuming current population (admittedly probably a bad assumption)
Putting this into perspective, the Canadian 2006 annual GNP per capita of Canada was US$26,000 per year
Wow!!
But wait, there's more!! (late night informercial is running, LOL)
Using a memory number of 150 billion barrels of recoverable bitumen, at 5 million barrels per day this production rate would last approximately 80 years. Unlike Norway, whose oil production is going downhill fast after a fraction of that time. (They do have a whack of natural gas though, too.)
Continuing our exploration in numbers; undiscounted and assuming the US$120 price stayed flat, would mean:
- US$7 TRILLION bitumen royalty funds inflow into the provincial treasury
- US$2.3 MILLION per Albertan, assuming population stayed flat
This is a staggering amount of wealth, by any measure.
I'm sure far too much to keep "Our Fair Share" of. Albertans should be careful about crowing too much, being too greedy, breaking contracts and laws in pursuit of wealth.
I have two pieces of advice to Ed Stelmach. He ignored my previous advice so probably will also on these points too, but maybe the next rascal will listen better!
First, is that he'd better set up a provincial intelligence agency to keep a very wary eye and aggressive PR efforts on the Feds, not to mention our neighbors to the south. It is just too damned much money to think there won't be some jurisdiction larger than Alberta calling for "Our Fair Share" of it.
Second, he'd better be generous, gracious, and humble to our neighbors. Fund development in other provinces. Make sure they know that we are on their side and that Albertans are good and generous neighbors. That might help keep them at bay from going after their "Fair Share".
"That's a pretty fucking good milkshake. I don't know if it's worth five dollars but it's pretty fucking good. "
Overall, an "interesting" effort. Short term is awful and aggregious, for all the reasons this blog has railed on. Long term, potentially a pretty fucking good fiscal regime, at least for the politicians and bureaucrats who will control the money.
Paraphrasing Travolta, "I don't know if it's worth $1.4 billion dollars a year and the broken promises, but it is pretty fucking good." As long as you are on the right end of the straw, that is.
Driller's Results - Pre Royalty Review Slowdown
Prior to the Royalty Review, in Alberta there has been a dramatic slow down in conventional oil and gas activities. The industry isn't doing very well. Layering a massive cost onto the industry in terms of increased royalties will hurt the conventional industry very badly.
Title: Nabors Reports Q3/07 Results
Details & Analysis: Nabors reported Q3/07 EPS of US$0.76, slightly ahead of consensus of US$0.73 but well below Q3/06 EPS of US$1.02. The company’s Canadian operations generated revenues of US$132.4 million, a 21% decline from Q3/06. Operating earnings for the Canadian segment were US$16.9 million versus Q3/06 of US$42.5 million. Canadian drilling days of roughly 3,365 represented a 30% decline from the 4,813 operating days in 2006. Our current Q3/07 estimates for the Canadian drillers in our coverage universe reflect an average year-over-year decline in operating days of 25% for their Canadian operations.
Nabors’ Canadian operating income margins fell from 25% in Q3/06 to just 13% in Q3/07, a decline of 1,200 bps. Our current Q3/07 EPS estimates for our Canadian drillers assume an average year-over-year margin contraction of roughly 700 bps. Canadian well servicing hours fell 20% compared to Q3/06. Nabors’ U.S. land drilling segment delivered revenues of US$416.5 million, down from US$498.2 million last year. U.S. operating days fell 14% from 23,414 to 20,166 while operating earnings margins contracted from 44% in Q3/06 to 31% in Q3/07. Operating margins per day fell US$767/day despite the addition of 16 new rigs during the quarter. Our current EPS estimates for our U.S. land drillers assume a margin decline of roughly US$800/day. Consistent with our current outlook, Nabors indicated that it expects weakness in the Canadian market through to the beginning of the 2008/2009 drilling season.
Precision also reported today, very bad results:
A colleague pointed to some interesting items wrt the Precision results:
Couple of interesting points – despite the large drop in Revenue, their earnings are still relatively healthy, so they are still managing to defend their margins – this is good, because it means there is still scope for them to drop day rates while staying profitable.
Also, note the shift of resources to the U.S. – from 81 to 533 operating days y/y
Title: Nabors Reports Q3/07 Results
Details & Analysis: Nabors reported Q3/07 EPS of US$0.76, slightly ahead of consensus of US$0.73 but well below Q3/06 EPS of US$1.02. The company’s Canadian operations generated revenues of US$132.4 million, a 21% decline from Q3/06. Operating earnings for the Canadian segment were US$16.9 million versus Q3/06 of US$42.5 million. Canadian drilling days of roughly 3,365 represented a 30% decline from the 4,813 operating days in 2006. Our current Q3/07 estimates for the Canadian drillers in our coverage universe reflect an average year-over-year decline in operating days of 25% for their Canadian operations.
Nabors’ Canadian operating income margins fell from 25% in Q3/06 to just 13% in Q3/07, a decline of 1,200 bps. Our current Q3/07 EPS estimates for our Canadian drillers assume an average year-over-year margin contraction of roughly 700 bps. Canadian well servicing hours fell 20% compared to Q3/06. Nabors’ U.S. land drilling segment delivered revenues of US$416.5 million, down from US$498.2 million last year. U.S. operating days fell 14% from 23,414 to 20,166 while operating earnings margins contracted from 44% in Q3/06 to 31% in Q3/07. Operating margins per day fell US$767/day despite the addition of 16 new rigs during the quarter. Our current EPS estimates for our U.S. land drillers assume a margin decline of roughly US$800/day. Consistent with our current outlook, Nabors indicated that it expects weakness in the Canadian market through to the beginning of the 2008/2009 drilling season.
Precision also reported today, very bad results:
A colleague pointed to some interesting items wrt the Precision results:
Couple of interesting points – despite the large drop in Revenue, their earnings are still relatively healthy, so they are still managing to defend their margins – this is good, because it means there is still scope for them to drop day rates while staying profitable.
Also, note the shift of resources to the U.S. – from 81 to 533 operating days y/y
Albertan's Letter to Taft
Letter from a good friend, if you see fit to add to the blog – its particularly powerful, as he has no direct stake in the industry at all.
--------------------------------------------------------------------------------
From: XXXXXXXXXXXXXXXXXXXXXX
Sent: Tuesday, October 23, 2007 7:57 PM
To: Calgary MountainView
Subject: Disturbing news from Leader of the Liberal Party
Dr. David Swann,
I read today, straight from the mouth of your party leader Kevin Taft, that the Liberal Party of Alberta supports at least a 20% hike in royalties charged to Oil and Gas producers, per the recommendation of the flawed document from the Royalty Review Panel.
(Here is but one trifling question about their credibility... How can Alberta's royalty scheme be compared to Libya, Jordan and Ecuador in that document, and yet not BC or Saskatchewan? Because the recommendations were preconceived and supporting evidence only worked with those comparisons).
The position of your party is not at all in keeping with the carefully considered message you presented to me earlier this month. Now that I know where your party stands (populist, unreasonably misinformed and unapologetically anti-industry), may I ask if you broadly support the dangerous stand your party has taken? Generally I vote for the best candidate when I vote, as I loathe party politics, but the Liberal Party is showing itself to be out of touch with what government is supposed to be for and who it is supposed to serve. Sadly, so are the provincial Conservatives.
Apparently equality of opportunity, of which the provincial government is but one guarantor, is being pushed aside in favour of equality of outcome, with the government using punitive taxation and redistribution as a bludgeon to achieve "our fair share" (a euphemism for freeloading off of a successful industry). Yes, I suppose the government would like to have an extra $2 billion per year in its coffers. Too bad the government will never see the increased revenue as you cannot tax unrecovered Oil and Gas. Under this kind of royalty regime, the ground is exactly where marginal discoveries of Oil and Gas will stay. No new oil, no new gas, no extra money from royalties. Meanwhile, many of the clever business people in this province will catch the next plane to a more favourable place to work and build a company. Fortunately for them, it will not be that far - to BC or Saskatchewan - as incredible as that would have sounded just five years ago.
This royalty hike will have the perverse effect of being revenue neutral for Alberta, as lower production will offset higher royalties (almost immediately). Just as perversely, it will likely be revenue positive for BC and Sask, vis a vis higher income taxes and corporate taxes raised from the ensuing economic migration and, unsurprisingly, the improvement of the Oil and Gas industries in those jurisdictions.
I'm sure it all sounds good to the people who hate big businesses in particular and capitalism in general, but to the rest of us this policy is a disturbing and gross misstep. I'm not in any way involved in the Oil and Gas business, nor do I have any investments in companies that are, but I can see clearly that, for all Albertans, this is precisely the worst policy to apply at almost exactly the wrong time.
I'd like to say that I'm stunned speechless, but obviously I'm not. I am shaking my head in disbelief. I feel your party has played populist politics with this issue, and that disgusts me. It panders to the wrong mentality... the envious, the angry, the embittered, and those fatigued by the cost of everything in this province.
This bad policy is willing to throw a sizable minority of Albertans under the train, for the seeming (and small) benefit of a narrow majority of Albertans. It is no doubt popular to lay penalties on big, rich companies like Encana or Conoco Philips (who themselves directly employ something like 15,000 people in Alberta), but what about the thousands of small Alberta companies who are going to wake up and find that their successful business model is now completely obsolete and untenable, through no fault of their own? It will be the fault of their own government using the caprice of a hefty and ill-considered provincial tax increase.
As someone earning an income in the top quartile in this province, how would you feel if your income taxes received a 20% hike because Albertans in the lower three quartiles wanted their "fair share"? I'd probably have little choice but to leave, especially if current programs and spending is any indication of how that "fair share" will be used. And I proudly call myself an Albertan! My wife is a third-generation Albertan and my newborn son is the fourth generation!
Friendly BC, the province of my birth, is right next door, and it has recently ensured that its median income taxes are lower than Alberta's (it was shocking to read that last week). I've watched for three decades with quasi-amusement as that province mismanaged its relations with and impacts on multiple industries. Now, Alberta seems to want to join that party. BC has cleaned up its act in response to Alberta's overwhelming recent success, and Alberta is in danger of responding by capitulating to populist demands for excessive and destructive wealth redistribution.
Pluck the golden goose of its feathers if you must. It better be a spectacularly warm coat, duvet or pillow that is made with the feathers, and we better have a fabulous stockpile of golden eggs, because there won't be a lot of egg laying going on for quite a while.
Cheers,
XXXXXXXXXXXX
Calgary, Alberta
--------------------------------------------------------------------------------
From: XXXXXXXXXXXXXXXXXXXXXX
Sent: Tuesday, October 23, 2007 7:57 PM
To: Calgary MountainView
Subject: Disturbing news from Leader of the Liberal Party
Dr. David Swann,
I read today, straight from the mouth of your party leader Kevin Taft, that the Liberal Party of Alberta supports at least a 20% hike in royalties charged to Oil and Gas producers, per the recommendation of the flawed document from the Royalty Review Panel.
(Here is but one trifling question about their credibility... How can Alberta's royalty scheme be compared to Libya, Jordan and Ecuador in that document, and yet not BC or Saskatchewan? Because the recommendations were preconceived and supporting evidence only worked with those comparisons).
The position of your party is not at all in keeping with the carefully considered message you presented to me earlier this month. Now that I know where your party stands (populist, unreasonably misinformed and unapologetically anti-industry), may I ask if you broadly support the dangerous stand your party has taken? Generally I vote for the best candidate when I vote, as I loathe party politics, but the Liberal Party is showing itself to be out of touch with what government is supposed to be for and who it is supposed to serve. Sadly, so are the provincial Conservatives.
Apparently equality of opportunity, of which the provincial government is but one guarantor, is being pushed aside in favour of equality of outcome, with the government using punitive taxation and redistribution as a bludgeon to achieve "our fair share" (a euphemism for freeloading off of a successful industry). Yes, I suppose the government would like to have an extra $2 billion per year in its coffers. Too bad the government will never see the increased revenue as you cannot tax unrecovered Oil and Gas. Under this kind of royalty regime, the ground is exactly where marginal discoveries of Oil and Gas will stay. No new oil, no new gas, no extra money from royalties. Meanwhile, many of the clever business people in this province will catch the next plane to a more favourable place to work and build a company. Fortunately for them, it will not be that far - to BC or Saskatchewan - as incredible as that would have sounded just five years ago.
This royalty hike will have the perverse effect of being revenue neutral for Alberta, as lower production will offset higher royalties (almost immediately). Just as perversely, it will likely be revenue positive for BC and Sask, vis a vis higher income taxes and corporate taxes raised from the ensuing economic migration and, unsurprisingly, the improvement of the Oil and Gas industries in those jurisdictions.
I'm sure it all sounds good to the people who hate big businesses in particular and capitalism in general, but to the rest of us this policy is a disturbing and gross misstep. I'm not in any way involved in the Oil and Gas business, nor do I have any investments in companies that are, but I can see clearly that, for all Albertans, this is precisely the worst policy to apply at almost exactly the wrong time.
I'd like to say that I'm stunned speechless, but obviously I'm not. I am shaking my head in disbelief. I feel your party has played populist politics with this issue, and that disgusts me. It panders to the wrong mentality... the envious, the angry, the embittered, and those fatigued by the cost of everything in this province.
This bad policy is willing to throw a sizable minority of Albertans under the train, for the seeming (and small) benefit of a narrow majority of Albertans. It is no doubt popular to lay penalties on big, rich companies like Encana or Conoco Philips (who themselves directly employ something like 15,000 people in Alberta), but what about the thousands of small Alberta companies who are going to wake up and find that their successful business model is now completely obsolete and untenable, through no fault of their own? It will be the fault of their own government using the caprice of a hefty and ill-considered provincial tax increase.
As someone earning an income in the top quartile in this province, how would you feel if your income taxes received a 20% hike because Albertans in the lower three quartiles wanted their "fair share"? I'd probably have little choice but to leave, especially if current programs and spending is any indication of how that "fair share" will be used. And I proudly call myself an Albertan! My wife is a third-generation Albertan and my newborn son is the fourth generation!
Friendly BC, the province of my birth, is right next door, and it has recently ensured that its median income taxes are lower than Alberta's (it was shocking to read that last week). I've watched for three decades with quasi-amusement as that province mismanaged its relations with and impacts on multiple industries. Now, Alberta seems to want to join that party. BC has cleaned up its act in response to Alberta's overwhelming recent success, and Alberta is in danger of responding by capitulating to populist demands for excessive and destructive wealth redistribution.
Pluck the golden goose of its feathers if you must. It better be a spectacularly warm coat, duvet or pillow that is made with the feathers, and we better have a fabulous stockpile of golden eggs, because there won't be a lot of egg laying going on for quite a while.
Cheers,
XXXXXXXXXXXX
Calgary, Alberta
Wednesday, October 24, 2007
The Canadian Centre for Energy Information Gets Numbers Right
Stay cool: Stick with facts
Colleen KilLingsworth, For the Calgary Herald
Published: Sunday, October 21, 2007
The report of the royalty review panel, and responses to it, have highlighted the need for a resolution of the facts.
The facts are contentious, as it can be assumed the public, the government and industry share an interest in policies that mean a fair share for the province, a secure and profitable environment for industry and jobs, and affordable living standards and prosperity for Albertans and Canadians. Government and industry leaders must carefully balance these interests as they seek to ensure the Alberta Advantage continues to work for all. It is a task that requires all parties to put forward their positions based on facts, the inescapable realities of market economics, reason and common sense.
The public wrestles with vital questions, such as at what point more government or business revenue begins to work against rather than in favour of its best interests.Oil, natural gas and petroleum products account for more than 70 per cent of Alberta's exports, approximately 40 per cent of provincial GDP, and are responsible for more than one-third of government revenues, which were more than $12.3 billion in 2006.
The sector employs one out of every six working Albertans, from rig hands and truck drivers in Grande Prairie to welders and electricians in Fort McMurray, to geologists and engineers in Calgary and Edmonton, and retail workers, accountants, nurses and others.
Capital spending by industry in Alberta has grown by $25 billion over eight years. Royalty payments have grown from $2.7 billion in 1998 to $11.8 billion in 2005 and $9.2 billion in 2006.
Bonus payments, the fees industry pays to acquire petroleum and natural gas leases, which are in addition to royalties, rose from $581 million in 1998 to $1.47 billion in 2006.
Alberta has more than 175 billion barrels of established oil reserves, second only to Saudi Arabia. Alberta's total recoverable reserves are estimated at more than 30 billion barrels.
Alberta has 40 trillion cubic feet of proven natural gas reserves, plus an estimated 100 to 500 trillion cubic feet of potentially recoverable natural gas in coal.
For exploration and production, Alberta is one of the highest cost jurisdictions in the world.
While the panel expects its recommendations to produce an additional $2 billion annually in revenue, private-sector capital investment experts estimate the province can expect the next impact of recommended changes will be revenue-neutral. They warn of reduction in gas supply from Alberta and a weaker economy.
Spokesmen for the industry indicate the report has understated capital and operating costs.
Norway, where marginal tax rate is 78 per cent, recently amended its tax system to stimulate greater activity. Now, 78 per cent of exploration expenses are refunded in the following year by the Norwegian government, making it possible for smaller companies to acquire capital by borrowing from commercial banks against the next year's rebate.
Indonesia recently moved to attract more investment as a result of becoming a net importer and enhanced its terms on some properties (deep-water and frontier) to 65-35 on oil and 60-40 on natural gas compared with its standard after-tax profit splits of 85-15 on oil and 70-30 on natural gas.
In 2006, total investment in Alberta was $75.3 billion, of which $38.5 billion, or 51 per cent was oil and natural gas-related.
In response to the panel's recommendations, companies have announced plans to cut their capital investment here. EnCana plans to cut about $1 billion, or 30 to 40 per cent of the $2.5 billion or $3 billion the company planned for Alberta-based activity in 2008. Canadian Natural Resources Limited announced they will cut $800 million, Talisman Energy Inc. $500 million and Crescent Point Energy Trust $150 million in capital investment in 2008.
Other companies such as ExxonMobil, Imperial Oil Limited, Petro-Canada and Enbridge Inc. have commented on the negative impact of raising royalties and how it would adversely affect oil and gas-directed investment, as have analysts such as Peters & Co., FirstEnergy Capital Corp., Tristone Capital Inc. and Wood Mackenzie.
The discussion's outcome will impact the province's economic reality and the atmosphere within which business and government work to ensure Albertans' welfare.
The decisions made in the next weeks and the actions taken in the months ahead will determine the welfare of Albertans in the decade ahead, just as they have in the decades past.
Colleen Killingsworth is president of the Canadian Centre for Energy Information.
Colleen KilLingsworth, For the Calgary Herald
Published: Sunday, October 21, 2007
The report of the royalty review panel, and responses to it, have highlighted the need for a resolution of the facts.
The facts are contentious, as it can be assumed the public, the government and industry share an interest in policies that mean a fair share for the province, a secure and profitable environment for industry and jobs, and affordable living standards and prosperity for Albertans and Canadians. Government and industry leaders must carefully balance these interests as they seek to ensure the Alberta Advantage continues to work for all. It is a task that requires all parties to put forward their positions based on facts, the inescapable realities of market economics, reason and common sense.
The public wrestles with vital questions, such as at what point more government or business revenue begins to work against rather than in favour of its best interests.Oil, natural gas and petroleum products account for more than 70 per cent of Alberta's exports, approximately 40 per cent of provincial GDP, and are responsible for more than one-third of government revenues, which were more than $12.3 billion in 2006.
The sector employs one out of every six working Albertans, from rig hands and truck drivers in Grande Prairie to welders and electricians in Fort McMurray, to geologists and engineers in Calgary and Edmonton, and retail workers, accountants, nurses and others.
Capital spending by industry in Alberta has grown by $25 billion over eight years. Royalty payments have grown from $2.7 billion in 1998 to $11.8 billion in 2005 and $9.2 billion in 2006.
Bonus payments, the fees industry pays to acquire petroleum and natural gas leases, which are in addition to royalties, rose from $581 million in 1998 to $1.47 billion in 2006.
Alberta has more than 175 billion barrels of established oil reserves, second only to Saudi Arabia. Alberta's total recoverable reserves are estimated at more than 30 billion barrels.
Alberta has 40 trillion cubic feet of proven natural gas reserves, plus an estimated 100 to 500 trillion cubic feet of potentially recoverable natural gas in coal.
For exploration and production, Alberta is one of the highest cost jurisdictions in the world.
While the panel expects its recommendations to produce an additional $2 billion annually in revenue, private-sector capital investment experts estimate the province can expect the next impact of recommended changes will be revenue-neutral. They warn of reduction in gas supply from Alberta and a weaker economy.
Spokesmen for the industry indicate the report has understated capital and operating costs.
Norway, where marginal tax rate is 78 per cent, recently amended its tax system to stimulate greater activity. Now, 78 per cent of exploration expenses are refunded in the following year by the Norwegian government, making it possible for smaller companies to acquire capital by borrowing from commercial banks against the next year's rebate.
Indonesia recently moved to attract more investment as a result of becoming a net importer and enhanced its terms on some properties (deep-water and frontier) to 65-35 on oil and 60-40 on natural gas compared with its standard after-tax profit splits of 85-15 on oil and 70-30 on natural gas.
In 2006, total investment in Alberta was $75.3 billion, of which $38.5 billion, or 51 per cent was oil and natural gas-related.
In response to the panel's recommendations, companies have announced plans to cut their capital investment here. EnCana plans to cut about $1 billion, or 30 to 40 per cent of the $2.5 billion or $3 billion the company planned for Alberta-based activity in 2008. Canadian Natural Resources Limited announced they will cut $800 million, Talisman Energy Inc. $500 million and Crescent Point Energy Trust $150 million in capital investment in 2008.
Other companies such as ExxonMobil, Imperial Oil Limited, Petro-Canada and Enbridge Inc. have commented on the negative impact of raising royalties and how it would adversely affect oil and gas-directed investment, as have analysts such as Peters & Co., FirstEnergy Capital Corp., Tristone Capital Inc. and Wood Mackenzie.
The discussion's outcome will impact the province's economic reality and the atmosphere within which business and government work to ensure Albertans' welfare.
The decisions made in the next weeks and the actions taken in the months ahead will determine the welfare of Albertans in the decade ahead, just as they have in the decades past.
Colleen Killingsworth is president of the Canadian Centre for Energy Information.
Regina Leader Post Gets Its Numbers Wrong
So many completely ignorant articles are flying about it is hard to keep up with them.
For example, the article being referenced below is encouraging Saskatchewan to raise its royalties too.
The BS is flying fast and furious. Whoever wrote this should be slapped hard.
The Alberta Royalty Review itself stated in 2006 that $9.533 billion was collected. They NEGLECTED to include approximately $3 billion in lease sales. I don't have handy numbers for lease rentals, corporate taxes, municiple taxes, but they are considerable.
Only considering royalties and lease sales and assuming the $40 billion in gross revenue is correct tne 31% of gross revenues are taken by government, not 7% as quoted.
For example, the article being referenced below is encouraging Saskatchewan to raise its royalties too.
Oil is a big-ticket item in Alberta. Alberta accounts for about two-thirds of Canada's crude production. Oil and gas activity produce one-quarter of the province's gross domestic product. Six hundred million barrels extracted last year generated around $40 billion in revenues.
Albertans collected $2.7 billion in royalties ... only seven per cent of the revenue. It is not surprising former Premier Ralph Klein has been quoted as saying he didn't give a "tinker's dam" about the royalty reviews or whether Albertans were getting a fair share of their hydrocarbon wealth.
The BS is flying fast and furious. Whoever wrote this should be slapped hard.
The Alberta Royalty Review itself stated in 2006 that $9.533 billion was collected. They NEGLECTED to include approximately $3 billion in lease sales. I don't have handy numbers for lease rentals, corporate taxes, municiple taxes, but they are considerable.
Only considering royalties and lease sales and assuming the $40 billion in gross revenue is correct tne 31% of gross revenues are taken by government, not 7% as quoted.
Odd Story on Bloomberg: In Favour of Boosting Royalties
WTF indeed; isn't it odd that pro-business Bloomberg and supposedly a realtor who should be pro-business are saying what they are? Alberta real estate will be hammered. In addition, the CEO of Weatherford advocating the royalty increase.
Does the American Elite have an interest in Alberta slitting its economic wrists?
Does the American Elite have an interest in Alberta slitting its economic wrists?
Albertans Rally to Levy `Porsche' Taxes on EnCana, Petro-Canada
Oct. 23 (Bloomberg) -- Alberta Premier Ed Stelmach may be about to bite the hand that feeds Canada's fastest-growing province by ordering an increase in royalties on oil and gas. Calgary real estate adviser Stefan Schulhof says it's about time.
Schulhof stands with a majority of Albertans who support a plan to raise taxes on energy companies by as much as 20 percent to help ease a shortage of roads, schools and hospitals. The companies say the levies will cost 19,000 jobs and slash oil- sands investments by C$28 billion ($28.6 billion).
The industry is ``crying wolf'' while reporting record profits, said Schulhof, 53. ``I just don't like the way oil companies are playing games with people's heads.''
Rising oil prices boosted Alberta's population by 10 percent in the past five years as workers flocked from eastern Canada, Mexico and Venezuela for oil-sands jobs in an area estimated to contain the world's second-largest reserves after Saudi Arabia. That's strained the province's public services and housing, putting pressure on Stelmach to find new revenue.
Stelmach's decision on royalties could dominate an election if he decided to call a vote seeking a tighter grip on power for the Conservatives.
``This has the potential to be the defining moment for Stelmach,'' said Harold Jansen, an associate professor of politics at the University of Lethbridge. ``The companies ratcheted up their pressure and rhetoric, which increases the political payoff for him if he shows that he stands up to them.''
Rising Prices
Though the province is debt-free and has run budget surpluses for 13 years, costs for public services are rising. The estimated price to build a Calgary-area hospital doubled to C$1.25 billion this year from 2005 because of higher wages and equipment prices. The province is also short more than 1,000 doctors, according to the provincial medical association, and Calgary's school board estimates the city needs 30 new schools to meet population growth.
The province's auditor-general earlier this month estimated at least C$6 billion is needed to replace or repair hospitals, schools and roads.
Albertans say Calgary-based EnCana Corp. and other oil and gas producers need to contribute more. About 88 percent of respondents in a Leger Marketing poll support higher royalties. The survey of 903 Alberta residents was done from Sept. 28 to Oct. 1 and has a margin of error of 3.3 percent.
`Money to Be Made'
``It's not being tough, it's being fair,'' said Tom Shanks, 42, a foreman at a fabricating shop near Edmonton. ``There's money to be made in Alberta and somebody's going to make it. If it's not these companies, let them go'' because others will replace them.
EnCana earned a record $5.65 billion last year.
Stelmach, 56, a former farmer, has pledged to make a decision on royalties this month. He will address the issue ``in a general way'' as part of a televised speech scheduled for tomorrow, spokesman Tom Olsen said.
Stelmach will respond to a report by a government-appointed panel that last month called for higher royalties to bring in C$2 billion more a year for the province, whose annual budget is about C$33 billion. The government's share of oil-sands revenue would rise to 64 percent, from 47 percent, and its take from conventional oil and gas wells would rise 5 percentage points to 49 percent and 63 percent, respectively.
The proposals would lower the global ranking for companies' return on investment in oil-sands projects to 73rd out of 104, down from 61st, according to an analysis by the Edinburgh-based consulting firm Wood Mackenzie.
`Fair Economic Rent'
``The status quo is not an option,'' Stelmach told reporters in Calgary on Oct. 19. Royalties must provide a ``fair economic rent'' for Alberta's natural resources, he said.
EnCana, North America's largest publicly traded gas firm, and other Calgary-based producers such as Petro-Canada and Talisman Energy Inc. have taken out newspaper ads or issued public letters to lobby against the proposals, which they say will derail the province's economy.
If Albertans are ``upset with regards to the number of Porsches driving around, this isn't the way to solve it,'' Tristone Capital Inc. Chief Executive Officer George Gosbee said. Tristone, a Calgary-based investment bank that works for the oil industry, spent more than C$100,000 on newspaper advertisements. The proposal will have ``catastrophic'' impacts on jobs and provincial revenue if implemented, Gosbee said.
`Pendulum Has Swung'
With 25 years of experience, Shanks said he isn't worried about running out of work even if higher royalties stifle growth. Other industries need skilled tradesmen, he said. The father of two teens estimated that his annual income in recent years averaged about C$100,000.
``I'd be lying if I didn't say it was OK money,'' he said. ``It's just not enough compared to the increased cost of living.''
Slowing the rush to develop Alberta's oil-sands may allow time for new technology to reduce the environmental impact of exploiting Alberta's tar sands, Schulhof said.
``The pendulum has swung too far in a boom direction, so we need to calm down,'' said Schulhof, a real estate adviser at 20/20 Group Inc. ``You can't always be rape, pillage and plunder.''
To contact the reporter on this story: Ian McKinnon in Calgary at imckinnon1@bloomberg.net
Real Estate Dropping
I recieved this note; had an MLS printout that will take me too long to format to get onto the blog. A reader can surf Calgary MLS listings for themselves to see what is happening:
Check out the verbiage in the first and fifth listings. Oilpatch recession is now hitting home in real estate in my neighbourhood - the $599k listing originally hit the market in the early summer at about $750k, and like most of the rest of the listings, it just isn't selling - now sellers are getting desperate, and hunting for buyers at much lower prices. If Stelmach does what I expect, just wait for the slaughter.
Big American Oil Sticks It's Where It Shouldn't
I recently recieved this from a friend at another company. It is obvious that Big American Oil Service Companies will benefit from small Canadian oil service companies being demolished. they will be buying equipment at auction for pennies on the dollar. The surprising thing is that Weatherford is so OPEN in its advocacy of demolishing the independant Canadian oil patch. Albertan consumers of oilfield services should display their displeasure with Weatherford by putting their dollars in the hands of others.
Note to Bernard Duroc-Danner: advocating policies which damage your customers simply isn't good business.
CEO
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Note to Bernard Duroc-Danner: advocating policies which damage your customers simply isn't good business.
Ian,
What’s the upside for the CEO of an American company to be talking like this!!! We’ll be using someone else.
XXXXXX
From:
XXXXXXXXXXXXXXXXX
Sent: October 23, 2007 12:37 PM
To: XXXXXXXXXXXXX
Subject: Now I know who will not get my dollars
I don't think our company will be buying anything from companies that encourage royalty rate increases.
Weatherford CEO Defends Proposed Royalty HikeXXXXXXXXXX
By Lynda Harrison
It's only reasonable to expect Alberta to raise royalties when every other country is doing it, says the head of a major services provider.
Nothing will happen to expand Canada's oilsands until the province's government makes up its mind about bumping up royalties, and if royalties are increased projects will be delayed but go ahead, added Bernard Duroc-Danner, chairman and chief executive officer of Houston-based Weatherford International Ltd.
There aren't many places around the world left where international and independent oil companies, particularly large ones, can get access to reservoirs, said Duroc-Danner during a conference call with analysts to discuss third-quarter results.
"There just aren't. Go around the world. Every single government has been raising taxes, changing the royalty regime, etcetera. Start with Algeria and then go around the world. Those countries that control the reservoirs don't feel they need IOCs [international oil companies] and so forth and so on, so they are behaving in a very rational way by basically keeping the economic rent," he said.
"Canada is just doing a mild version, best I can tell, of what the other countries are doing," he added.
Oil and gas companies are not going to turn their backs on Canada's heavy oil market, though it does have challenges, because they are out of choices, he said.
"You give me one country that has been generous with their tax regime and royalty regime in an $80 oil environment. No country is. They keep the economic rent," he told analysts.
Weatherford reported third-quarter 2007 income from continuing operations of $294.9 million (all figures in U.S. dollars), or 85 cents per diluted share. Third-quarter diluted earnings per share rose 27% over the third quarter of 2006 diluted earnings per share of 67 cents.
North American third-quarter net revenues were $993.83 million, a four per cent increase over the prior year. Growth in the United States rig count was more than offset by a drop in the Canadian rig count. Artificial lift, directional and underbalanced drilling and wireline performed exceptionally well, said Weatherford.
North American operating income fell to $264.18 million in third-quarter 2007 from $281.48 million the year before.
The Canadian market recovered from the extreme trough of the second quarter, said Duroc-Danner. The country's rig count recovered seasonally, averaging 347 rigs, but was 29% below third-quarter 2006 levels. "Basically the market showed signs of life but remained subdued," he said.
Pricing weakened throughout the Canadian oilfield, hitting rigs, tubulars and pressure pumping hard, he said. Pricing for product service lines was down more modestly with the drop occurring essentially in the second and third quarters.
This was offset in large part by cost and productivity gains. Weatherford substantially changed its operating structure in Canada: management, people and equipment. It simplified its organizational structure, moved equipment and people, and "took some people out." The company also recently reduced cash costs by more than $40 million and will take out more, as needed, he said. The country's leadership also changed early in the quarter.
Weatherford's revenues per rig grew to the highest level in its Canadian history, to $262,000, said Duroc-Danner, adding productivity indices showed some of the highest performance levels in the company. "We're running Canada at much higher people and equipment productivity than throughout '06 and as a result and in spite of lower pricing, Canada's EBIT (earnings before interest and taxes) incrementals were sequentially very strong. Our operating structure and portfolio breadth in Canada are real assets."
He credited the United States market for shouldering strong growth while Canada was shrinking hard in absolute and relative terms. Canada is to be credited for managing its cost structure and revenue generating capabilities so well and without delay in a poor market environment."
"With hydrocarbon pricing hovering above $80 for oil and $7 for gas the Canadian market feels very ripe for strong recovery in '08 led by the heavy oil segment," said Duroc-Danner.
Nearly $80 billion in heavy oil projects have been announced for Alberta, he told analysts. However, with the proposed change in the province's royalty tax rate makes this is uncertain or could be delayed, he said. "Until the government of Alberta comes up with a decision it's difficult to make a judgment either way on market direction. We expect our results in Canada to reflect our operating improvements as well as our product line breadth."
Weatherford will likely invest $1.6 billion in capital expenditures in 2007, he said, adding the company is well advanced in planning its supply chain actions for 2008, when it plans to again spend about $1.6 billion.
"We expect a reversal of trends to occur in Canada now or at a later date but in the meantime we rely on our operating strengths in that market."
To decrease costs in Canada the company continued to concentrate on heavy oil, which has always been stable, and was proactive early, said Duroc-Danner.
Weatherford is, and always has been, more heavy-oil based, on a percentage basis of its operations than any of its peers, he said. While heavy oil has its ups and downs in Canada, well maintenance is completely immune to them, said Duroc-Danner."You will not shut down a heavy oil well in Canada. You will not. The economics just are compelling."
CEO
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False Claim By the Liberals
How does the point below reconcile with the reality of the previous post, that BC and Saskatchewan have generally lower royalty rates than Alberta? Kevin Taft loses all his marbles for false political posturing and cheap shots.
"This could easily be the most expensive scandal in Canadian history."
Tuesday, October 23, 2007
BC and Saskatchewan's Response
Ever wonder why the Alberta Royalty Review Panel didn't compare Alberta to Saskatchewan or British Columbia?
Fiscal terms for the oil and gas sector in the three Western provinces are either competitive or slightly more advantageous in B.C. and Saskatchewan, where governments have tried to lure more energy activity.
Monday, October 22, 2007
Open Letter by Bill Hunter
This was published as an open letter by Bill Hunter.
It is very interesting. Hunter states that "there are still 6 Panel members who stand behind their report". Hmmm. Judith can't be standing by the conclusions of the report after being the primary author of this report. Who is the seventh panel member? I counted six.
Further, he states "Six extraordinary (extraordinary because they gave up their lives for 7 months to volunteer to participate...." Bill is calling himself "extraordinary". How humble. Also he says the work was done on as volunteers! The panel wasn't paid? This explains in large part the report. They apparently didn't devote full time efforts to it but crunched it in between other commitments. Or were they in fact paid and Bill is misrepresenting facts again? Really, pretty much anything that guy says should be considered with caution at best. This is a guy who actually believes the forestry industry pays its fair share, and is gentle on the environment and...... the Orwellian imagery gets pretty thick indeed.
Here is Bill's missive in whole, from this site:
It is very interesting. Hunter states that "there are still 6 Panel members who stand behind their report". Hmmm. Judith can't be standing by the conclusions of the report after being the primary author of this report. Who is the seventh panel member? I counted six.
Further, he states "Six extraordinary (extraordinary because they gave up their lives for 7 months to volunteer to participate...." Bill is calling himself "extraordinary". How humble. Also he says the work was done on as volunteers! The panel wasn't paid? This explains in large part the report. They apparently didn't devote full time efforts to it but crunched it in between other commitments. Or were they in fact paid and Bill is misrepresenting facts again? Really, pretty much anything that guy says should be considered with caution at best. This is a guy who actually believes the forestry industry pays its fair share, and is gentle on the environment and...... the Orwellian imagery gets pretty thick indeed.
Here is Bill's missive in whole, from this site:
"My friend
The Our Fair Share report is a culmination of learnings, analysis, debates, arguments (for and against), thoughts and personal believes … in the future of Alberta through some stringent Terms of Reference, asked of Albertans.
Six extraordinary (extraordinary because they gave up their lives for 7 months to volunteer to participate in a Panel to ascertain whether Albertans get their fair share of revenues from “their” non-renewable energy resources) Albertans, many of which are North America’s top minds when it comes to; Royalties, Taxes and Fees, Business, Economics, Sustainability, Production and being Albertan … elected to design and deliver a report that came from a position of what they believe is compromise and balance.
Each Panel member brought unique and solid strengths to the mix of intelligence and compassion for the topics being discussed. Judith Dwarkin is an example of that strength; her careers and exposure to/and in the Energy world were critical to the balance we found in our deliberations, I am indebted to her contribution and appreciate her ability to represent the industry’s positions.
Today, Oct. 20th, 2007 … I feel that there are still 6 Panel members who stand behind their report and its intent to be a starting point for the launch of a new regime that embraces “continuous improvement” and will ensure Our Fair Share for the Owners, the People of Alberta!
Proud to be an Alberta Royalty Review Panel Member and it’s Chair,
Bill Hunter"
Debunking the Chrapko and van Meurs Response
A reader asked me to have a go at this........ I was going to give it a pass but hell there is just too much bullshit in it to go without comment. Here it is:
This link states there are 112 oil producing nations in the world. Knowing that many of those nations have multiple jurisdictions that assign royalty like the US and Canada, I'd bet there is well over 200 fiscal systems. If that assumption is correct, Pedro is saying that 9% of nations have changed royalties. Many of that small percentage are indeed unstable places to do business.
And what about the freehold issue? Freehold mineral leases will all be subject to a higher fee without reference to price. So to say "at $5, royalties on all wells would be less" is essentially lying.
Yes but it ended, and the industry is adjusting, and is now hit with this royalty increase. Chrapko doesn't state the extra royalty that will be grabbed from higher productivity wells at $6.20. If he was being transparent and truthful, he would.
Note how accusatory and conspiratorial these guys are. "whose pocket are they in?"
What is good for the goose is good for the gander; who's pocket is the royalty review panel in?
When I see contradictions I know someone is lying.
glamphier@thejournal.canwest.com
Energy royalties: responding to the criticsThe argument that 18 countries have altered royalty rates is specious. Far more countries that 18 produce petroleum in the world. Furthermore, there would be many more jurisdictions which can change royalty. Canada has at least six jurisdictions, the US I'd bet 25.
Gary Lamphier
The Edmonton Journal Saturday, October 20, 2007
Oil and gas companies have waged a furious assault on the recommendations of an independent royalty review panel since it submitted its report in September.
Gary Lamphier sat down with panel member Evan Chrapko and royalty expert Pedro Van Meurs -- who was retained by the panel -- to get their responses to the industry's charges.
Q: Alberta is widely known as a stable place to invest. By raising royalties, won't this put Alberta on par with places like Russia or Venezuela?
A: "The vast majority of countries change their fiscal terms regularly. I take great exception to Alberta being compared to Venezuela or Russia, countries that rip up existing contracts. Alberta is absolutely not doing that," says Van Meurs. Wood Mackenzie, a global energy consulting firm, says 18 countries have altered royalty rates since 2001, transferring $260 billion US to government coffers, Van Meurs adds.
This link states there are 112 oil producing nations in the world. Knowing that many of those nations have multiple jurisdictions that assign royalty like the US and Canada, I'd bet there is well over 200 fiscal systems. If that assumption is correct, Pedro is saying that 9% of nations have changed royalties. Many of that small percentage are indeed unstable places to do business.
Q: Instead of gaining $2 billion (Cdn) a year in royalties, as the panel suggests, won't Alberta lose billions as companies like EnCana slash spending?No comment on natural gas. Apparently his colleague feels differently. Not to mention almost everyone in the industry.
A: "I've assisted in changing the fiscal terms in at least 20 jurisdictions around the world. Every time terms change, companies say they'll go elsewhere," says Van Meurs. "Yes, some oilsands projects will be deferred. But Alberta needs a slower level of development" to curb inflation and maximize its oilsands resources, he argues.
Q: With natural gas prices down, the Canadian dollar above $1 US, drilling levels depressed and foreign LNG (liquified natural gas) supplies rising, isn't this a terrible time to raise royalties?It costs approximately $6 to find and develop gas; with no economic return essentially. If these guys are going after "windfall profits" the royalty bump should be at much higher levels.
A: "The panel recommended lowering royalties at low natural gas prices. With lower royalties, there's more support for industry," says Van Meurs. "At $7 (Cdn) per gigajoule, all royalties would be higher. At $6, 82 per cent of all gas wells would pay lower royalties. And at $5, royalties on all wells would be less."
And what about the freehold issue? Freehold mineral leases will all be subject to a higher fee without reference to price. So to say "at $5, royalties on all wells would be less" is essentially lying.
Q: So how much would industry save from these lower royalties?
A: "At $6.20 gas prices, the royalty savings on low productivity wells would be about $227 million," says Chrapko. Q: The energy sector is already grappling with the end of the Accelerated Capital Cost Allowance and the elimination or scaling back of several royalty programs. Why didn't the panel take this into account? A: "We did extensive analysis on this. There are practically no countries in the world that permit a 100-per-cent writeoff for major capital expenditures. So ACCA was an unusually rich program that was no longer in keeping with Alberta's healthy oilsands industry," says Van Meurs.
Yes but it ended, and the industry is adjusting, and is now hit with this royalty increase. Chrapko doesn't state the extra royalty that will be grabbed from higher productivity wells at $6.20. If he was being transparent and truthful, he would.
Q: Even if most gas wells pay lower royalties at low natural gas prices, what does it matter if, as some say, the entire basin is now uneconomic?Most of it is. The companies were developing on the optimism that prices will go up. You are proposing taking that price upside away with the royalty report. So of course companies are pissed, they've stranded a massive amount of capital if your report is implemented.
A: "Drilling is down, but we had very active drilling going on, even at $5 (per gigajoule). So are all these companies dumb? To say the whole basin is uneconomic at $5 makes no sense," says Van Meurs.
Q: According to Tristone Capital, five per cent of Alberta's gas wells account for 50 per cent of production and generate about 40 per cent of all provincial royalties. Under the panel's recommendations, won't these critical wells -- mainly in the Foothills -- take the biggest royalty hit?Such wells won't be drilled anymore; the risk / reward simply doesn't work under the proposed royalties. Alberta's royalty income will certainly be affected.
A: "We don't deny that at all. The most profitable wells will bring in most of the (additional) royalty revenues," says Van Meurs. According to the panel's report, higher royalty rates on such wells would generate more than $900 million a year in additional royalties, roughly half the projected $2-billion total increase. However, even at a gas price of $9 per thousand cubic feet, Tristone reckons returns on such wells would be cut sharply.
Q: Won't the panel's recommendations, if implemented, kill any incentive to drill these high-cost wells?Well then why didn't one get written into the proposal?
A: "Some of the reaction of the industry, particularly EnCana, was I think largely related to the deep well (royalty incentive) program. It's true the panel recommended cancelling a number of royalty programs. But it never recommended cancelling that one," says Van Meurs.
Q: Ziff Energy estimates that "full cycle" natural gas supply costs in Alberta have doubled to $7.90 per thousand cubic feet (Mcf) since 2000. If so, isn't there very little incentive left to drill expensive deep-basin targets in Alberta?Van Meurs doesn't know the price decks the producers are using. Most are betting on higher gas prices and willing to take a short term loss for a long term win. The strip price is in contango so forward sales can actually pull some projects on board now. A very basic strategy that is lost on Van Meurs.
A: "Under the current royalty terms, deep gas wells are paying as much as a 20-per-cent royalty. These wells are being drilled today at $6 per Mcf. So this argument doesn't make sense. And remember, the (deep-basin gas) royalty holiday only applies to the first $500,000 of royalties," says Van Meurs.
Q: But if full-cycle costs are really $7.90, as Ziff says, why does the panel recommend that all wells pay higher royalties at just $7?"one of the most subsidized in the province"??? Proof of that? I know of one industry that is far, far more subsidized. The forestry industry. And who in the oil and gas sector is asking for a guarenteed profit? No one. What we are asking for is to not have a guaranteed shakedown in revising the royalties upwards. All the above is exceptionally dishonest. Even for these guys.
A: "The full-cycle view means you account for everything, not just the successful wells. So you factor in all the costs of exploration, and the denominator is your total production," says Chrapko. "But it's the commodity price that's the key to profitability. Royalties are not a magic wand that are meant to address all ills. In the capitalist system, every inefficient operator isn't entitled to a profit -- especially in an industry that's already one of the most subsidized in the province."
Q: Sure, there's drilling even at low gas prices. But aren't lease holders forced to drill their prospects while gambling that prices will rise?No one sets out to lose money. Classic bumper sticker: "We are a non-profit organization. We didn't plan to be, but it just turned out that way." Donald Trump fired Pedro in a previous post, please don't force me to roll him out again.........
A: "Each well has a different break-even price level. As the price declines, more wells are less economic. Do some companies drill because their leases are running out? Of course. But I can't think of anybody who would actually deliberately lose money by drilling a well," says Van Meurs.
Q: Let's turn to the oilsands. CAPP president Pierre Alvarez says today's high oil prices are somewhat meaningless. Yes, light crude is now above $88, but bitumen is worth less than half that. More importantly, it is returns that matter, not commodity prices. Your response?
A: "The answer is very simple. In all the economic analyses we did, the panel assumed bitumen prices would be 45 per cent of light crude oil prices. So that's the basis of all the economic analysis," says Van Meurs.
Q: OK, but what about the returns from these projects?
A: "First, I suggest you take a look at the market values of these companies, if you don't think these oilsands projects are highly profitable," says Chrapko.
"Suncor's stock price just hit an-all time high. So did Canadian Oil Sands Trust, and Canadian Natural Resources (CNRL) shares are just below their all-time high."And what Chrapko is really saying is that "hey these guys made money, let's get it." Corporate taxes, income taxes, etc. aren't enough. No, must get it all. Chrapko will get the share prices down and make things right for his world. Possibly share prices have come up a bit because investors can't believe the Alta government would be so stupid as to adopt the "Ourwellian Fair Share" vision.
Q: But oil prices are up about $7 a barrel since the panel's report came out, close to a record high. Doesn't that explain it?Chrapko, I worked in thermal oil projects in the 1980's. Billions of dollars were poured into figuring things out. Now that they've been figured out and some people can make money on it, they've got a "sweetheart deal". You know nothing about the history of oilsands development it appears.
A: "In part. As I like to say, it's the oil price, stupid. That's always the key factor. And that's why these companies are racking up record profits. But on top of that, let's talk about the sweetheart deal these producers get under the current generic oilsands royalty regime," says Chrapko. "They not only deduct their startup capital costs, they also deduct their R&D costs and their operating costs, as incurred. And on top of that, they get another six per cent on their capital invested," he adds. "During this whole period, they pay a one-per-cent royalty until all such costs, plus six per cent, are recovered. That's the sweetheart deal. If that's not looking at returns, I don't know what is."
Q: But what about the huge cost overruns companies have absorbed?The company pays for it, it absolutely makes their projects less profitable in terms of ROR and payout if they grow the costs. Albertans do lose a bit; maybe 20% of the overrun. The argument above is dishonest.
A: "The reason they're able to absorb the multi-billion dollar hits is that you and me, all of us, are paying for it. That's why they can agree to 24-per-cent increases (over four years) in their labour agreements, as Suncor and CNRL just did."
Q: Still, the panel proposes two major increases to current oilsands royalties, including a hike in the ultimate net profit payout to 33 per cent, and a bitumen tax tied to oil prices that scales up to a high of nine per cent at $120. Won't this severely impair returns for oilsands projects?I don't believe this. If J.S. Herold only looked at a five year timeline, most oilsands projects would not be paid out and they would have a negative rate of return. Be careful with what these guys say, as I've demonstrated above they use dishonest methods in all points of this interview, don't know why they'd stop there.
A: "My work for the panel was precisely to measure, to ensure, the linkage between profitability and royalty rates. So in all my reports I analyzed the rate of return, the profitability ratio, and the net present value per barrel of oil equivalent for every feasible price-cost combination for oilsands as well as conventional natural gas and oil wells," says Van Meurs.
Q: All right, but as you know, J.S. Herold, an industry consulting firm, says returns from the oilsands aren't as high as other jurisdictions, correct?
A: "J.S. Herold makes a basic mistake in calculating returns. They only looked at a five-year timeline, instead of the entire lifespan of a project. The economic rent -- or royalties -- have to be looked at when the project is done, not just in advance. Otherwise you end up with a castrated view of the revenues," says Chrapko.
Q: Suncor and Syncrude operate under special Crown Agreements that don't expire until 2016, and which enable them to opt to pay royalties on lower-value bitumen in 2009. Isn't it wrong to recommend tearing up these contracts?Dang, I can't catch them fibbing on this one.
A: "The panel under no circumstances recommended any ripping up of contracts. The current agreements with Suncor and Syncrude are there, and all the forecasts in the panel's report are based on those agreements," says Van Meurs. "You can see that even in the forecasts on page 17 (of the report). Clearly, oilsands royalty revenues are projected to drop to $1.7 billion from $2.2 billion by 2010, under the current system."
Q: But what about other oilsands producers that have made big investments, such as CNRL, which falls under the current generic oilsands royalty regime? Even if royalties are changed, shouldn't CNRL be 'grandfathered?'Slagging the Ministry. Boy, I'd love to see the Ministry folks take on these two as well.
A: "The oilsands division of the Ministry of Energy and its utter incapability of monitoring the current system -- as shown in the recent auditor general's report -- would suggest that you don't want to start setting up two sets of rules when they can't even monitor one," says Chrapko.
"But I want to make it clear that our problem is with the oilsands division, not the whole energy department. Dave Breakwell and his team, including Barry Rogers and Matthew Foss, were beyond exemplary. Our whole report could not have been done without them."Oh my, now playing inter department favourites. Political animals indeed.
Q: You say you're not in favour of ripping up the current agreements with Suncor and Syncrude. Yet, they'd be subject to the proposed new bitumen tax. Isn't that the same thing?Yes, reporter. It is the same thing.
A: "No. The Suncor and Syncrude agreements only apply to royalties, not absolute fiscal stability in the province. So any tax -- whether it's a bitumen tax, a water tax, or a carbon tax -- can be imposed, just like any tax. That's not ripping up an agreement," says Van Meurs.
Q: OK. But isn't a bitumen tax just another name for a royalty?Yes reporter, it is the same thing. Calling a duck a cat doesn't make it a cat. I take Pedro to task for the level playing field and many other peculiar ideas he has here.
A: "No, they're two different things. As we've said, Suncor and Syncrude won't be subject to any new rules on oilsands royalties, yet they account for about 50 per cent of all bitumen production. So that's one reason why we introduced this new bitumen tax," says Chrapko."Ideally, you always like to work towards a level playing field for all investors," says Van Meurs. "The bitumen tax does that."
Q: Let's get back to oilsands project costs. As you know, the industry says costs have skyrocketed, and the panel's numbers are outdated. Any response?The fantasy numbers are Pedros!
A: "In January, Wood Mackenzie updated all of the cost estimates for all the major oilsands projects. Their study was widely distributed, and I was conservative in interpreting their data. The energy department assured me subsequently they have reconfirmed that Wood Mackenzie still believes the cost data is reasonable," says Van Meurs.
"Since then, Wood Mackenzie has stated that yes, some new projects are 25 per cent more expensive than those we had studied, and these are projects that are on the drawing board, so they're just estimates. Well, give me a break. These are just fantasy numbers that are now being thrown around."
Says Chrapko: "In January, on a conference call we had with Wood Mackenzie, they were estimating oilsands capital costs ranged from $50,000 to $80,000 per barrel, depending on the project. "Since our report was issued, they're saying it's now $100,000. Well (bleep), whose pocket are they in?"I've been following oilsands projects from public data and it has been clear to me for at least a year that the $100,000 number is plainly in the public realm.
Note how accusatory and conspiratorial these guys are. "whose pocket are they in?"
What is good for the goose is good for the gander; who's pocket is the royalty review panel in?
Q: Wood Mackenzie says the panel's recommendations, if implemented, would reduce the value of current or future oilsands projects by some $26 billion, or 13 per cent of the sector's value. How does that serve the province's interests?Steal $26 billion with the stroke of a pen! Not bad for a dishonest, Orwellian day's work, eh?
A: "Please understand what this means. It means that if you bought all of the oilsands assets today from all the companies there, you would pay $26 billion or 13 per cent less than you would have paid before," says Van Meurs. "Why is this in the interest of the province? Because this value is going to be transferred from the companies to the province (in the form of higher royalties). That's the benefit. Alberta will be $26 billion richer on a net present value basis."
Q: But doesn't this imply that some marginal oilsands projects will be killed? Isn't that part of the rationale for the $26-billion figure?And if this report is put in, every Albertan's house will fall dramatically in value. Was that factored into their calculations?
A: "No. Let me put it this way. It's as if you bought a house. Previously it was worth $400,000, but the municipality comes in and says, from this day forward, there's a further $10,000 in property tax on that house. So now, maybe you're only willing to pay $370,000 for it. That's basically what's happening here."
Q: Why didn't the royalty panel include land-lease sales to determine whether Albertans are getting their fair share? Wasn't that a key omission?But Pedro figures he has an "apples-to-apples" comparison between comparing high rate light oil wells in Norway to a surface oilsands mind in Alberta. Pedro, you are fired.
A: "No. The panel's task was to determine a fair share of resource revenues, and fair share has to be determined based on a relative comparison with other jurisdictions in the world," says Van Meurs. "A lot of nations have payments that look like bonuses, but are very difficult to determine and aren't normally taken into account, like import duties. So that's why, by taking these figures out of it, we get an apples-to-apples comparison."
Q: You admit some marginal oilsands projects are likely to be scrapped if royalty rates are raised and a bitumen tax is imposed. Shouldn't the industry decide how fast development occurs?So Pedro will "pre-destroy" that value, rather than maintaining it. Ingenious. Kind of like pre-crime in Minority Report. The minority report reference is of course a delicious pun. Small consolation to having to debunk these "gentleman".
A: "It's the government's function to create a sustainable rate of development for the oilsands. That's not an industry function. The mandate of the department of energy is to maximize the value of the resources," says Van Meurs. "If you let the free market completely decide what happens, then every time oil prices go up, more expensive projects get built, which jacks up the rate of inflation even more. So using the revenue minus cost royalty formula that applies to oilsands projects, you wind up collecting less royalty revenue," he adds. "Since it's the mandate of the department of energy to maximize the value of the resources, therefore, one of the ingredients in maximizing the value of the resources is to establish a sustainable level of development. In a boom scenario, you're destroying that value, rather than maintaining it," he adds.
Q: Some critics say the panel didn't adequately consult industry, and therefore the data you used is dated or incomplete. Your response?To which the panel apparently listened to none of it.
A: "That's nonsense. In many countries, fiscal changes or hydrocarbon tax changes are passed with far less consultation, or no consultation at all. There aren't many places in the world as open to consultation as Alberta. The industry had six months time to make its case," says Van Meurs.
Adds Chrapko: "Now -- after repeatedly hearing from industry, 'If it ain't broke don't fix it' -- we're suddenly hearing 'Well, there's room to move.' Well, I don't know how to put it elegantly, but that just takes the cake. About two-thirds of the public hearings, and probably 90 per cent of the written material, was from industry. We needed wheelbarrows to carry it around."Yes, industry tried to get you to listen. On one hand these people say "industry had its chance to consult to us" and implies industry was negligent in not doing so. On the other hand they complain they got too much input.
When I see contradictions I know someone is lying.
Q: What are your views on the closed-door meetings the government has had with industry representatives since the panel's report was issued?Of course the royalty review panel's meetings were behind closed doors. Totally not-transparent. I find that more than somewhat disconcerting. I wish industry had six months to work behind closed doors like the panel did.
A: "What I regret is that this is not part of the official process, where we could have sorted out all these debates about costs in public, rather than behind closed doors. "That is of course somewhat disconcerting" says Van Meurs.
Q: So have you been asked to comment on industry's objections to the report by the premier and the energy minister?This site would have a lot of it. Chrapko, you should be keeping up with your reading.
A: "Four panel members, including myself, Bill Hunter, Andrew Plourde, and Judith Dwarkin, met the premier and the energy minister for about two hours, on Thursday. But we weren't given the data that was being used against us," says Chrapko.
"We were asked only to comment in generalities. So we just made the point that the debate should be based on data that's open to third-party verification, like our own. So the conversation was at a level that didn't offer an opportunity to do a proper analysis."You had the chance to do a proper analysis and blew it. Instead you did the "Ourwellian Fair Share" document.
Q: Any comments on Dwarkin's involvement in the report issued Thursday by her firm, Ross Smith Energy, or her subsequent statements?More conspiracy theory. It wouldn't surprise me that somebody got to the panel. What did you guys do to the poor woman to get her to adopt such a wacky position?
A: "It doesn't surprise me if the industry got to her. Her employer's bread is buttered directly by investors in the conventional energy sector. But she advanced the recommendations we adopted as a sector champion of that part of the report."
Q: The hints we're now getting from the premier suggest he'll announce a "balance" between the panel's recommendations and the position that's being expressed by industry, behind closed doors. Your thoughts?Well the Parkland Institute is right there with you, comrade! Thanks for letting the lunatics loose.
A: "Therein lies my problem. The energy industry has succeeded in leaving the impression that the panel produced some kind of communist-Marxist document that was egregious and outrageous. I think that's the biggest problem now. In fact, we were more pro free enterprise and conciliatory in the industry's favour than much of the independent advice and international comparables indicated we needed to be."
glamphier@thejournal.canwest.com
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