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.