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.