I agree with Yedlin on most of this article but am not sure the headline is appropriate. I'm also not sure Klein did things wrong, either. If the royalties had been cranked in 2000, would Alberta have experienced the incredible level of prosperity that it has enjoyed of late? Clearly the answer would be "no".

I never thought I'd see the day when politicians were criticized for delivering too much prosperity to citizens. Bizarro world.

http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=9d10f3c0-f931-47c0-a59b-b868d57aa536

Royalty mess bears Klein's fingerprints

Lack of leadership prevented earlier reviews

Deborah Yedlin, Calgary Herald
Published: Tuesday, October 02, 2007

The report by Alberta's auditor general Monday confirms what many have suspected for some time; had this province's former premier been more of a leader, the current maelstrom over the report by the royalty review panel would not be taking place today.

The issue of boosting royalties had been raised as early as 2000, but was wilfully ignored by the existing government. Had Premier Ralph Klein listened back then -- before oil prices and costs shot up -- and undertaken a review of the existing fiscal regime on which many companies made big bets, we might have avoided this nasty business.

In fact, a regular review should be part of any responsible government given that the energy business is dynamic, global and capital-intensive; it's not unlike boards of directors reviewing their governance on a frequent basis to make sure the company is following best practices.
Evan Chrapko, a former panel member, said as much in a session with the Calgary Herald's editorial board; if there had been appropriate stewardship in Edmonton, this kind of discussion would not be taking place.

Instead, Alberta's energy sector is grappling with a flawed report based on outdated information whose recommendations could seriously compromise the economic well-being of this province if implemented -- even though Chrapko believes otherwise.

Ever since the panel tabled its report two weeks ago, the brightest minds in the energy business have been hard at work finding big gaps in the panel's data, analysis and conclusions.
And it hasn't been confined to the Calgary-based investment dealers who obviously have something at stake. Wood Mackenzie, a global energy consulting firm has weighed in, as have Deutsche Bank and Dennis Gartman. Last week, FirstEnergy Corp. released its analysis, as did Peters & Co., which highlighted the impact of higher costs, and Monday, Tristone Capital took the debate to another level.

From an industry standpoint, natural gas giant EnCana Corp. weighed in with its views last Friday saying it will take $1 billion in investment elsewhere. And it's safe to say it won't be the last energy company to make its views known.

What's interesting is that there appears to be industry consensus regarding room to move on the existing royalty structure. It's just that what's currently on the table is neither constructive nor informed. Best of all, there is no hint of a phase-in period, which is customary when changes to an existing fiscal regime are on the table.

Monday was another classic example of the disconnect between fiction and reality.
In one day, a report from Tristone shows the flaws in the royalty review panel's recommendations on changing the royalty structure. This was followed by a session with a former panel member and an adviser to the group, effectively refuting Tristone Capital's analysis.

Yet, as Chrapko and Pedro Van Meurs -- a Bahamian-based economist who assisted the panel -- were queried on the use of data in the report and the punitive nature of the recommendations, there was no backing down.

Sure. That's what they have to do. But when Van Meurs suggests that grandfathering is a concept that really can't apply in Alberta because the royalty rate is not specifically written into a lease bought by an energy company, it's cause for concern. Furthermore, Van Meurs believes that every energy company -- including those in the oilsands making the billion-dollar bets -- should expect royalty rates to change over time.

"Rational businesspeople will understand that if a company bids on a lease, there is no guarantee in terms of royalty rates," he said, adding that the only jurisdictions to make that promise are places like Saudi Arabia, Turkmenistan, Peru and Angola.

As to the clearly punitive Oilsands Investment Tax, which would render uneconomic those projects by companies engaged solely in bitumen production, both Chrapko and Van Meurs suggested perhaps not every endeavour in the oilsands should proceed.

Presumably that's the market's job; if a company can't make money, it won't be able to raise the necessary funds. Period. An additional layer of taxation isn't required to discourage investment.

Then there was the issue of bitumen valuation.

The existing market isn't transparent, claims Van Meurs, even though 250,000 barrels a day of West Canada Select Blend is traded every day.

Another disconnect was apparent with regard to natural gas.

The report says-low productivity wells will pay a lower royalty rate at lower prices. But production falls at lower prices -- especially at current costs.

Tristone goes on to suggest the proposed structure acts as a disincentive for companies to pursue natural gas exploration opportunities, ultimately rendering Alberta "a stripper well economy" because the only production will come from shallow wells.

The recommendations would effectively discourage the continued exploration and development of the deeper natural gas prospects. While Chrapko said the panel had not opined on the issue of deep wells, a reading of the report suggests otherwise. It recommends all programs be eliminated because they are no longer appropriate. Clearly this needs clarification because these wells are where future natural gas production in Alberta will come from. They are not cheap and carry with them a fair bit of risk. But the way the report reads, there is no economic incentive to pursue them -- even at $9/mcf prices.

EnCana has already talked about withdrawing $1 billion in capital investment, and Talisman Energy is also pulling back expenditures. The real shoe will drop when the junior companies that are levered to natural gas start curtailing activities.

All this doesn't bode well for Alberta's coffers.

The industry invests upwards of $60 billion in the province -- this yields royalties, taxes, keeps unemployment low, surpluses high and let's us all boast of the lack of a provincial sales tax.
Bad facts and bad assumptions make for bad decisions. Yes, there are opportunities for change -- but they have to be made with an eye to the future that will not compromise economic growth for years to come. Alberta has already been down that road.

dyedlin@theherald.canwest.com