Oil Industry Worker's Reponse

From: Dan Baumgarten
Sent: Friday, September 28, 2007 10:09 AM
To:
RE: Royalty Review Feedback (AC160837)

Well, it wasn't my bosses thoughts, Dan P is a colleague of mine, but that's not the point.

I can agree that perhaps there needs to be a 'cooling off' of the costs of labor and services in the province, but this report is flawed in numerous ways, whether you are in the patch or not. Here's why:

-changing the royalties without grandfathering existing wells/production is STEALING. The analogy of a landlord changing rents is not valid in that the tenant is given notice of the rent change and can decide if the new rent is palatable and either pay up or move out; in the case of royalties, companies see the fiscal regime in which their investment will be employed in (i.e. what rate of take the government rightfully takes), and then decides if the investment is economic or not …right from the land bonus the company pays to gain access to the mineral rights to what it costs to drill, complete, and produce the resource. If that investment is made, and then the government rate of take increases after the fact, the playing field changes and the investment could turn uneconomic (we have verified that some of our own projects will never fly under the new regime, as have many other companies). As per Dan P’s note, at least Venezuela paid the companies for the expropriated resources when they did it… Note that during past royalty shake ups in Alberta, the existing production was grandfathered, as it really should and has to be…that’s how we got ‘third tier oil’, etc.

-the report bases the future $2 billion in extra revenue to the province on the existing forecast of activity through 2016 or something like that….hmmm, we will make the fiscal environment harsher, but big oil will suck it up and we’ll collect our dough. C’mon, it doesn’t take a economics degree to conclude that the same level of activity will NOT happen (lots of projects will now be uneconomic and hence the increased royalty will be applied against ZERO production, not too mention the loss of investment in the province). We’ve done some calcs of our own, and figure that at best the province may break even on increased royalties gathered through the next little while, but with a huge loss of investment in the province. That results in fewer jobs, less tax revenue, blah blah blah. Can’t really back that up, but that’s what it looks like to us.

-As far as Alberta getting ‘competitive value’ for it’s resource, note that the Canadian basin ranks dead last in petroleum producing nations as far as ROR on investment is concerned – a whopping 12% is the Canadian average (see attached report, excerpt from JC HErold review). The only reason we get any investment at all is security of supply and political stability in the region – we are essentially the ‘GIC’ of the petroleum producing regions – you won’t make a ton of money, but you could count on not losing money. That’s starting to change now with that report – note that in this global economy, capital freely moves about to the most attractive places….

-eliminating incentive programs will kill many projects many investments only happen because the riskier ventures are aided by some sort of royalty relief to encourage that investment. Heck, EnCana just released that they will cut $ 1 BILLION of investment into Alberta next year if the royalty plan is put into effect. This isn’t saber rattling, EnCana is a numbers company run by engineers that is basically a money churning machine – their claim to fame is tight gas / marginal gas that they make money on through sheer economies of scale and through incentives to drill these crappy wells….obviously the new royalty regime kills a lot of their activity and with it all that investment – people lose sight of the spin-offs of these major investments – folks that get paid out of that $1 BILLION would pay taxes, buy cars, build homes, yadda yadda. Wonder how we got rid of the deficit in Alberta?

OK, that’s all I have time to write at this time…admittedly most of the above is based on the conventional oil and gas. Perhaps something needs to be done with the oilsands regime, I’m not as familiar with all the aspects of that business (and from what I gather from Dan W’s note, you too think the cost structure for that development is not properly addressed in the review). However, I STRONGLY urge you to consider the above; there WILL be serious repercussions to the Alberta economy if the reports findings are implemented as is. Not saying the royalty regime is sacred and can’t be changed, but this report is fundamentally flawed in many ways. Please reconsider and even think about redrafting your letter….this is important to all Albertans.