Royalty row divides Alberta

Royalty row divides Alberta

Oil majors threaten to pull investment

Saturday, September 29, 2007

CLAUDIA CATTANO and JON HARDING

National Post

CALGARY - In the 10 days since a provincially appointed panel dropped its bombshell report recommending that Alberta play hardball with the oilpatch, work inside Calgary's office towers has turned from planning growth to assessing damage and even eyeing an exodus.

EnCana Corp., Canada's largest oil and gas producer, took the first shot across the bow yesterday, saying it will move $1-billion worth of spending from Alberta next year if the full brunt of the recommendations are adopted. Others could follow suit.

Oklahoma City-based Devon Energy Corp. sent an internal memo to its 1,400 employees saying it was analyzing the potential impact of the recommendations on its investment plans in Canada. Some producers are weighing the merits of shifting their investments to other provinces. Pipeline companies are reviewing billions in pipeline plans.

Others are working with lawyers to assess their strategy if agreements are ripped up by the provincial government. Job searches are being put on hold. Real-estate deals are in limbo.
In a reaction typical of many recent arrivals, Norway-based Statoil ASA, which was attracted by Alberta's reputation and stable fiscal regime, said it's "surprised and disappointed" at the changes being contemplated.

"Everybody is holding their breath right now," said Hal Walker, a long-time provincial Tory and real-estate developer who is critical of the review process. "All bets are off."

The panel, headed by former forestry executive Bill Hunter, claimed in its 104-page report, using anti-business language that surprised many, that Albertans are not receiving their fair share from energy industry activity and recommended the Alberta government increase its revenue from the oil and gas sector by 20%, or about $2-billion annually.

Noting that oil belongs to the people, not the oil companies, the panel said royalty rates on oilsands projects should be boosted to 33% from 25% after initial investment is recovered. It also recommends a new super-royalty that would rise with higher oil prices, and higher royalties on high producing conventional oil and gas wells. It urges that the new deal apply across the board, regardless of existing agreements.

The Our Fair Share report created the perception that Albertans are getting ripped off by big oil, despite the government's continuing budget surpluses fuelled by oil activity.

What's fair, however, remains ambiguous.

"People are demanding their fair share, without fully understanding what that means," said one political insider.

Premier Ed Stelmach, who appointed the panel to follow through on a political promise, said he will respond by mid-October, while deputy premier Ron Stevens continues to get feedback.

The recommendations have created an explosion of debate akin to the one that arose from the federal National Energy Program that devastated the provincial economy in the 1980s.

But the difference this time is that the issue is pitting Albertan against Albertan, largely Calgary and its oil sector versus the rest of the province, and has even divided the provincial Tory party.

"He should be listening to everybody in the party, because right now he's not doing so," Mr. Walker said. "He's taking a lot of action that a lot of mainstream conservatives don't agree with."

Mr. Stelmach is said to be aware that his handling of the controversy will be his biggest political test. There is even speculation he will trigger a provincial election based on this issue.
Meanwhile, outsiders are watching in horror as their investments and trust in Alberta falter.
In the latest financial note to condemn Alberta's changing landscape, entitled The Bolivarian Republic of Alberta, Deutsche Bank said yesterday to clients that its first reaction was that the report was authored by a visiting delegation of Venezuelans.

Deutsche Bank highlighted the escalating risk of investing in the province: "Risk, risk and risk, and there's risk. Above all, be warned about risk," it said.

As out of character as the panel recommendations seem in business friendly Alberta, observers say it has big support in rural Alberta and in Edmonton, areas that believe they have suffered the downside of the oilsands driven boom, while not reaping enough of the benefits.

It's there that Mr. Stelmach, a farmer from Andrew in Northern Alberta, draws his support and his arms' length view of the oil industry.

David MacInnis, president of the Canadian Energy Pipeline Association, said people outside of the oilpatch view higher oil and gas royalties as the fix to funding the infrastructure deficit created over the past 10 years by the previous tight-fisted government of Ralph Klein.

"People are using higher royalty rates as a proxy for getting more money in communities that can be invested to help education and various infrastructure needs," he said.

"If that is what you are concerned with, and you want a stable economic future, then this draconian act being put forward is not the way to go."

Roger Epp, dean of the University of Alberta's Augustana campus in Camrose, said there is considerable support for the review and its recommendations in rural areas.

"The sense is that the Premier has done a brave thing in appointing a credible committee," he said. "And having done that, it's pretty hard for him to do less than deliver."

David Taras, political scientist at the University of Calgary, says the report also reflects a pitched battle along class lines.

"For those who are enjoying the upside of the boom, it's been an incredible ride, but for those suffering the downside, which is a lot of people struggling with housing prices and other things, they are looking at the Jaguars and the mansions, so there is this great social divide."

Those with large investments at stake are in a state of shock. The extent of the panel's recommendations were so unexpected industry groups took days to come up with a response.
Statoil, which moved to Alberta only this spring with its $2.2-billion acquisition of North American Oilsands Corp., said it was drawn to the province largely because of its "Alberta Advantage", the term coined by Mr. Klein to lure investment.

In fact, the company notes the government's own Web site still boasts that "Alberta has a stable and fiscally responsible government ? the Alberta government is committed to attracting investment and continued economic growth and development.

"It is also surprising that the panel did not seem aware of the costs (of building an oilsands project), costs that in our first few months' experience in moving our project forward are manifestly continuing to increase," said spokesman Robert Skinner.

"We will be conveying our concerns to the Government of Alberta while reflecting our appreciation that it too has challenges posed by an economy stimulated by high oil prices."

Industry's dismay also stems from its view that the panel's conclusions are based on flawed and outdated data and its assumption that oil companies will pay up because they have nowhere else to go.

There is concern about the message that it's OK for Alberta's ranking as a place to invest to plummet because it would still remain competitive against other oil jurisdictions.

Said one industry insider: "The panel seems confused as to what Alberta should do relative to other petroleum jurisdictions. It cannot have it both ways. We in Alberta cannot brag about the "Alberta Advantage" then go all wobbly and lose confidence the moment others change their regimes. For the panel to take this line of reasoning (that others are changing, so we must change, too), implies that all regimes were at an equal starting point in some fiscal horse race; in other words, the others have taken away the feedbag, so Alberta must do likewise."

Another observer said the panel triggered a debate where the conclusion was predictable, but reality is more complex.

"If you ask anybody in a poll, 'Do you think that big business is taking too much, everybody would say yes'," the observer said.

"Naturally, many people think the oil industry has been taking too much and we deserve more. That is a point of view, but it's not particularly that informed."

Much of the panels' conclusions were based on the views of Petro van Meurs, a consultant based in the tax haven of Nassau, Bahamas.

"The oil industry always gives strong negative reaction any time you propose a royalty or tax increase, because they get negative reaction from investors," he said.

"My business is to protect the owners of the resource and get the best possible deal for them, so consequently in the current environment with higher oil prices and higher profits, there are a large number of governments increasing the government take.

"Just ask individual landowners in Texas, who are increasing their royalties. It's what landowners do if prices go up and margins go up."

Regardless of where one stands in the debate, all agree that Mr. Stelmach is in a tight spot, balancing his political future against Alberta's prosperity.

So far, he has stood back, igniting even more fury in the business community, which is not used to this level of uncertainty in Canada's most pro-business province.

Said one provincial Tory insider: "He recognizes that this decision will make or break his leadership. He knows the stakes here."

Meanwhile, the drilling sector, which employs many in rural Alberta, yesterday called the royalty review panel naive for recommending higher royalties at a time drilling for gas is in a deep recession.

"The royalty review panel is wrong to believe that there is a surplus $1-billion that can be taken out of the natural gas business in Alberta," said the Canadian Association of Oilwell Drilling Contractors.

If Alberta politicians take the advice of the royalty review panel, "our workers, their families, and communities lose the best jobs they will ever have."