From:
To:
Sent: Saturday, September 29, 2007 1:26 PM
Subject: Alberta and Texas Shares
Dear Sirs:
My sister-in-law in Calgary forwarded the Alberta report on the potential increases in royalties in the province. She also forwarded a list of comments that are right on the money. I was Canadian and when the industry overnight saw a 30% drop in revenue when the 1980 National Energy Program was enacted, I seized an opportunity to come to Texas. I left April 1, 1981 (No fooling!). Both my wife and I are now U. S. citizens and have two Texas born kids. We still have family in Calgary and it saddens me to see a potential repeat of the historical mistakes made by the Canadian governments.
Obviously, you’ve done a significant amount of work looking at the situation but thought you might be interested in an expatriot’s view who’s still heavily and directly involved in tertiary recovery here in Texas.
Best of luck with this fight.
Charlie Adams, P. Eng. (TX No. 58827 and Alberta No. 010027)
To:
Sent: Saturday, September 29, 2007 1:26 PM
Subject: Alberta and Texas Shares
Dear Sirs:
My sister-in-law in Calgary forwarded the Alberta report on the potential increases in royalties in the province. She also forwarded a list of comments that are right on the money. I was Canadian and when the industry overnight saw a 30% drop in revenue when the 1980 National Energy Program was enacted, I seized an opportunity to come to Texas. I left April 1, 1981 (No fooling!). Both my wife and I are now U. S. citizens and have two Texas born kids. We still have family in Calgary and it saddens me to see a potential repeat of the historical mistakes made by the Canadian governments.
Obviously, you’ve done a significant amount of work looking at the situation but thought you might be interested in an expatriot’s view who’s still heavily and directly involved in tertiary recovery here in Texas.
Best of luck with this fight.
Charlie Adams, P. Eng. (TX No. 58827 and Alberta No. 010027)
##################
Comments on Proposed Alberta Royalty Increase 9/29/2007
K. C. Adams, P. Eng. (Alberta and Texas)
Conclusion
It is always interesting the lengths that governments will go to justify increased taxes. The document titled “Our Fair Share, A Report of the Alberta Royalty Review Panel” is an excellent example. In business, this unilateral changing of basic business premises and agreements would be legally actionable. Obviously, it would not be politically correct, but it would be refreshing if the good ship Alberta would pull up beside the industry flotilla, unfurl the Jolly Roger, open the gun ports and be honest for once about their intent.
This change in royalties has the potential to be as devastating to the economy in Alberta as the National Energy Program of 1980. If Canadians do not learn from history, it will repeat itself. As a mentor of mine said once, there is nothing more fluid in the world than capital. It will easily move to areas of better opportunities.
The irony will be, much as has happened in the past, those with cash will have a unique opportunity to enter the business in Canada or expand their holdings in the next couple of years and, as the government brings back incentives to compensate and revitalize the industry, they will see a significant return on their investments. Those who are strongly invested in the industry now and highly leveraged will not be as fortunate.
Summary (Note: This discussion is supplemented by details in a Powerpoint file “Share Comparison.ppt)
1. The estimated effect of an increase in ownership and government take as proposed on conventional oil in Alberta when applied to a Texas tertiary project was calculated. An increase from 44 to 49% royalty is approximately an 11.4% increase in that take. Based on a similar increase in a Texas tertiary project, the loss of profit on the project is about 20% over life. This would be a sufficient decrease to halt investment in this type of endeavor.
2. The change in the Tar Sands regime in Alberta as proposed would take the “Albertan’s” share from 47% to 64%. This is a 36.1% increase or over 3 times that calculated for the conventional oil increase. No details by this author on the economics of the tar sands are available but the immediate conclusion is that this should halt any additional new project development in this area. It also shows the complete lack of understanding of the critical requirement for a long term stable fiscal environment to encourage high cost, low return projects such as the tar sands.
3. The Texas ownership and government share of a conventional oil resource is shown in the Alberta report is 66%. Including U. S. Federal Income Tax and a cost of “EOR Market Acquisition Cost” of $0.50/NBO based on market conditions in Texas, the total ownership and government share is estimated at 41%. Peak oil production occurs 9 years after initial injection so a gas resource play that shows high initial rates with steep declines, due to time value of money, may be able to tolerate a higher share load but the 66% number for Texas seems an excessive estimate. Also, the State and ownership share in Texas without income tax is about 20%.
4. The economic squeeze that the Canadian business is seeing in profit margins cannot be overstated. Costs have been going up at high rates of inflation while product prices have actually stayed flat. This is partially due to the increased valuation of the Canadian dollar. In January of 2006, oil on NYMEX traded at about $US 65/GBO. With the exchange rate of 0.86 at that time, the equivalent in Canadian dollars was $CDN 75/GBO. Although up and down, if a present estimate of $US 75/GBO is assumed (15% increase), with the exchange rate of 1.0, this equates to a price of $CDN 75/GBO. The Canadian producer has seen their prices stay flat while the prices in the United States have increased by 15% helping to offset inflated costs. Also, it is insulting to intimate, as in the Alberta report, such cost increases can be mitigated by better management and, as others have mentioned, shows a complete lack of knowledge of the basics and efficiency of the oil industry or any industry basic metrics.
5. The move to increase royalties quite possibly could not come at a worse time with regards to market conditions. World production has been flat or slightly decreasing since January of 2005. The Saudi’s have decreased their production from a peak of 9.6 MMBOPD to, at present, 8.5 MMBOPD. They have again begun to act as the world’s swing producer to keep prices up. Supply/demand does work in these markets and world demand for oil is reacting to the substantial price increases seen in recent history. The potential for a softening of world oil prices is significant especially over the next few years. Layering this potential softening on top of the royalty increases and increasing costs does not bode well for continued strength in the Canadian industry.
K. C. Adams, P. Eng. (Alberta and Texas)
Conclusion
It is always interesting the lengths that governments will go to justify increased taxes. The document titled “Our Fair Share, A Report of the Alberta Royalty Review Panel” is an excellent example. In business, this unilateral changing of basic business premises and agreements would be legally actionable. Obviously, it would not be politically correct, but it would be refreshing if the good ship Alberta would pull up beside the industry flotilla, unfurl the Jolly Roger, open the gun ports and be honest for once about their intent.
This change in royalties has the potential to be as devastating to the economy in Alberta as the National Energy Program of 1980. If Canadians do not learn from history, it will repeat itself. As a mentor of mine said once, there is nothing more fluid in the world than capital. It will easily move to areas of better opportunities.
The irony will be, much as has happened in the past, those with cash will have a unique opportunity to enter the business in Canada or expand their holdings in the next couple of years and, as the government brings back incentives to compensate and revitalize the industry, they will see a significant return on their investments. Those who are strongly invested in the industry now and highly leveraged will not be as fortunate.
Summary (Note: This discussion is supplemented by details in a Powerpoint file “Share Comparison.ppt)
1. The estimated effect of an increase in ownership and government take as proposed on conventional oil in Alberta when applied to a Texas tertiary project was calculated. An increase from 44 to 49% royalty is approximately an 11.4% increase in that take. Based on a similar increase in a Texas tertiary project, the loss of profit on the project is about 20% over life. This would be a sufficient decrease to halt investment in this type of endeavor.
2. The change in the Tar Sands regime in Alberta as proposed would take the “Albertan’s” share from 47% to 64%. This is a 36.1% increase or over 3 times that calculated for the conventional oil increase. No details by this author on the economics of the tar sands are available but the immediate conclusion is that this should halt any additional new project development in this area. It also shows the complete lack of understanding of the critical requirement for a long term stable fiscal environment to encourage high cost, low return projects such as the tar sands.
3. The Texas ownership and government share of a conventional oil resource is shown in the Alberta report is 66%. Including U. S. Federal Income Tax and a cost of “EOR Market Acquisition Cost” of $0.50/NBO based on market conditions in Texas, the total ownership and government share is estimated at 41%. Peak oil production occurs 9 years after initial injection so a gas resource play that shows high initial rates with steep declines, due to time value of money, may be able to tolerate a higher share load but the 66% number for Texas seems an excessive estimate. Also, the State and ownership share in Texas without income tax is about 20%.
4. The economic squeeze that the Canadian business is seeing in profit margins cannot be overstated. Costs have been going up at high rates of inflation while product prices have actually stayed flat. This is partially due to the increased valuation of the Canadian dollar. In January of 2006, oil on NYMEX traded at about $US 65/GBO. With the exchange rate of 0.86 at that time, the equivalent in Canadian dollars was $CDN 75/GBO. Although up and down, if a present estimate of $US 75/GBO is assumed (15% increase), with the exchange rate of 1.0, this equates to a price of $CDN 75/GBO. The Canadian producer has seen their prices stay flat while the prices in the United States have increased by 15% helping to offset inflated costs. Also, it is insulting to intimate, as in the Alberta report, such cost increases can be mitigated by better management and, as others have mentioned, shows a complete lack of knowledge of the basics and efficiency of the oil industry or any industry basic metrics.
5. The move to increase royalties quite possibly could not come at a worse time with regards to market conditions. World production has been flat or slightly decreasing since January of 2005. The Saudi’s have decreased their production from a peak of 9.6 MMBOPD to, at present, 8.5 MMBOPD. They have again begun to act as the world’s swing producer to keep prices up. Supply/demand does work in these markets and world demand for oil is reacting to the substantial price increases seen in recent history. The potential for a softening of world oil prices is significant especially over the next few years. Layering this potential softening on top of the royalty increases and increasing costs does not bode well for continued strength in the Canadian industry.
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