This letter was written in response to this note, previously posted.
Stelmach - Response Letter from GP
Many times when i get an email like this i just sit back and read it, and wonder just who really wrote it and what was their motivation for doing so. Being the little knowledge freak I am, I decided to do some investigating of my own, in the back yard of GP and area based on the content of the letter. Many of you know I have a Small Oil and Gas company of my own (150 BOE/D) and try to stay in tune with the political issues that affect me based on my current size of production and costs. I also like to stay in tune with larger players and the way changes affect them so that I may look forward and plan my continually evolving business model.
I contacted via telephone a senior member of CNRL's team in that area. We used to work together in Rainbow Lake for many years and have both went on in separate directions to become strong friends and strong business people, excellent technical people (both hands on mechanical/instrumentation and paperwork and people skills). I guess thats why we are friends, we think the same ways, and face many of the same challenges. We talked personal for awhile, then things let to the royalty review, actual operations and current projects, and the impacts we expect to see from each our perspectives. I mentioned this letter. He asked me is that the one from the rental guy in GP. Yes it is I respond. Yes I know that guy he says. So we discuss what's in the letter about the canceled projects, I am wondering if these rigs actually folded up and went home or not. I got the answer.
I've never actually seen this, rig moves are not cheap at all, but sometimes cutting a loss is the best outcome you could foresee. He said yes we did cancel those wells. One of the rigs we talked about was just in the process of setting up for spacing and prep'ing to stand for drilling, and the word came down to rack it all up and send it back to yard. So yes this is a true case story, not just some letter from a disgruntled taxpayer who needs to go on a holiday and chill out for awhile.
I asked what was it that lead to that choice to rig out before you're finished rigging in. That must have been a hard decision to make I responded with. He said it was not what they wanted to do, what they wanted to do was to drill the wells. But when you are embarking on a D&C (drill and complete) project that will run between $5,000,000.00 and $20,000,000.00 and the rules change in the middle of the game, you sometimes have to modify your game plan. With a D&C cost like that, and with a risk of capital of that magnitude (of which the citizens of the Province of Alberta do not participate in), where the original rule book gave a royalty exemption until payout to recover capital costs of that size, the risk was slightly offset and a projected ROI would be 3 to 5 years if the project did not go bust completely, but there is still risk attached. He indicated that now this royalty exemption is gone and the risk remains the same, the anticipated ROI is now forecast to be 8 years. And thats IF what the target is, gives it to you, to move you toward any ROI at all.
I'm starting to see it now. The citizens that had Ed demand their "fair share" were never sharing in the risk before, and now even more so. So I can see why one would elect to not drill a well, even when the rig is in the process of setting up. Now there is no well. The risk of capital has been removed. There is no asset to apply any royalty to, even if it would have been 3 years down the road. Now there is nothing to apply any royalty to. When ill-informed people send regulators to send you a message that sums up like this:
- You take all the risks
- You pay all the costs
- We want our share first
- We will not share in any risk though, you will assume all risks yourself
- If you go bust thats too bad
- If you find production we want our "share" first
- We don't care what your ROI is or if there is one at all.
THAT......kills industry and all the people it would have employed just to drill these wells, not including tie ins, pipelines, facilities, operating, etc. It takes over 75 people to drill just one of these wells. Now there is no well. No taxation of corporate or personal income because there are no services provided for 14 of these wells at $5 - $20 million dollars a pop. No royalty revenue because there is no well. No decent land sale bonus to the crown for offset sections because no one will want to lease crown P&NG rights anymore, because its all different now.
To the citizens of the Province of Alberta who insist that they are overdue to get their fare share.......get ready for it, because here it comes. I don't care what the rate is, any rate times zero is = ZERO. Thats grade one math. To these citizens and the cronies who gave in to get greedy.....are either of you smarter than a fifth grader? I would say, No they can't be. But....I know one man who is...he saved his capital, he may soon need it to move to Saskatchewan, and I'm right in his footsteps. I actually started evaluating Saskatchewan yesterday, one day before receiving this letter.
This is just starting, we haven't even seen the ramifications of this yet. Its just getting started. That's too bad, it's gonna hurt a lot of people really bad in a somewhat geographical way. Rental company or completely otherwise.
You may forward or send this to whoever you want. It doesn't matter now, it's not a disgruntled letter, its just a true life example.
Brad Peake
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The moral of this story is to let the markets word. Government needs to bud out of the private sector.
Oilsands investors reassured
High crude prices compensate
By LAUREN KRUGEL, CP
Calgary Sun, November 17, 2007
There's no reason for investors to be spooked by massive cost overruns at many big Alberta oilsands operations since robust oil prices will likely keep the sector chugging along for decades to come, junior oilpatch players say.
"When you have $95 oil, it really outweighs the majority of the costs that have increased over time," said Jason Gigliotti of Habanero Resources Inc., a junior oilsands producer.
"Going forward (Alberta) is still the only viable place that's growing in production ... This is where the money's going to go. Logically (the sector) is only going to increase for the next 40 years, not decrease."
Gigliotti's optimism flies in the face of recent warnings the business of pulling bitumen out of the ground is only going to get more expensive.
Last month, Canadian Natural Resources said its Horizon oilsands project will cost eight to 14% more than its original $6.8-billion estimate -- a rise of up to $1 billion.
The 2004 estimate for Nexen and Opti Canada's joint Long Lake operation was $3.4 billion, but in August the companies raised that to $5.8 billion.
And a National Energy Board report Thursday suggested there could be more issues ahead, with oilsands production likely to be 200,000 barrels lower in 2015 than forecast in 2006 as a result of soaring costs.
But while one of the most costly elements of the process -- labour -- will probably remain tight for the next few years, Shamir Premji of junior company Alberta Oilsands Inc. believes that problem will ease once megaprojects such as Horizon and Long Lake wrap up, freeing workers to help keep the sector afloat.
And his company, like others, is looking for the most cost-efficient ways to operate oilsands projects with a keen interest in new extraction methods such as the so-called THAI technology at Petrobank Energy and Resources Ltd.'s.
University of Alberta economics professor Andre Plourde said it's important to put the issues facing the oilsands industry into perspective, noting the 200,000-barrel decrease predicted in the report represents only a fraction of forecast production.
"That's not a huge deal. But I think it's a signal that people are actually looking at this issue seriously," he said.
The best way to alleviate cost pressures is to allow the market to "discipline itself," he said.
"There will be an automatic cost dampening that occurs when all of a sudden people realize maybe it's not worth building (oilsands developments) right now."
High costs are just a reality in the oilsands business and there's only so much that can be done to manage them, said Joseph Doucet, a University of Alberta professor who specializes in energy economics.
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