Alberta Royalty Review

Kelly - The sad truth is that more Albertan's than not have been sold a bill of goods (believing the review panel's "report" is an accurate reflection of how much more "Big Oil" can afford to pay in royalties & taxes). Hence Mr Stelmach's rise in popularity in the polls. IF Stelmach's government implements the increases full bore as proposed, it will quickly become apparent to all what a mistake it was. What upsets me most is the way the board and Stelmach have so totally distorted the facts. The "costs" that Hunter and his board use not only are dated, but come from Texas industry statistics, hardly the same scenario producers face in deep drilling in Alberta.

Excellent posting Jim. The smaller players in the industry will be showing their dissatisfaction this week through a rally on the Legislature front steps. Info can be found here: http://www.quattroenergy.ca/Royalty.html Stelmach is in a difficult position and certainly has to weigh his options very careflully. Cheers, Jane

Perhaps Jim should read the report and not rely on the media to the summaries for him. The data the royalty review panel was working with was what was made available to them. They solicited data from Alberta Energy, oil and gas companies, EUB etc.. Data is not the issue here. Companies have not right to complain about the data, they were asked to give accurate data, so where does the blame lie? The issue at hand is; should these companies be able to continue to make windfall profits from a public resource? Of course not! The oil in Alberta represents this province's legacy. Why would we take it all as fast as possible? What about three generations from now when the oil resource has all but been exploited for a measly $80/barrell, when it could be $120, $140.. do the math taking it all now does not make good business sense. The oil resource is not going anywhere; its value is ever increasing. Also, why are we all assuming that the boom is going to go away? There is investment capital in this province that people earned from the past 10 years of exploitation. Lets put that to work instead. Also with the new recommendations Albertans receive more and less goes to Ottawa! Isn't this a complaint we have had all along? Why should the feds be receiving so much from what is rightfully for Albertans? The fear mongering of a slow down in the economy is not warranted. Read the TD Report (http://www.td.com/economics/special/db0907_alta.pdf ), they are saying that sky rocketing costs, which have occurred from the irresponsible pace of development, is slowing down oil&gas developments in Alberta. In addition, do you really think the royalties are going to slow it down drastically? This royalty debate has been skewed with arguments made by people who are looking out for the best interest of a few corporations and not looking at the long term potential of this province.

Gabriel - Thank you for your comments! They accurately summarize the feelings of many Albertan's. Unfortunately, your willingness to accept the report as "fact" undermines several of your assumptions. The board did NOT use accurate data (as provided by both Producers and Service companies). Do you work in the exploration & development industry? If you did, there's no possible way you'd accept the information as factual. You also suggest "with the new recommendations Albertans receive more and less goes to Ottawa". I'd have to disagree with that suggestion. In fact, if the proposals are implemented as recommended by the board, the total royalty & tax take by the Alberta government will trend down *as a result of producers abandoning marginal wells & fields, as well as redeployment of their capital to other projects with more favourable royalty & taxes*. Given the revenue the federal government receives from Alberta, it won't be long until the feds come looking for more.

Calgary Agent- Again this notion that everyones going to pull out of Alberta when the royalty recommendations come down is absurd. In fact, just yesterday Warren Buffett (who we could probably agree knows a bit about investing) is saying he is investing more in Alberta's oil sector. He has read the recommendations. I work in the oil sector. I am familiar with the models being used by Tristone, van Meurs, Royalty Panel, Pembina, and CAPP. I have run the numbers. The feds take is going to drop and here is the rationale. There is likely going to be a decline in income taxes payable for oil companies! Of course, overall profit is not expected to decline to a point that deters investment as the current rates of return are very high. If Warren is buying, I am buying. Overall government take declines if the royalties stay the same. If the royatly recommendations are put in place, as presented by the Royalty Panel, royalties will increase. The Feds won't try to claw back money because they can't. They will not risk their political capital (especially this federal government) on pissing off Albertans. I will be back soon with some actual figures for you.

Gabriel - I welcome your comments, but I get the impression you've misinterpreted what I've written: First, your comment "this notion that everyones going to pull out of Alberta when the royalty recommendations come down is absurd" seems to miss what I originally said, which was "While there is certainly room for increases to energy royalties, should Stelmach decide to adopt the recommended changes, he'll cut the legs out from under the Alberta energy industry". I certainly didn't suggest EVERYONE is going to pull out of the province, and I also made it quite clear that there is room for increases to both royalties & taxes. The cutting the legs out from under the industry was in reference to a full-bore implementation of the proposals that Mr. Hunter's board has made (and that he's now insisting be put into place exactly as written). I've spoken with hundreds of industry workers, from service companies to CEOs of large integrated producers, and you're the first and only person in the industry that is suggesting a full implementation would be absorbed without large amounts of capital being redeployed elsewhere.

Excerpts from AN OPEN LETTER TO PREMIER STELMACH & THE CITIZENS OF ALBERTA - Oct 16/07 Calgary Herald, Pg B9 Wake up Albertans and see the morning light, for if the royalty report is adopted in full as proposed by its chairman Bill Hunter, then as sure as day follows night our province will be plunged into darkness. I am totally offended, even angered, by this report and I believe all of you should be likewise, maybe hopping mad would express it better. The "Our Fair Share" report would be much better entitled "The End of an Era" for that will be the result. I wish to stress at the outset that I have no reason to believe that the six panel members are anything but hardworking, fair minded, unbiased people, but since the decision to be made as the result of the panel's recommendations may be the most important since Alberta joined confederation, I do believe all Albertans should at least know the participants better. It may be simplistic, but if their previous employers, ie Shell in the case of Mr. Sam Spranglet, would provide a broad resume to the various media outlets extolling their virtues while employed I believe it would be helpful to all of us. It is not with the panel, however, I find fault, but rather with the mandate of the panel. Their report was apparently prepared for Mr. Lyle Oberg, and until I hear differently, it is with he I must lay blame. The fairness of Alberta royalties has been examined before, firstly in the time of Premier Manning and then in the time of Premier Loughheed. Royalties were increased, but in both cases the panel consisted of at least two representatives from industry. That was fair, but having no one approved by industry and appointed by industry to this panel is not fair and is truly unconscionable. We in Calgary have the most knowledgeable people in the world when it comes to the oil and gas industry, but someone chose Pedro van Meurs, a Bahamian based economist to assist the panel. I do not question his credentials for one minute but who in our industry was consulted prior to his appointment and why not one of our own. I know as an oilman with fifty years experience I would not have included countries such as Nigeria, Venezuela, China & Russia when establishing a base royalty with which to compare the fairness of Alberta royalties. I do know from my own experience after drilling more than 100 wells in Texas that royalty on those wells rarely exceeded 12.5% and total ad-valorem and severance taxes an additional 7%. How the panel's report shows a total government take in Texas on oil production of 66% is certainly not easily understood. I am baffled that panel participants continue to speak out on a government report when such would normally not be allowed. Why did Mr. Oberg not intervene? And yes, we seem to have some university professors whose knowledge of our industry is less than adequate and whose understanding of risk is nil. That leaves us with our Auditor General. Mr. Fred Dunn is obviously a bright man, but as one who has seen only a small part of the thousands of pages presented by industry and the investment community, I am amazed that almost immediately Mr. Dunn could pronounce the panels increased royalty was too low, when even the good Lord himself couldn't digest all the data available in a month even if He didn't stop to pray. You the citizens of Alberta have been asked if you get a fair share of royalty from producers and have answered overwhelmingly no, yet I suspect few have read the panel's report. I also suspect that if asked if you wanted your income tax reduced you would also overwhelmingly answer yes. Folks, let us be careful what we ask for because in the case of royalty, more over time will most assuredly be less. You have read many specifics in the media and I will bore you with only a few. Firstly, oil companies are paid in American dollars so while $80 may convince you oil companies are getting rich that is far from the truth for they were much better off with $60 oil and our Canadian dollar at 70 cents. Gas prices are quoted in the newspaper at $7.20, but many Alberta companies are receiving the Alberta spot price for which the month of September was $4.41 / MCF. I will leave conventional oil and gas royalty increases to others better informed than I, but the panel on tar sands royalties (Fort McMurray) proposed an increase from 25 percent to 33 percent with an additional severance tax that at $80 oil would be 5 percent. The panel recommends no grandfathering, even for companies that have already spent billions on new projects assumings the original royalties would prevail. I am left to wonder if you, my honest fellow Albertans, might consider this as countenancing theft. Does the Alberta government really think the Federal government is prepared to give up extra royalty they normally receive tax on. If the extra percentage is not allowed as a tax deduction few projects will be economic and who is to say they won't make the entire royalty a non deductible item. For those who own shares in the two longest producing oilsands projects, Syncrude and Suncor, I ask if you really have seen any windfall profits? You may not all buy junior oil stocks, but those that do know that at least half have fallen more than 50% during the past 2 years. A recent industry study shows that 70% of 140 small producers lost money in the first 9 months of 2007. The royalty report is not only not fair, but not credible. Clearly if the panel had even the slightest understanding of the oil business they would have recommended lowering not raising royalties. ... Fellow citizens I cannot believe you truly want a six person panel, people you hardly know, appointed by who we do not know, and without any representation whatsoever from the oil industry that stands to be destroyed by its proposals, to speak for the entire population of the province. The fishing industry, the forestry industry, and the manufacturing industry, are on the ropes in Canada. The oil industry if left to be efficient will be the engine of growth not just for Alberta, but for all of Canada. Out industry generates only a small amount of the total capital required and it is absolutely essential that Alberta retains its worldwide reputation as a fair place to do business if we are to attract the necessary billions required. .... The unfair and misguided royalty report must be rejected other than cosmetic changes which are helpful .... - William A. Bell, P. Geol

Warren Buffett Likes Alberta's Oil Sands As An Investment Bad news for the Alberta oil sector doom and gloom propagandists - and it is coming from Warren Buffett. Buffett says he had spent time avoiding the oil sands as an investment. On Thursday in Toronto he told an international audience of 140 prominent investors from all over the globe he has changed his mind. The Toronto Star story gives his reasons as follows: "Buffett, who has made substantial resource investments this decade, after a history of avoiding them, is now interested in the Alberta oil sands. His rationale is that it is a known resource, says Hull, who manages money for clients of Berkshire Securities Inc., recently acquired by Manulife Financial Corp. In contrast to speculative drilling, oil-sands projects are mining operations where the size of the reserves is known. One can calculate with relative certainty the breakeven requirements over 10 years. And production costs tend to drop as the extraction and processing technology improves. " For those who say they are going to be pulling out of their oil sands related investment in Alberta because of the royalty review - call Buffett - he is coming into the market. As an Albertan I would welcome him. For those of you who will be leaving us, presuming you were not scaremongering or merely pulling our legs - good bye. I presume you will be considering transferring your efforts to Venezuela's oil sands. The weather is nice there even if the political and investmate climate is not. But it is a free country - at least in Canada...so do as you wish. Toronto Star

Frankly Calgary Agent, I am surprised that someone in your business would not support the royalty recommendations. These recommendations, if adopted might cut a portion of the legs out from under the industry but the reality is what is will do is slow it down. By slowing down the boom it will buffer the economy from a boom and bust cycle. This has huge benefits for the real estate sector. By altering the the rate of economic growth we will likley see prolonged growth in the economy rather than severe peaks and troughs. This will play out in more permanent jobs with longer overall disposable and therefore investment income in the economy. Therefore, more real estate buyers. I think it is short sighted to count on a boom that is not taking into account the real costs of growth (social and environmental costs). Looking long term benefits everyone, especially the real estate market.

Gabriel - re: "For those who say they are going to be pulling out of their oil sands related investment in Alberta because of the royalty review - call Buffett - he is coming into the market." Perhaps Warren is going to short the oilsands stocks (or invest in oilsand BEAR ETF's ....)? In any event, I can almost guarantee you that Mr. Buffett will not be investing his money in the Alberta oilpatch UNTIL the royalty & tax changes are known and clearly understood. Buffett doesn't gamble ... . On the other hand, if the changes Stelmach makes are somewhere between where we are now and what Hunter's board proposed, life should continue pretty much unabated. re: "Frankly Calgary Agent, I am surprised that someone in your business would not support the royalty recommendations." I follow the market daily, and can tell you that the Calgary market started slowing down at about the same time those intimately familiar with the industry & the impact the PROPOSED royalty changes will have on the entire Alberta economy either froze hiring or began cutting back. These just aren't fat-cat oilmen no longer buyer million dollar homes, it's affected the entire buying side (all price ranges). There may well be plenty of homes & condos on the market, many at significantly lower prices than they would have sold for 4 to 6 months ago, but I don't see a rush of people trampling one another to buy on softening prices.

OK the government will be earning $2 billion dollars from the hike in royalties. QUESTION: Does the government of Alberta have enough reserves in cash to pay the EMPLOYMENT INSURANCE of all the workers who will be laid off due to this bull shit.

I could not agree more. I do not hink the "average" Albertan, who is not directly employeed in the energy sector has a clear understanding of what will happen to them if these changes are implemented. Housing and land investments will fall, the job market will dry up, the economy will stall. This will hurt the average Albertan, living in the cities tremendously. Do the people that support this insane idea think that the extra money collected will go to them? or lower their taxes, improve roads/schools/healthcare? It will just end up squandered by the goverment. Then, when the wells producing now have depleted, the revenue collected will begin to dry up, and there will be NO MORE new production.We WILL be on the outside looking in. Money invested by these companies goes DIRECTLY to Albertan's, directly in the pockets of all of us.

I miss Ralph...

It appears Mr. Stelmach is going to share with Albertans this Wednesday night (6:40pm) what his decision is on the royalty increases. Stay tuned - hopefully full details will be available via download shortly after his speech.

The playing out by all sides, "right" or "wrong" to "change or not to change" your perspective is only secondary to what is at the heart of this whole debate. Albertan's are simply not into planning things. Anyone can get mad, it is not a set of skills. Your bigger issue is that your province and those in it have essentially fumbled this one and had done so quite a long time ago. The rest as they say "is life", better luck next time.

What I don't understand is how Albertan's can claim they are not getting their fair share. Why don't you come to Northern Alberta where there are major labour shortages in all sectors of work. Want your fair share...work for it like the rest of us!

It is unfortunate that some pencil pusher minions come up with a theoretical calculation for increasing royalty reserves, and people actually believe it to be sound reasoning. The Alberta economy has benefited immensely (all sectors) from the oil boom. Major producers (Shell, Suncor, Exxon, etc.) invest billions and billions, shouldering immense financial risk when they engage in mega projects. These projects take years to pay dividends, but the immediate benefits are felt by all. The gut reaction of the government is then to punish these companies for their investment???? The reality is that conventional drilling is on the decline as the future for oil is in bitumen/heavy oil refining - this is a very expensive process, and these companies will go elsewhere if the government continues on with this ridiculous royalty reveiw scheme. It will be awfully strange for us in Alberta when major producers focus on exploration offshore Newfoundland

It's all about the numbers. If investment return doesn't pay out as well or as quick as it does today. The producers will shy away. When producers shy away, the jobs will too. As a previous blogger stated, does anybody really think the royalties will go into the pockets of Albertans. HaHa think again. The economy in Alberta is great Don't mess it up Stelmach with another energy crisis of the 80's forcing us to sell our homes for a buck.

Oct 31/07 I've not posted since Mr Stelmach announced his government's proposed changes to the Alberta royalty structure last week, primarily because I needed some time to digest the information and to allow my anger to subside. At this point all I can say is that Albertans were sold a bill of goods by both the royalty review commission and the Premier, and the "fair share" Mr Stelmach so often refers to is going to be far less than what he suggests the province will reap from this new arrangement. Not to mention the juggernaut economy Albertans have come to enjoy is already seeing slowdowns, with the number of wells expected to be drilled in 2008 down significantly from the number drilled in the preceding several years *this as a result of both low natural gas prices, high input costs and the new royalty regime*. Gwyn Morgan, retired founding CEO of EnCana Corp and former CEO of Alberta Energy, minces no words in conveying what many of us already know: "Consistent with the fact that you can't tax what doesn't happen, Alberta's coffers could end up with no gain at all, or even a net reduction". Mr Morgan's commentary can be read in its entirety at http://www.theglobeandmail.com/servlet/story/RTGAM.20071029.wrmorgan29/BNStory/energy/

It's been an interesting week of reaction this latest wonder-idea of Stelmachs. Consider another reality: as our Canadian producers (CNRL, Encana, Suncor, etc,) look elsewhere to invest, more and more of our oilsands properties/reserves will end up in the control of foreign nations. This is already starting as Total (France) looks to build their upgrader in Fort Sask and China Petro is already investing in Fort Mac. As Stelmachs' gov't continues to raise taxes and, essentially, punish major Canadian oil producers for creating this amazing economic boom, we will see more and more of this type foreign investment resulting in less and less control of oil reserves by Alberta.

Hi Jim, I would like to invite you and your readers to a meeting on Nov 27, in Calgary. Main topic will be the Royalty Review. One of our speakers will be Duane Mather, President and CEO of Nabors Canada. Full details can be found on our homepage: www.albertaalliance.ca Thanks, Jane

Everybody wants someone else's money... In this case it is Stelmach. What better position can a politician come into a role... in the black. Hard legacy to follow if you change the recipe. Stelmach needs to follow the Klein recipe and continue to draw business to Alberta, not turn it away. Albertans have more money in the pocket than the rest of Canada, Albertans are spending more money, yadda, yadda, yadda. Take good jobs away from people by pushing the employers away and guess what... we get to live like the rest of Canada... in the red. If Stelmach wants more money for the province, he needs to roll up his sleeves to become part of the competition... thar's awl in them hills... The government can invest in exploration and exploiting resources as well... now there's an idea!

I guess I'm one of those "average" Albertans who is not in the Oil and Gas industry and thus does not have the same stakes and sympathies as those with direct ties. The "juggernaut" economy, while creating jobs and higher incomes for many has also brought with it the instability that is associated with such spikes. 3 years ago I (like others I know) was almost in the position to purchase my first home, but unfortunately waited a little too long, and also did not subscribe to the "buyer's panic" that enveloped others, and I currently sit well out of sight of owning my own property. The issue is not only the current price of property, but my overall confidence in the value of condos at the moment, and in the notion that our "boom" will not be followed by a "bust" as the predicted cyclical model would dictate. So what's this have to do with the Royalty Review? Personally I'd like to see growth reigned in, and the very threat of increased royalties seems to have accomplished this, and I'd even like to see properties settle at appropriate levels of affordability. Decline and recession are dirty words but explosive growth creates it's benefactors and it's victims, and I at times feel more like the latter. By the way, I think it's funny that many of you are nostalgic for the leadership of Ralph when Ralph himself said that his government did not properly anticipate or even recognize the Oil boom in time to plan for it's vices.

I'm just wondering if anyone attended the meeting on Nov. 27th that Jane invited everyone to?

 What a load of BS all this whining about the royalties is! The oil companies are still making *increasing* profits every year. So what does this mean? The oil companies are going to make 50 billion instead of 60 billion??? If any jobs are lost blame the oil companies instead of the government. Why don't you think of your children instead of your greedy selves! Right now the wealth is being stripped out of Alberta and in 30 years (or whenever) the oil sands run out we will be just like many small towns in Alberta that no one has heard of that were once booming. Now they are dead with nothing left but the cost of their ecological problems. All the real wealth has been long since stripped and the new trucks and real estate long forgotten. Thank god the government has the balls to step up to all you greedy short sighted fools (I am referring to the people whining about the royalties only) and try to conserve some more wealth for Albertans and not just the oil companies.