CanPol - Alberta edition

[notyoueither]

QFT

For better or worse it really really is an issue for oil execs. and No NYE they are not paragons of virtue but to most of them a deal is a deal.

The point of mentioning Chavez, Putin, et al. is that dealing with changing political landscapes is part of their industry.

I am not buying that simply changing royalty regimes is going to kill the patch. I think that the treatment the industry experiences from the GoA is pretty reasonable. There are other destabilising issues that the GoA has zero control over (capital and markets, national and international politics).

[KrazyHorse]

I am not buying that simply changing royalty regimes is going to kill the patch.

This is the same tired fallacy of the excluded middle you've been yammering on about.

[Asher]

The point of mentioning Chavez, Putin, et al. is that dealing with changing political landscapes is part of their industry.

Your point of mentioning it, repeatedly, was that if they didn't like it in Alberta they could go to these other countries. The implication that Alberta=stable while they are not was clear, no matter how much backpedaling you do.

I am not buying that simply changing royalty regimes is going to kill the patch. I think that the treatment the industry experiences from the GoA is pretty reasonable. There are other destabilising issues that the GoA has zero control over (capital and markets, national and international politics).

We understand you are not buying it, because you do not understand the financial models that determine if a projects are a go or not. They do very detailed financial planning, they need to be very certain when there's hundreds of billions of dollars at stake. The new royalties can, and have, single-handedly thrown a wrench into the works of new projects. Their risk rating has gone up, which means their viability has gone down. Add in other recent investment opportunities around the world and impending environmental legislation that will cost the companies tons of money, and oil companies are shifting their focus.

Again, I know this first hand through my father. I know exactly why the projects were cancelled and I know exactly why they're pulling out, and to pretend it has nothing to do with the royalty rate is both incomprehensibly naive and amazingly stupid.

[notyoueither]

NYE you are aware that for a lot of oilsands projects the simple break-even point required prices (weighted, life of project of course in the 70s and 80s)-- So to say there is little risk or no risk is ludicrous

Where did I say that?

[Asher]

It was probably an inference from you laughing at the concept that making tens of billions of dollars of investment into Alberta's oil sands today is one of the highest risk plays in the market. Which it is.

[notyoueither]

I do not trust government to appropriately weight cash now versus royalties.

I can just envision plays where someone gets a huge field for 200 million plus a 2% royalty because they overweight cash .. Or alternatively they overweight royalties and someone picks up big leases for no/little cash but the project can never move ahead because they bid a royalty that isn't economic. I see too many chances for abuses, stalled projects or government mistakes.

A 25% royalty is reasonably fair. In offshore newfoundland they actually add in an additional royalty once the porject has returns to the owners of say 30% and I see that as fair as well as long as its known before they do their investing. 1% before payout to me is 'fair" as well. Think about it. You have a resource that makes you no money until someone spends billions. Isn't it fair that they get their billions back before you start sharing in a big way in the revenue produced?

I don't think I explained that well but I have to run. My bottom line is that I think bidding royalties could be a very bad idea. Perhaps government could weight things well but I have little confidence of that

An alternative for Alberta could be a Crown corp do the development if private industry cannot see their way through the risks to do it.

If Albertans are going to pay the costs of development, why not own the whole show?

[Asher]

An alternative for Alberta could be a Crown corp do the development if private industry cannot see their way through the risks to do it.

If Albertans are going to pay the costs of development, why not own the whole show?

Wow...

I honestly am starting to think you're just trolling now. You're being uncharacteristically...um...yeah.

I like how you think Alberta is paying the costs of development. That makes no sense. You think Alberta is spending hundreds of billions of dollars to develop these oil sands projects that the oil companies then just operate? Did I get that right?

[Jon Miller]

How about this:

Deals are setup for a long term by a government, but they are a lease which are set to be renegotiated every ~10 years. If the negotiations fall through, and the lease is not extended, the government pays a fee (assuming the property has been well cared for/etc).

This eliminates both problems:
1. where a particular government has sold out and not considered future people (or at times even current people) when deciding on the sell price/etc
2. where a company invests a lot into the property and expects at some (much) later time to make a profit, and the government takes away the property after the investment occurs

JM

[notyoueither]

Yeah, yeah, NYE. The companies renegotiated out of the goodness of their heart. Not because they had a gun to their head.

Do you really think they care how the government expropriated them? They know that it happened, and so does everybody else who's not intent on denying it. This affects all future contracts with the government of Alberta, and THIS is the only thing that matters. Not fairness or legality.

I just said they did have a gun (several of them) to their head.

The point is that gun has always been there, and in other jurisdictions they are larger and there are more of them.

[Asher]

I can't spend the time and effort to argue this anymore, so this'll be my last post on the matter.

The crux of the problem here, nye, is you have a simple view of a complex situation. You seem to think there's minimal risk to investing in the oil sands, even to the point that you think the taxpayers should foot the bill by funding a crown corp to do the development. I don't think you understand the enormous magnitude of the cost of doing that development. I don't think you understand the enormous complicated logistics of developing the oil sands -- from the extraction to the upgrading to the transportation and refining. These projects are so big and so complex that in almost all cases no single massive corporation does it alone. They're all partnerships between companies with revenues orders of magnitude larger than Alberta's.


I don't think you understand the massive uncertainty of upcoming environmental legislation and how it'll play into the role. I don't think you understand the very high "break-even" point for oil from the oilsands means there needs to be a large padding between the cost of production and the oil price, which would then be filled by royalties, environmental fees, etc. And the price is not at all a certain thing. The oil companies were scared ****less when Oil started to drip below 60 bucks, because it's unprofitable even at the then-current 1% royalty rates. The fact that the royalties are now up to 25-40% is just terrifying to these risk-averse companies.

They would rather deal with China than risk it in the oil sands right now.

[notyoueither]

Your point of mentioning it, repeatedly, was that if they didn't like it in Alberta they could go to these other countries. The implication that Alberta=stable while they are not was clear, no matter how much backpedaling you do.

I'm not backpedling.

I maintain that Alberta is a stable political jurisdiction for the oil industry to do business in, and they know it. Their campaigns against the new regime are not surprising though. If they can get it rolled back I'm sure they'd like that.

Good luck to them.

We understand you are not buying it, because you do not understand the financial models that determine if a projects are a go or not. They do very detailed financial planning, they need to be very certain when there's hundreds of billions of dollars at stake. The new royalties can, and have, single-handedly thrown a wrench into the works of new projects. Their risk rating has gone up, which means their viability has gone down. Add in other recent investment opportunities around the world and impending environmental legislation that will cost the companies tons of money, and oil companies are shifting their focus.

Again, I know this first hand through my father. I know exactly why the projects were cancelled and I know exactly why they're pulling out, and to pretend it has nothing to do with the royalty rate is both incomprehensibly naive and amazingly stupid.

There are projects going forward...

[notyoueither]

Wow...

I honestly am starting to think you're just trolling now. You're being uncharacteristically...um...yeah.

I like how you think Alberta is paying the costs of development. That makes no sense. You think Alberta is spending hundreds of billions of dollars to develop these oil sands projects that the oil companies then just operate? Did I get that right?

What do you call royalty forgiveness until costs of projects are recovered?

[Asher]

There are projects going forward...

Why don't you make a list of the projects going forward and contrast it to the projects cancelled?

Also keep in mind that the ones going forward were the ones too far ahead to cancel.

[notyoueither]

I can't spend the time and effort to argue this anymore, so this'll be my last post on the matter.

The crux of the problem here, nye, is you have a simple view of a complex situation. You seem to think there's minimal risk to investing in the oil sands, even to the point that you think the taxpayers should foot the bill by funding a crown corp to do the development. I don't think you understand the enormous magnitude of the cost of doing that development. I don't think you understand the enormous complicated logistics of developing the oil sands -- from the extraction to the upgrading to the transportation and refining. These projects are so big and so complex that in almost all cases no single massive corporation does it alone. They're all partnerships between companies with revenues orders of magnitude larger than Alberta's.


I don't think you understand the massive uncertainty of upcoming environmental legislation and how it'll play into the role. I don't think you understand the very high "break-even" point for oil from the oilsands means there needs to be a large padding between the cost of production and the oil price, which would then be filled by royalties, environmental fees, etc. And the price is not at all a certain thing. The oil companies were scared ****less when Oil started to drip below 60 bucks, because it's unprofitable even at the then-current 1% royalty rates. The fact that the royalties are now up to 25-40% is just terrifying to these risk-averse companies.

They would rather deal with China than risk it in the oil sands right now.

Norway is doing a good job of it with difficult to get resources.

[KrazyHorse]

How about this:

Deals are setup for a long term by a government, but they are a lease which are set to be renegotiated every ~10 years. If the negotiations fall through, and the lease is not extended, the government pays a fee (assuming the property has been well cared for/etc).

This eliminates both problems:
1. where a particular government has sold out and not considered future people (or at times even current people) when deciding on the sell price/etc
2. where a company invests a lot into the property and expects at some (much) later time to make a profit, and the government takes away the property after the investment occurs

JM

Jon, this is seriously a really dumb idea. The timescale on which these projects become profitable is decades. Whoever signs a lease doesn't have the right incentives to develop the resource fully.

You can honestly do better than this. Answer my question about competitive bidding and why there would be a large amount of money left on the table by the government.