CanPol - Alberta edition

[Ben Kenobi]

It was a disastrous move. I couldn't believe he did that, if it's running too hot the market will raise labour costs to compensate. The only benefit here is that some folks moved back, but not many.

[Asher]

He is not a bright man. And that reflects poorly on the idiots who keep appointing him leader of the party.

This is why the PC needs to go.

[notyoueither]

I understand the rotation type sentiment. I just don't happen to believe in it that much . In the last leadership race, unfortunately the strongest candidate was not Ed Stelmach. But the regionalist sentiment played a part in his election as leader.

Your earlier post indicated that it was a problem for some Calgarians. I have heard similar elsewhere.

You may not care that much about it, but you might understand that balancing power among regions is a hot-button issue for Albertans, and it has been for a very long time.

[notyoueither]

The patch didn't need to be slowed with a royalty disincentive. By the time the royalty changes were being announced the patch was already slowing. The boom of activity in many ways worked to cool itself as labour prices were being driven so high that several projects were being shelved. Royalty changes on top made things worse.

Where does the price of natural gas figure in there?

One of the most negative aspects for industry was the idea that government was going to unilaterally change oilsands royalties that had been NEGOTIATED as part of getting the first projects going. I haven't followed how that ended up but the very idea that government would backtrack on promises that were made to trigger billions and billions in investment gave industry a very cold feeling

Suncor and Syncrude negotiated new deals. Stelmach pointedly stated that there were contracts and they had to be respected.

[Flubber]

Where does the price of natural gas figure in there?

.

Obviously that was also huge in slowing natural gas drilling everywhere but it slowed it more in Alberta than BC. In some of the cross border plays it was a no-brainer to drill in Bc compared to an Alberta location a mile away. Anyone with a brain knows that BC locations would all get driled prior to Alberta ones as long as the Alberta ones attracted a higher royalty. Thats an obvious part of hiking royalties.

It would have been a good move if the stated aim was to slow the industry or conserve the resource but Stelmach couldn't say that he had intentionally done something that would lose jobs and lessen current revenues when they had sold Albertans on the royalty changes as being something that would increase revenues (with no mention of a dip for a few years first)

Suncor and Syncrude negotiated new deals. Stelmach pointedly stated that there were contracts and they had to be respected.

I'll have to go back to what was said at the time since I seem to recall that the early messages did not give SunCor and Syncrude any such warm and fuzzy feelings that they would be left alone. I had thought the early message was along the lines of "renegotiate or else" but I could be misremembering. In any event the messaging was confused and oilsands projects, many of which now considered marginal in the face of escalting costs, hardly needed another negative contingency to be moved into the uneconomic side


In the long run some of this may be good anyway . Doing a few oilsands projects sequentially is far better than a 15-way rush when it comes to economic and industrial sustainability and the available infrastructure and housing in the Fort mac area

[Flubber]

I found one from Oct 2007-- Stelmach started with statements like old projects will not be grandfathered but then later said stuff like I am not breaking any contracts. See the first line of the story as to how very uncertain it seemed. Also the statement in the government report about "other measures" seemed like a threat.

Effect of royalty changes on Suncor, Syncrude unclear
Oilsands companies have contracts guaranteeing current rates until 2016
Ron Chalmers, edmontonjournal.com

Published: Friday, October 26 2007

EDMONTON - Premier Ed Stelmach's new royalty framework fails to explain how his government will escape from Crown agreements that promise continued low royalty rates for Syncrude and Suncor.

Those two companies have contracts guaranteeing current rates will continue until 2016.

"The Alberta government acknowledges that a legal contract exists," Marcel Coutu stated today in a news release. Coutu is president of Canadian Oil Sands Limited, Syncrude's largest shareholder.



"We would expect that the Alberta government would honour the contractual commitment it made to the Syncrude owners, which induced the owners to spend over $8.5 billion of capital in the past five years," he said.

Suncor president Rick George said the proposed changes "could have a significant impact on industry economics," and that "we will work with the government to find the right solution for Suncor and the people of Alberta."

Stelmach's report announced that "the government will not grandfather existing oilsands projects" and argued that "a level playing field" requires all operators to pay equal royalty rates.

"The government is in discussion with Syncrude and Suncor, whose Crown agreements expire in 2016, to participate in the new oilsands royalty regime," his report stated. "The transition details will be worked out over the next 90 days."

The government's dilemma - honouring agreements or treating everyone equally - arises from its 1997 decision to simplify, reduce and standardize oilsands royalties.

Under that policy, every operator pays only one per cent of gross revenue at startup until initial capital costs are recovered - then pays 25 per cent of net revenue.

Stelmach's new framework follows that same one-and-25 formula for oil prices up to $55 per barrel. Then the startup royalty rises gradually to a maximum of nine per cent when prices hit $120. After costs are recovered, the royalty rises to a maximum of 40 per cent.

When the Alberta government implemented its policy in 1997, it already had signed royalty agreements with Suncor and Syncrude. To bring them into the one-and-25 policy, it agreed to not raise those rates before 2016.

(The government entered a similar agreement with Imperial Oil, for its Cold Lake plant. But that deal expires at the end of 2007 and is unaffected by the new framework.)

No other operator has a Crown agreement limiting royalties.

Stelmach's strategy to avoid the contractual commitments is unclear.

"In the event the agreement cannot be reached, the government will take other measures to ensure a level playing field for all industry stakeholders," his framework report states.

In a radio interview today, Stelmach said "I'm not breaking any contracts."

He insisted "it is in the best interest of their shareholders ... for those two companies to roll into the Alberta framework" - but did not explain how they would gain by paying higher royalties.

"I have no idea what they have in mind," says Andre Plourde, chairman of the economics department at the University of Alberta, and a member of the Alberta Royalty Review Panel. "It really becomes a negotiation."

Stelmach's report also announced that all oilsands operators will pay future royalties based on an objective "bitumen valuation methodology" to ensure that the resource is not undervalued in sales between related companies.

It further stated that the provincial portion of the accelerated capital cost allowance will end, following the federal government's recent elimination of its portion. This will tend to raise taxes.

However, with higher royalties, "we anticipate there will be reduced tax revenues from corporate income in the short term," the report stated.

Plourde estimated that provincial income taxes, from tax-paying operators, could drop by up to 10 per cent of the oilsands royalty increase, which the Stelmach report projected at $470 million in 2010. Federal taxes could drop by up to 20 per cent of that amount - with no offsetting revenue gain

[Wezil]

What does the Fort Mac economy look like these days?

[ShaneWalter]

What does the Fort Mac economy look like these days?

According to my friends in Fort Mac it is booming as much as ever. Though those guys are all heavy equipment operators. The picture may be different for people in management positions...

[notyoueither]

Obviously that was also huge in slowing natural gas drilling everywhere but it slowed it more in Alberta than BC. In some of the cross border plays it was a no-brainer to drill in Bc compared to an Alberta location a mile away. Anyone with a brain knows that BC locations would all get driled prior to Alberta ones as long as the Alberta ones attracted a higher royalty. Thats an obvious part of hiking royalties.

It would have been a good move if the stated aim was to slow the industry or conserve the resource but Stelmach couldn't say that he had intentionally done something that would lose jobs and lessen current revenues when they had sold Albertans on the royalty changes as being something that would increase revenues (with no mention of a dip for a few years first)

Gas is ****ed. Nothing can be done about that until the Yankees exhaust the stuff they recently learned to tap at resonable costs (costs much lower than Alberta's gas if what I've read is correct) and maybe not then (LNG technology 20 or 40 years from now...). That is why royalties (and activity) were tanking before any changes in royalties came into effect.

It's all about the bitumens (to steal a phrase). Suncor and Syncrude were cramming in extra billions of dollars of expantions on their existing contracts. All to be paid for by the people of Alberta in royalty forgiveness (for those outside who are interested, we forgive royalties to early producers until capital paid back). All at the lowest royalties anywhere on the planet at $120 oil... I don't think so.

People were beginning to realise that the oil sands were paying squat into provincial coffers. At the same time, there has been significant disruption for development and many communities (including major cities) are paying a huge price for higher costs and need for more services to feed the beast.

Royalties were going to change. If the Tories didn't do it, the Liberals would when they formed the next government. Good luck to Wild Rose if they choose to campaign based on rolling it back. They'll have been a nice blip.

[Asher]

People were beginning to realise that the oil sands were paying squat into provincial coffers.

This was the very real problem. The people who "realized" this didn't even come close to understanding the market, or the royalty agreements and their terms. Alberta was making a lot of money from the oil sands, and were about to make a whole LOT more in the coming years. The provincial government, bowing to growing public pressure by people who didn't understand what was going on, started meddling with **** and as a result, they ****ed it up.

Disclaimer: My father is an exec at a major American oil company who has negotiated royalties with provincial governments for the past ten years and I've heard endless *****fests about this ****.

[notyoueither]

No doubt he's *****ing.

All that safe, secure oil that isn't being sold for the lowest royalities on the planet (or among them).

We should be charging a significant premium.

[notyoueither]

Of course, you're welcome to negotiate with Chavez for his heavy oil.

Them's secure investments, right there.

[Asher]

No doubt he's *****ing.

All that safe, secure oil that isn't being sold for the lowest royalities on the planet (or among them).

We should be charging a significant premium.

We are, with the costs of capital investment and far more expensive cost of extraction.

The problem with the media, and subsequently the informed opinions of many people including yourself, is they don't often quote the whole story.

It's sensational to cry about the "LOWEST ROYALTY RATES IN THE WHOLE ENTIRE WORLD".

Let's put that bull**** to rest.

Average royalty rates for oil are 10-20% around the world. The US charged 12.5% in the Gulf of Mexico, for instance, until recently til it was raised to 16.7% (in 2007). (source: New York Times)

Alberta was charging 1% royalties, but only until the companies have recouped their capital investment costs to construct the oil sands project, at which point it goes up to 25%. This 25% rate is one of the highest in the world (and absolutely, definitively NOT the lowest in the world).

The problem was until about 2010, all of the Oil Sands projects were still recouping their massive, massive capital costs. The entire reason this 1%/25% scheme was enacted was because it costs far, far more to set up oil sands projects than it does traditional oil projects. Alberta needed to add incentive for companies to finally start tapping the oil sands. So in 1996, they enacted this 1%/25% scheme and the oilsands patch just took off, as I'm sure you know.

So it's true that from 1996 til 2007 the oil sands were only generating 1% in royalty revenue. However, they're about to hit 25%, which is a jackpot of money for the province.

The revamped royalty agreement the government did -- in response to pressure presumably from people like you -- was to set the base royalty rate to 20%. Which is higher than many conventional-oil regions, and it does nothing to provide incentive for companies to invest tens of billions of dollars on new oil sands projects. Combined with the falling oil prices and high base costs for oil sands extractions, the new royalty program represented a massive increase in investment risk for oil companies. As a result, virtually all new oil sands projects were shelved.

[Asher]

Of course, you're welcome to negotiate with Chavez for his heavy oil.

Them's secure investments, right there.

I think you have no idea how many other reliable sources of oil there are. There's a reserve off the coast of California "found" this year. In the past couple years, additional discoveries were made in the Gulf of Mexico and off the coast of Brazil as well. Additional work in BC and Saskatchewan has picked up. Not to mention the recent China offshore finds, and Chile..

[Asher]

FWIW, the notion of Alberta being this "stable" energy source is not very sensible, either.

Not too long ago -- and within the memories of most oil execs -- we had our own Chavez in Trudeau, who essentially exiled most American oil companies from the country.

More recently, we had this guy named Stelmach who massively changed the royalty scheme "under the feet" of the oil companies.

There's a history there that many people are too quick to forget, and Stelmach's actions were bush-league and ridiculous and didn't do Alberta any favours in the eyes of investors.

That's not even going into the whole Carbon Tax / Green Shift / Cap and Trade / Kyoto bull**** which further scares away investors from Alberta. It's a massive question mark what the oil companies are going to need to pay in the near future in Alberta, and that is a MASSIVE factor in investment.

So the notion that companies "should pay a premium" in royalties to extract the most expensive (by far) oil in the world with some of the highest risk in the world is just absurd. Oil companies wouldn't touch Alberta's oil sands with a ten foot pole until the 1996 royalty agreements were put in place with the investment incentive of 1% royalties until capital costs were recovered.