CanPol - Alberta edition

[notyoueither]

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.

1970.

Suncor and Syncrude have been at it since the late 60's, early 70's.

They were running through billions of expansions that would have enjoyed the same royalty scheme / 100% paid for by the people of Alberta in royalty forgiveness.

Perhaps if the bottom of the gas market had not fallen out they could have snuck it through. Unfortunately, gas started to tank in 2005-06.

And actually a majority of the world's oil is not open to play by private oil companies. Comparing our oil to American royalty rates is not illuminating.

The oil is here. Even the UN is saying it is needed, dirty as it is. What had to end was the relatively free ride in terms of cost to the province and municipalities the oil sands were enjoying due to the large revenues the province enjoyed from natural gas.

[Asher]

1970.

Suncor and Syncrude have been at it since the late 60's, early 70's.

I'm not going to play this game with you as it's clear you're just going off the sensational media stories and your eyes on what you perceive to be a quick buck.

But in closing:

Without Suncor and Syncrude's work -- which was a massive gamble and a massive risk with a massive cost -- Alberta's oil market would be far smaller than it is. They've done far more for Alberta's economy than I think you give them credit for.

Suncor and Syncrude had special deals that were independent of the oil royalty rates Alberta raised, even though you are trying to draw a parallel. Suncor and Syncrude's royalty rates were unchanged when Alberta upped the royalty rates.

As you said, Suncor and Syncrude date back to the late 60s and everyone else didn't jump on board til the late 90s, essentially. It's Suncor/Syncrude vs everyone else. And it was the "everyone else" affected by the new royalty scheme, so if you are seriously trying to tell me this was all about Suncor/Syncrude, then I've nothing to say but "epic fail". The government chased away many other investors with their new scheme, including big boys like Chevron and cancelled many projects -- but it didn't touch a single royalty rate Suncor and Syncrude paid.

(Suncor and Syncrude ended up re-negotating their specific agreement in Jan 2008 to pay more royalties, by the way)

[notyoueither]

Highest risk in the world.

[KrazyHorse]

Is there any particular reason that the provincial government shouldn't simply have auctioned off the mineral rights to the various production fields?

Why the hell should it implicitly be in the business of speculating on production costs vs. market prices by setting fixed percentages?

[notyoueither]

174 billion barrels of oil for sale. Oops, maybe 350 billion. Oops...

Does anyone, anywhere, do that?

[KrazyHorse]

Why not?

The NPV of those barrels is far, far below 175 billion*80$

Hell, if it's too big a chunk, auction off a smaller fraction to start.

Seriously, there is absolutely no reason to believe that the provincial gov't is a better estimator of the value of those barrels than are the companies themselves. Let a competitive process reveal the value of the resource instead of trying to set it through what is obviously a deeply flawed political process.

[KrazyHorse]

By the way, you can run an auction on a more relevant variable than simply "cash for unlimited rights in perpetuity". You could, for example, auction on a sliding scale of cash + points on the extracted oil.

[KrazyHorse]

One thing the province SHOULDN'T be doing is ****ing about with contracts as written. Companies dislike the thought of political risk. It's a bit difficult to hedge/insure against it...

[ShaneWalter]

Why not?

The NPV of those barrels is far, far below 175 billion*80$

Hell, if it's too big a chunk, auction off a smaller fraction to start.

Seriously, there is absolutely no reason to believe that the provincial gov't is a better estimator of the value of those barrels than are the companies themselves. Let a competitive process reveal the value of the resource instead of trying to set it through what is obviously a deeply flawed political process.

I was going to post a list of reasons why I think royalty rates (when properly administered) would maximize government revenue. Then I thought, truthfully, that really isn't at all the primary reason why I'd support a royalty system over a "permanent mineral rights auction" system.

The market value of the mineral rights in a certain area far exceeds the amount that would be paid in royalties in any given year. As a resident of an oil producing province with a history of inept governments, I would not trust any government to be able to properly handle and deal with such a large inflow of money in a single year.

[ShaneWalter]

By the way, you can run an auction on a more relevant variable than simply "cash for unlimited rights in perpetuity". You could, for example, auction on a sliding scale of cash + points on the extracted oil.

This would probably be a good idea.

[notyoueither]

One thing the province SHOULDN'T be doing is ****ing about with contracts as written. Companies dislike the thought of political risk. It's a bit difficult to hedge/insure against it...

Then they shouldn't have started ****ing around with the contracts... rushing through billions in expansions they expected to have the same deal on. Suncor was $15 billion, IIRC.

You speak as if corporations are paragons of virtue.

The alternative suggested was to implement new taxes. Did they have a clause denying the right to tax? No, I didn't think so. What Stelmach did is ask them to renegotiate. They did.

[notyoueither]

This would probably be a good idea.

They do that.

Leases are sold and we collect royalties on extraction.

[KrazyHorse]

NYE, nobody doubts the right of governments to do basically whatever it is they want to. Whether you want to call it a "tax" or simply ripping up contracts doesn't really matter. In areas in which the province is basically sovereign, contracts exist on the government's sufferance. The point is that when the gov't begins to bring political pressure to bear in order to change the terms of contracts, NO MATTER WHAT LEGAL NICETIES THAT PRESSURE IS COUCHED IN it erodes confidence in future contracts, and thus devalues them. If the one-time cash grab is big enough, it may be worth it, but most of the time governments grab pots that are too small to offset the cost.

[KrazyHorse]

They do that.

Leases are sold and we collect royalties on extraction.

...and then renegotiate the royalties later?

Plus, there's no reason to fix a percentage of market price a priori. Like I said, that is a variable which can be bid on.

[notyoueither]

Why not state that there will be a sliding scale of royalties, and we can change it if we want?

You can do business here, or you can go do business with Putin, Chavez, and company. Your choice.

Suncor and Syncrude have pretty sweet deals, even now. We wanted their expertise and attention to develop the resource. We agreed to pay for their capital costs by them deducting their investment from royalty payments. That was 40 years ago. We've recently decided that deal was about done. Poor babies.