CanPol - Alberta edition

[Asher]

Highest risk in the world.

If you think that's a joke, look at the upfront capital costs to set up a 25,000 barrel a day operation in Alberta vs with conventional oil.

We're talking orders of magnitude.

Such a massive investment represents tremendous risk alone. You add in confounding variables such as political instability, pending tree-hugger legislation, and fluctuating royalty rates and it's very, very risky.

[Asher]

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.

Suncor and Syncrude did have long-term deals with the government. Alberta, for all intents and purposes, reneged on the deal which was a huge red flag to other companies.

Suncor and Syncrude were just following the existing contract they had with the province. And again, this is a red herring as Suncor and Syncrude's deal was independent of the royalty rate change which actually did **** up our economy and scare off future investors.

[Asher]

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.

Again, I cannot understate how ridiculous this is. You continually paint it like Alberta is a massive stable supply of oil while the rest of the oil supply world is run by contemptuous dictators. The reality is Alberta has ****ed around with oil companies far more in the last 30 years than you seem to recall. First the NEP, then the reneging on contracts and random royalty rate adjustments, and finally pending environmental legislation which could dramatically increase production costs in Alberta.

Just because Alberta's not likely to suffer a civil war doesn't mean that the government's not going to **** over the oil companies. They've already done it, very recently.

As for the other countries, the vast majority of the world's oil reserves are in stable business environments. And yes, in fact, my dad's company is pulling out of Alberta (they've just a skeleton staff here on one floor of an entire skyscraper in downtown Calgary they own) and did you want to guess where they're investing instead? Hint: It was in your sarcastic list.

We've recently decided that deal was about done. Poor babies.

Yes, that's correct. Alberta broke that contract which was due to expire in 2016 anyway. This was politically expedient for a moron populace who think now they'll just get more money, it was severely damaging to Alberta's long-term investment potential because you can't trust the agreements you make with the government of Alberta now.

[Wezil]

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...

I know someone who has recently fled from Ontario and moved to Fort Mac. He's an AZ Class driver so he should be okay.

[Asher]

Oh, please.

There was a review of royalties. The scheme was adjusted to account for prices of commodities that were not anticipated when the existing scheme was developed and changing viablity of our products.

Are you ****ing serious?

The royalty rate is a percentage. The raw price has nothing to do with it.

The adjustments were made after consultations with industry and other interested parties and after study of what is done abroad.

This is total bull****. There was a distinct lack of oil-business representatives that were consulted, part of the reason they're so up in arms.

Name me one other country abroad that retroactively changed royalty rates on companies after they've spent hundreds of billions of dollars to invest in that region?

There is no uncertainty. What there is is a global recession following instability in financial markets.

There's no uncertainty??? How the hell can you honestly think that?

The province has shown having a contract with the province is not a certainty. They've retroactively changed it.

There's constant talk of FEDERAL environmental legislation including potentially devastating costs to the oil companies.

In addition there's talk of PROVINCIAL environmental legislation including potentially devastating costs to the oil companies.

What was once a stable area for oil investment has now turned into a risk-laden highly uncertain environment. Even if you disagree, that's not even the point. It's not just the recession and falling oil prices that caused them to shut projects down -- if you look at the capital expenditures of the big oil companies, they're going up and not down. They're just investing elsewhere.

[Asher]

Yeah, right.

If oil gets to $120 we want $48.

We're monsters.

You know, for someone so clever you're really very stupid.

He's absolutely right. I'm not sure what the hell you're thinking.

The oil companies run massive financial simulations to attribute potential cost and profitability for new projects. It wasn't until 1996 when this 1%/25% royalty scheme came in that it became an acceptable risk to invest in the oil sands. Now that this was removed from the equation, it's now generally considered an unacceptable risk to invest in the oil sands. Add in environmental uncertainty and the uncertainty that Alberta can be trusted to adhere to their contract, and oil sands viability took a massive hit.

And despite what you think, these companies are investing in countries like China quite heavily instead. The numbers just make more sense.

This arrogant attitude of "Alberta or Chavez, take your pick" is juvenile and ignorant. Alberta's recently suffered from the National Energy Policy as well as a government that decides it doesn't need to adhere to its own contracts. How is that any worse than Chavez to an oil company? Add in the fact that oil companies have to spend far more to get oil from Alberta than Venezuela and it's even more obvious.

If oil goes up to $300, would the royalties go up yet again? All signs point to yes, considering your perspective as well as the government's history. And you don't see a problem with that or see why companies would have a problem with that uncertainty

[Asher]

Oh, and yes, I realise that changing royalty regimes is less than perfectly stable. I also realise that the GoA had no choice as one of the legs of the stool (the biggest one) has been kicked out.

The government had no choice???? What the hell?

They had tons of choices. Suncor and Syncrude were just a couple years out of paying 25% royalties, and their royalty agreement was set to expire in 2016. The government could've done the LAWFUL thing and renegotiate the agreement WHEN IT EXPIRES, and not reneging on the agreement for a quick buck. It's done far more damage than you know.

[Flubber]

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.

Ya "ask"-- Government asking to renegotiate while waving its remaining government powers to screw you over is the very definition of political risk.

NYE-- bottom line is that Syncrude and Suncor took huge risks on projects that no one else would (or do you think other oil companies just chose to ignore what you seem to think was an obvious windfall)--At various points over even the last 15 years, there were points when there were fears that the oilsands would be a money loser.

Its just like the Hibernia field offshore Newfoundland. When the deal with government was done with all the various incentives and royalties decided, Gulf canada looked at it and decided that they didn't believe in the economics. They surrendered a 25% interest for nothing. The partners started looking for other companies to take it up and in the end there was 7.5% that they couldn't find ANYONE to take. The feds eventuiallty took it as an economic stimulus measure-- never thinking they would ever make money.

As recently as 5 years ago, people believed the Hibernia project would NEVER achieve payout and hit the higher royalty levels. But it did and has made all the partners a boodle of money. Huge amounts-- But now all the revisionists talk as if this was all obvious and risk free and somehow a sweetheart deal for the oil companies-- How wonderful!!


NYE-- I have sat in the meetings where projects are being considered and you work out the NPV based on various scenarios. High royalties early in an oilsands or an offshore project KILL project economics. Its very simple math actually. The reality of having to spend billions and billions years before any revenue starts means that you NEED every bit of revenue to pay off those capital costs as early as possible. If you saddled an offshore or oilsands project with a higher royalty before payout, there are many more projects that will not get done. You may be willing to assume oil prices over 100 bucks in perpetuity but the oilsands and offshore players will not and frankly a high early royalty brings the needed average weighted price at various capital cost projections to be higher than the companies anticipate.

Oh and variable and increasing royalties are relatively common for projects that need billions of up-front expenses. Its a different world than a conventional (drill a million dollar well and start production inside a month) play.

Oh and I make no comment on any 'games" Syncrude and Suncor may have played with expansions. Personally I would have designed things so that a capital expansion would mean that the incremental productuion would attract the lower royalty (ie treat each expansion as a project in a project) and not defer higher royalties on the whole original project. The contracts probably should have anticipated expansions.

[Asher]

Hibernia is what my dad worked on in the late 1980s/early 1990s.
Then it was the oil sands.
Now they want him to work on the new China initiatives since they're getting out of the oil sands, but he's going to retire instead. They just did some big layoffs again for the people who refused to move out of the country to work on new projects, since the economics no longer make sense for new oil sands projects.

[Asher]

Funny that this report comes out today: http://www.calgaryherald.com/busines...098/story.html

Canada's dirty oil needed on market: UN report

The world needs Canada's so-called dirty oil, the International Energy Agency said Tuesday even as it called on leaders to make decisive moves to slash greenhouse gas emissions at a United Nations-sponsored negotiating session next month.

"World leaders gathering in Copenhagen next month for the UN Climate Summit have a historic opportunity to avert the worst effects of climate change," IEA executive director Nobuo Tanaka said in a statement after releasing the agency's annual World Energy Outlook analysis.

The IEA, which is funded by and provides advice to Canada and 27 other industrialized countries, said lower emissions are needed not only to protect the environment but also to enhance energy security during a period of soaring demand.

Without concrete actions to limit emissions, primarily through efficiency measures and new technology, energy demand will jump by 40 per cent between now and 2030, the IEA said in its report.

Canada, with 178 billion barrels of proven oil reserves that ranks second only to Saudi Arabia, plays an important role on the supply side, the IEA said.

The "vast bulk" of those reserves come from oilsands deposits, which are more costly to extract than conventional oil, require a huge amount of water, and produce 20 per cent higher carbon dioxide emissions.

The IEA's annual report predicted long-term growth in the sector despite the recent cancellation of numerous projects due to the economic crisis, which has reduced U.S. demand, and weaker oil prices.

While Canadian oilsands production had doubled to 1.2 million barrels a day from 2000 to 2008, the IEA noted that $150 billion U.S. in new projects that would have added 1.7 million barrels of daily production have been suspended or cancelled due to the crisis.

"The new economic challenges come on top of fresh worries about the environmental impact of the oilsands industry," the report states.

"In today's uncertain regulatory framework, this is creating worries for investors."

The IEA's proposals to make serious progress on reducing global carbon emissions by 2020 include the imposition of an average price on carbon emissions of $50 U.S. a tonne in western industrialized countries.

That would boost the cost of a barrel of oilsands oil by up to $5 a barrel, according to the IEA.

Many analysts and politicians say the oilsands sector's future, in a world where many are targeting it due to its "dirty oil" reputation, depends on expanded use of carbon capture-and-storage technology.

"Providing that current challenges can be overcome, Canadian oilsands have the potential to make a significantly greater contribution to global energy security

for decades ahead by increasing the diversity of supply," the IEA said.

Canadian oilsands "represent one of the few growth areas" outside of the Organization of Petroleum Exporting Countries, a body dominated by countries in the Persian Gulf region and Africa.

"Many countries — particularly the United States and China — will be looking for a bigger share of oilsands output in order to reduce their dependence on Persian Gulf oil."

While the medium-term outlook is described as "less certain," the Paris-based agency said that expected higher energy prices as the world economy recovers will increase Canadian oilsands production to 2.1 million barrels a day by 2015 and 3.9 million barrels a day by 2030.

[Flubber]

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

They actually do auction them off. The Alberta government used to make lots and lots from these auctions. But an amazing thing happened when they raised royalty rates (well when they announced they planned to). Almost immediately the prices paid for lands at the auctions went down.

Its almost as if . . . I don't know . . . the oil companies plugged the new royalties into their modelling and found the play was worth less to them-- Naw thats too fantastic to believe!!


Now if you are talking about trying to auction off an oilsands field once you know more about its size and characteristics, you hit a little snag. No matter what you might have heard about the oilsands, you don't know the characteristics of any part of it until you drill it up a few times. The Alberta government, I guess, could have done that drilling themselves 20-30 years ago at costs of hundreds of millions to delineate the field etc etc and then sold or auctioned the assets for higher prices . . But if you don't want govenment speculating by being a mere royalty owner, would you rather they speculated by drilling and proving up plays to sell?

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

Because for better of worse, government as the resource owner wants to share in the upside of any project. A fixed royalty is far too inflexible and can often kill project economics in far too many scenarios. Variable royalties allow certain types of plays to be de-risked somewhat and encourages development with the jobs and taxes that flow from that.

[Flubber]

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...

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.

[Flubber]

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.

I don't think you can accurately do that at elase uissueance unless the goverbnment has already drilled up the resource enough to know its size and scope. As a taxpayer I would not trust government to accurately weight the two variables and fear they would get screwed. I think the system of a (known) variable royalty with cash bids is the best as we are generally talking about auctions for unproven lands

[Flubber]

Oh, please.

There was a review of royalties. The scheme was adjusted to account for prices of commodities that were not anticipated when the existing scheme was developed and changing viablity of our products. The adjustments were made after consultations with industry and other interested parties and after study of what is done abroad.

There is no uncertainty. What there is is a global recession following instability in financial markets.

The report largely ignored industry input and then when drilling slowed and landsales prices dropped ( compared to neighboring BC and Sask so recession effects should be neutral) government seemed all shocked.

And uncertainty was part of it. Recession etc etc does not account for the much larger downturn in Alberta compared to BC and SASK!!!

Did you read the report? I did -- With all respect they seemed to pull a number of conclusions straight out of their azz. To me it seemed they went in with a political motive/idea that Albertans were getting screwed and the report reflected that attitude back

[Flubber]

Oh, and yes, I realise that changing royalty regimes is less than perfectly stable. I also realise that the GoA had no choice as one of the legs of the stool (the biggest one) has been kicked out.

Could you elaborate on this statement?