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Thursday, August 10, 2006

alberta energy confusion.

According to recent polling released by the Pembina Institute, 84% of Albertans think the Provincial government isn’t collecting enough royalties from our non-renewable resources.

Yesterday, Alberta PC leadership hopeful Dave Hancock joined the ever-growing chorus of Alberta political leaders calling for a review of Alberta's oil royalties. Among those Hancock is joining are Alberta Liberal MLA Hugh MacDonald and NDP leader Brian Mason, who have been calling on the province to review it's share of oil royalties and the structure under which they are collected for some time.

In July, Energy Minister Greg Melchin announced that the government had conducted and A-OKed the current royalty structure through a secret non-public internal review. This came as quite a surprise to almost everyone in Alberta, including Tory MLA's and PC leadership candidates Ed Stelmach and Ted Morton, who remember the review being shelved... ... Mark Norris wants the royalties reviewed... Jim Dinning was vague, but wants royalty information to be made more public...

Was there actually a review of Alberta's oil royalty structure?

And on another bizarre note, Premier Klein doesn't think that Alberta needs a long-term oil sands strategy, something that his government announced it would do back in October of 2005... only about 33 years after original Syncrude oil sands site was built...

Are Albertans going to have an oil sands development strategy?

Maybe they should hire Ian Urquhart and Larry Pratt to do it...


Anonymous said...

"a secret non-public internal review."

This probably means:

A. They didn't really do a review.

B. They didn't do a balanced review, which is just as good as A.

C. They did a balanced review, but just don't want to release it.

If C, then why not release it?

glen walker said...

Oil royalties and the long-term development and sustainability of the oil sands are far beyond partisan politics and are at the heart of Alberta's sustained economic prosperity.

We need a serious plan to make sure that the mistakes of the 1980's are not made again.

Lookout Mountain said...

The oilsands royalty regimen is actually pretty fair.

When your plant turns a profit (ie you pay off your costs) you pay 25% or revenue from that point on. Everyday until then you pay only 1%. The first couple plants are now paying out at the 25% rate.

This leads to, at the current price of around $70 a barrel $638 million a year into provincial coffers for a 100 thousand barrel per day plant.

At a more sane $40 a barrel thats $365 million a year per 100 thousand barrel per day unit.

With the large capital costs of oil sands plants, and the chance of a very long term until profitability (if there is a price crash) the initial 1% rate allows there to be a better economic case for plants to be built.

Changing regulatory environments in mid-stream for very large capital intensive projects (many land leases have already been bought) is just about the most business unfriendly move a government could make.

michael in calgary said...

ko - that doesn't mean that so called "reviews" should be done secretly behind closed doors - it's not so much a issue with the royalties being bad, it's a matter of openness and transparency that is missing from this current government.

If the royalty review said things were a-okay, then prove it - show Alberatns. Don't just lay on the weak "trust me" argument.

Ken Chapman said...

Good work on the Pembina study. There is a fundamental confusion over oil sands royalties I think.

The 1% is in effect until a project capital costs are recovered in full. So cost over runs are not so a big deal because of the royality holiday. Then the project pays 24% NET royalty. That means the government of Alberta is "in the business of being in business" because we have to be sure the operating and related costs are accurate and actual - so do we audit each project every year to be sure the royalty calculation is fair? Not practical but how do we verify the royalty otherwise?

We need to go to a royalty based on gross revenues so Albertans can get the price upside and share the risk on the downside. This demands a royalty regime review as Hancock has called for.

Steve Okashi said...

The 1% is in effect until a project capital costs are recovered in full. So cost over runs are not so a big deal because of the royality holiday.

Look up the term net present value as it relates to the business of oil and gas production and you'll see the fallacy of that statement.

Then the project pays 24% NET royalty.

Oil sands royalties after payout are the greater of 25% net revenue or 1% gross revenue.