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Sunday, September 23, 2007

alberta's royalty review.

Now that I've had a chance to take a look at the much talked about Alberta Royalty Review Panel Final Report, I have some thoughts to offer.

1. The report is much more damning than I think anyone thought it would be.

The report begins with the opening statement: "Albertans do not receive their fair share from energy development." The report proves this to be an understatement.

2. The report revealed that a lack of government accountability has led to billions of dollars in reduced royalty income over the last 15 years - the royalty holidays and adjustments have reduced Alberta's income by nearly $8.6 billion over the past 15 years.

Alberta Liberal Leader Kevin Taft and Shadow Energy Minister Hugh MacDonald pointed out that:

the government failed to report a four year royalty holiday period, which began in 1997, under former Minister of Energy Steve West. In 2001, the Auditor General questioned why the royalty holiday and incentive programs were not reported. The Auditor General started to report these amounts in his annual report. Since then, the Department of Energy has buried the amount of the royalty adjustments in their financial footnotes.
Here are Kevin Taft and Hugh MacDonald in their media conference following the release of the report:


3. Though some are rallying against the report, the same people don't seem to understand the difference between a royalty and a tax.

4. There is no doubt that the release of
this report is a defining moment in Alberta's politics and the reaction or lack thereof by Ed Stelmach's Tories may define the main issue of the next provincial election.

5. In 2004, Federal Auditor General Sheila Fraser's report into the Sponsorship scandal revealed that up to $100 million of the $250 million sponsorship program was awarded to advertising firms and Crown corporations for little or no work.

In 2007, Alberta's Royalty Review Panel revealed that approximately $8.6 billion in natural resource royalties owed to Albertans were not collected. This failure occured while Ed Stelmach and Lyle Oberg were sitting at the table in Ralph Klein's Tory Cabinet.

Albertans have been cheated in a big way and should be furious.

45 comments:

Art said...

As a Liberal supporter, how do you feel about the fact the Liberal position is for less royalties (25% vs 33%) to be collected than the report calls for?

Is this a case of the Liberals again caving in to big oil?

Anonymous said...

This is a scandal! How many hospital beds could have be funded with the $8.6 billion? how many schools could have been fixed? How many AISH recipients could have been properly supported? How many infrastructure projects could have been properly maintained?

Stelmach was at the table the entire time. The buck stops at the top.

not a leader. said...

ED STELMACH IS NOT A LEADER!

Anonymous said...

The Federal Liberal Party was destroyed in Quebec for about $8.5 Billion less.

It's time Albertans start opening their eyes to what a screwjob the tories have been giving them.

michael in calgary said...

This raises serious concerns about the credibility of Stelmach's leadership. Like Paul Martin in Jean Chretien's government, Stelmach was a key-player in Ralph Klein's government for 10 years. Stelmach was there while the Tories failed Albertans by not collecting what we were owed. These resources are OWNED by ALBERTANS. Not the other way around.

While the oil companies were racking up record profits, Albertans were cheated out of what we were owed because our Conservative Premier and his government were too lazy to collect the proper information to collect what Albertans were owed.

I have absolutely nothing against oil companies collecting a profit - whether people like it or not, these companies are helping create Alberta's boom - but they need to pay proper royalties to Albertans for the right to extract those resources which belong to Albertans.

This is a scandal and I agree, Albertans should be furious.

Anonymous said...

Ed Stelmach implementing the full report would kind of be like Paul Martin implementing the Gomery Report.

Stelmach will probably live up to the monkeyer and 'dither.'

Anonymous said...

Were the Liberals even calling for a review of the royalty rates in 2004? I recall the NDP being the only ones to bring it up, but I could be wrong. Also the 25% number that Taft has produced is below what the report calls for, which is a little bizarre for an opposition party.

edmonton east said...

The ND who?

Only a pathetically desperate small third party would want to deflect the scandal that is the Tories not collecting $8.6 billion over the past 15 years to an attack on another more viable opposition party.

Daveberta, don't take your eye off the real target and the real issue. This is a larger than adscam size scandal, don't let small opportunists distract from the real issue.

Anonymous said...

Royalty Panel’s Report Flawed; Industry Committed to Working Constructively with Government
Calgary, Alberta (September 24, 2007) The Canadian Association of Petroleum Producers (CAPP) welcomes Premier Stelmach’s decision to consult with Albertans on the Royalty Review Panel’s final report.

“We are committed to staying focused on the facts and working constructively with government throughout this process,” said Pierre Alvarez, CAPP President. “Every Albertan wants their government to have all of the facts, the best possible analysis and all sides of the story in making this important decision.”

The panel’s report promises a future that the oil and gas industry sees as unrealistic. It calls for significantly higher royalties and taxes, but suggests there will be no overall impact on industry investment, activity and growth. “The basic assumption is that the size of the ‘pie’ will not change,” said Alvarez. “Past experience, in this country and around the world, just doesn’t support the panel’s view.”

Industry will be sharing its concerns with government during the consultation process. Some of CAPP’s concerns are:

The panel acknowledges increased royalties and taxes will slow oil sands investment and activity, but suggests this will be balanced by an upswing in conventional oil and natural gas activity. The panel claims that 82% of gas wells will actually pay lower royalties under their approach. This is only true at low and uneconomic prices. At prices expected over the next year, all gas wells will pay higher royalties (see Attachment 1) which will only make the current drilling downturn worse. Click here for attachments

The panel points to a single report to back its argument that Alberta’s share of revenues is low in comparison to other jurisdictions. This report was not raised for discussion during the public hearings. In fact, the report was only released after the close of public hearings. Reports prepared by other independent and qualified consultants are readily available. One report that was given to the panel shows Canada providing the lowest return on oil and gas investment (see Attachment 2). It appears this side of the story was not considered by the panel.

The panel ignores the real costs facing the industry. For example, the costs for a typical oil sands project are stated to be $5-6 billion by the panel, but the actual costs are $10-11 billion. These costs, such as the price of steel, are largely driven by global factors and are not within control of the industry.
“This debate is often painted as industry versus government or the public,” said Alvarez. “The truth is that we are all in this together. One in six Albertans work for or alongside the industry. Industry revenues are reinvested in the economy, generating further prosperity and growth. We all know this issue is too important not to get right.”

The Canadian Association of Petroleum Producers (CAPP) represents 150 companies that explore for, develop and produce natural gas, natural gas liquids, crude oil, oil sands, and elemental sulphur throughout Canada. CAPP member companies produce more than 95 per cent of Canada’s natural gas and crude oil. CAPP also has 130 associate members that provide a wide range of services that support the upstream crude oil and natural gas industry. Together, these members and associate members are an important part of a $100-billion-a-year national industry that affects the livelihoods of more than half a million Canadians.

- 30 -

For additional information:
Taryn Albizzati
Public Affairs Advisor
Canadian Association of Petroleum Producers
p: (403) 267-1151
e: albizzati@capp.ca

Anonymous said...

Looks like the spinwizards at CAPP found your blog, dave.

Anonymous said...

Only a pathetically desperate small third party would want to deflect the scandal that is the Tories not collecting $8.6 billion over the past 15 years to an attack on another more viable opposition party.

And only a pathetically bankrupt opposition party selling out to big oil would want to oppose something while proposing a solution that would continue the problem.

Only a pathetically bankrupt opposition party would claim that they have an alternative, but spew names when anyone dared to question their policies or point out that they are more of the same.

I mean seriously, is the Liberal party in favour of more royalties or not? The Tories are guilty guilty guilty of letting big oil get the resources pratically for free. But it's not good enough to point to the past if what you propose is largely more of the same.

Anonymous said...

Alberta Royalty Review:
Relative Attractiveness of Alberta vs. US Gas Basins
--- 2 Very Contrasting Views
Calgary, September 14, 2007
The Alberta Royalty Review Panel will shortly be advising the Provincial Government on recommendations for a new
royalty structure for Alberta’s energy resources, including natural gas, following which the Alberta Government will make
its policy decisions.
New gas cost study information was recently added to the Alberta Royalty Review website by the Alberta Department of
Energy. In the interests of a sound outcome for the Canadian gas industry, from producers to transporters to end-use
consumers, Ziff Energy Group, Canada’s leading energy consulting firm, is sharing its own research analysis and findings,
which present a very different perspective on the relative attractiveness of Alberta vs. US gas basins. We consider this to
be a crucial time in the gas industry. The Ziff Energy results are based on actual cost and production data collected
continuously for several decades, and present a very different conclusion.
The analysis posted by the Alberta Department of Energy (Technical Royalty Report OG#2) presents analysis excerpted
from a study of US & Canadian gas basin economics entitled ‘Diminishing Returns’, 2007. The conclusions of this wellsbased
analysis summarized on page 7, are:
“IHS/CERA (2007) analyzed the costs for all new natural gas wells in 2005. Figure 5.1 below shows the
all-in long run costs by basin for wells added in 2005. IHS/CERA reports that the average total cost
including capital, operating, return on capital, severance tax and royalties for these new wells was [US]
$6.83/Mcf. In fact, much of Alberta’s resources are shown to be substantially below the average cost ...
4 of the 6 Alberta areas identified by IHS/CERA are in the lowest 7.” [emphasis added]
Another report recently posted, Technical Royalty Report OG#1 (page 16) also states:
“A recent study by IHS/CERA ranks… 76 areas …[and] CERA identifies 6 areas in Alberta (3
conventional natural gas areas and 3 unconventional natural gas areas) … All 6 of the Alberta areas are
shown to be below average for cost and above average for profitability.” [emphasis added

kate said...

This is nothing short of gross incompetence on the part of the Alberta PC government.

Heads need to roll on this.

Anonymous said...

For the last quarter century, Ziff Energy has been
conducting in-depth analysis of Finding &
Development Costs, Operating Costs, and this year
an in-depth North American Gas Cost Basin Study.

All of Ziff Energy’s analyses reach highly different
conclusions. CEO Paul Ziff, a 30 year veteran of
the Canadian energy industry, in both government
and consulting, states:

“The IHS/CERA conclusion that the Alberta Foothills Gas Play is the lowest cost & most economically
attractive gas play in Alberta flies in the face of both empirical knowledge, and Canadian E & P
industry experience. Since our firm began calculating F & D for specific Alberta and Western Canada
gas plays in the mid-1990’s, the Foothills deep gas play has never been the lowest cost gas play type.

To the contrary, for many years, Foothills Gas has had the highest F & D of any gas strategy.
If the quoted study conclusion were accurate, gas production in the Foothills region should be increasing
rather than declining. In fact, very few companies engage in Foothills grass roots exploration and
development, which entails very high costs and risks, even for the largest, most technically sophisticated
companies. Our detailed spending and reserves data is gathered from a number of explorers in each
region/play type, and analyzed by seasoned exploration veterans with over a quarter century of actual
experience in Western Canada.

Consequently, we believe that our use of empirical data for a multi-year
period from the explorers themselves reveals a far more accurate picture than the processing of
cumulative industry technical statistics, and inferred costs

In addition to Ziff Energy’s client economic analysis, Paul Ziff, when speaking to the Canadian Association of Drilling
Engineers (Sept. 5, 2007), presented the following facts on current energy industry energy activity.

1. The Full Cycle Cost for Gas in Canada has tripled during the last decade, driven during 2001-2004 by
smaller reserves added, and in the last 3 years by rampant service cost inflation, much of which has not
yet materially subsided.

2. The Canadian dollar has gained over 50% compared the the US$ since 2002, decreasing the price
received by Canadian gas producers.

3. In contrast to oil, which is setting new records daily, the field price for natural gas is selling at a huge
discount to oil, roughly half of the energy value of 6 Mcf per barrel.

4. Canadian gas supply has certainly peaked – the only question is how fast the decline will be. Currently
the Canadian Gas Reserve Life Index (RLI, a measure of Inventory, calculated as Total Reserves divided
by Current Year’s Production) is only 8.5 years, a full third below the US level of 13 years.

5. The chart below shows that Canadian gas completions are down 19% this year, and gas rig activity is
down 40%, while US gas rig activity has remained constant. If Alberta gas economics were superior,
then the reverse would be true --- Alberta gas drilling would be outperforming US gas activity.
Current Canadian gas rig activity is barely

If Alberta gas economics were superior,
then the reverse would be true --- Alberta gas drilling would be outperforming US gas activity.
Current Canadian gas rig activity is barely above the levels of 6 years ago, while US drilling rig
activity is 50% higher.

Bill Gwozd, P. Eng., VP, Gas Services and head of Ziff Energy’s Gas Research, says “E & P companies operating in
Canada (both Canadian and American) have significantly cut back their Canadian gas directed drilling activity.

This trend to divert incremental spending away from gas towards oil began several years ago, and is well documented in
Canadian energy media coverage, and in corporate reports. Many companies operating in Canada have direct knowledge
of comparative economics of various gas basins in which they operate, and their decisions are not arbitrary; rather reflect
capital allocation based on comparative economics, to receive the highest return.”

The findings published by IHS/CERA, derived from their study approach, could direct readers to seriously misleading
conclusions, possibly damaging the credibility of the Royalty Review panel and consequently the health of an already
highly stressed Alberta gas industry. As reported in this week's DOB, 60% of the Canadian upstream service companies
lost money in the first 6 months of this year. The IHS/CERA study's conclusion above is contradicted by a DOB article of
Sept. 29, 2005, which summarized the results of the 2005 Global Upstream Performance Review, published by John S.
Herold, Inc., [now owned by IHS] in the following words:
“Canada has the dubious honour of being the most expensive region in the world to either buy or
develop oil & gas reserves”. [emphasis added]

Given that 70+% of conventional activity in Canada is gas directed [i.e. excluding SAGD activity and reserve bookings],
it’s hard to reconcile the 2 separate conclusions regarding the attractiveness of the Canadian upstream gas industry.

The recommendations of the Alberta Royalty Review, and the decision of the Alberta Government, will be very
significant for the future of Alberta’s gas industry, which Ziff Energy believes is at a critical juncture

Anonymous said...

So let me see if I understand this. The energy company is saying that it's getting harder to get gas out of the ground and costing more, and for that reason, we should not require them to pay as much.

It's an interesting theory. Here's an analogous one, it's costing more to pay for gas to drive your SUV, and for that reason, the energy companies should not charge as much.

Bottom line, Alberta is in a boom that is simply too big to sustain and leading to serious social consequences (housing, infrastructure deterioration etc). Gas is a limited non-renewable resource, once it's gone, it's gone. Therefore, if we can simultaneously cool down the economy some, conserve the non-renewable resource, and get more money to address the social ills that the boom has created, I'm not sure I see the downside.

stand up for albertans. said...

Journal Columnist Graham Thomson put it perfectly:

"There are plenty of Albertans who want royalties increased.

As an editorial in The Journal said: "In the matter of royalties, as with anything else, the first duty of the government and the legislature is to do the best for the people of Alberta."

The editorial was written in 1972 -- but could have just as easily been written today."

Anonymous said...

Nobody's saying leave royalties alone altogether, but the report's recommendations are draconian. They threaten to end the good times that we have been enjoying in Alberta.

Ken said...

There has never never been an "tar sands" development that has been "on time and on budget" so lets get real. The oil companies have for too long ridden the gravy train and the time has come for them to pay their fair world average share.
Why should we Albertans pay for all the ridiculous infracturse costs, when in a New York minute the oil companies would pack up.

not a leader said...

The questions still remains: Who will pay for the $8.6 BILLION in royalties owed to Albertans that weren't collected.

Who will pay for the gross incompetence that has occurred in the Tory Government over the past 15 years that led to this?

The buck stops at the top.

ED STELMACH IS NOT A LEADER!

not a leader said...

ED STELMACH IS NOT A LEADER!

not a leader said...

ED STELMACH IS NOT A LEADER!

not a leader said...

ED STELMACH IS NOT A LEADER!

Anonymous said...

OMG!! $8.6 Billion!! Wow!! That sure would build a whole heck of a lot of roads, schools and hospitals. We sure do need all of that infrastructure what with all these new folk moving in these past few years. Oh wait, you know what, nevermind, we won't need all of that junk come next year - the oil industry will tank and cause a recession. Don't worry, you can stay in my mum's basement back in Ontario with me!! We'll make s'mores and sing camp songs and talk about how much time we'll spend camping under the stars when the Athabaskan is finally clean and pollution free!! Hey, if we leave now maybe we can even get a job working at Wendy's....$100,000 engineering degrees must be worth at least a bus boy's position eh?

Anonymous said...

Hi, i'm from ontario and i would just like to say thanks for funding our schools and infrastructure projects. your oil money has really helped. also, i have some friends in newfoundland that would also like to pass on their thanks. you see, they're fishermen and lately there hasn't been so much fish and your money helps them get by while they wait for the fish to return. they have assured me that the fish will come back, someday, and when they do, my friends will be waiting to catch them.

Anonymous said...

Looks like we had a good run Alberta.

It was great while it lasted, but I guess it's time to move on to bigger and better things.

Maybe I can be a greeter at Wal-Mart in Flin Flon??? I think I'll check their website for a job position.

This Royalty Review has me stressed! A lot of regular ass people at oil companies like myself will lose their jobs. Then the regular ass people like me won't be able to spend money at restaurants. This in turn means that the Wait Staff and dish washers will lose their jobs. So on and So forth.

Listen I am a Liberal and even I know the "Our Fair Share" is only good for Toilet Paper.

Anonymous said...

Did you guys just make this bit about the missing $8.6 billion up? I've just read the report and it says nothing of the kind. It does say the royalties structure is no longer appropriate for current market conditions. Fair enough. But it also says that Alberta's take prior to 1997 was plenty aggressive and that there were good reasons ($27 a barrel oil) for putting the regime in place AT THAT TIME. Yeesh. Have a debate, by all means, but don't state opinion as fact.

Anonymous said...

What most people do not realize, is that the returns in Alberta and Western Canada can not compete with other places in the world. I ask you the question, if you could make 12-15% rate of return on an investment or 25% which would you take?? The fact of the matter is that the royalties in Alberta are low for a reason. If you increase royalties you will further reduce the amount of spending in the industry in 2008. After allready losing 10,000 jobs in the Oil and Gas industry from 2006 til 2007, what do you think an increase in royalties is going to do to that numbere by 2008?? I am pretty sure if most people had an idea of how the numbers in that report were flawed, and if they realized that it is harder to come by oil and gas in Alberta then most places, that the government shouldn't increase royalties. As for everyone saying that we had a huge scandal and deserve another 8.6 billion, that is if the industry had maintained the levels with a higher royalty scheme. The fact of the matter is, spending would not have been as high, and the Alberta government would have taken in less money over the past 15 years. People see a couple numbers and start saying things without having any knowledge of the oil and gas industry. If the alberta government does increase royalties, alberta will be lucky to maintain the current amount coming into the government from royalties next year as this year. Then where is the money for the new hospitals and infrastructure going to come from?? Atleast look at things from the other point of view before you jump to conclusions.

Anonymous said...

I'm surprised that most people here don't realize the huge economic benefit that 'big oil' generates for our province. Everyone is irate over the additional 2 billion/year that they feel we are entitled to. Why do people forget that we don't pay sales tax, we have the lowest income tax and by most standards, have the highest quality of life in Canada. Albertans get their fair share of oil and gas revenue through a simple concept known as 'trickle down' economics. Prosperity and wealth generated in the oilpatch is distributed throughout all communities in Alberta. It is distributed by honest hardworking folks who are employed by oil companies. It manifests itself as tips in restaurants, purchases at clothing stores, donations to charity, etc. 'Big oil' is not threatening Albertans, 'big oil' is not out to get us. 'Big oil' is promising to invest money where it can get the best return on a dollar. 'Big oil' has a responsibility to it's investors (also hard working Canadians). If 'Big oil' finds that it can't make a suitable rate of return in Alberta, workers here will be laid off and the benefits of 'trickle down' economics will disappear. Without continued capital investment into the oil and gas sector, our provincial oil and gas production will decrease. With decreased production will come decreased royalties paid to the people of Alberta. Say hello to sales tax!!

Anonymous said...

Put in terms everyone can understand.

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20."Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible

michael in calgary said...

"In fact, they might start drinking overseas where the atmosphere is somewhat friendlier."

Like friendly Saudi Arabia. Or even friendlier Venezuala.

The whole concept of oil companies leaving Alberta if royalties are raised is a bunk scare tactic.

Also, it's more like a cup of coffee.

Anonymous said...

I was born in Alberta and I’ve worked in the Alberta oil patch for 30 years. I come from a family that has worked in this business for over 65 years. We are not big investors, just ordinary workers like the rest of you. All of the emotional rhetoric that I see in the litany of demands and accusations that I see so many of you posting, seem to come from another era and place. The place is Eastern Canada. The era is during the late 1970’s and early 1980’s. This is when our fellow Canadians complained bitterly that Alberta and its industry were earning windfall profits at the expense of the rest of Canada. Their proposed solution, the National Energy Program, so heavily penalized the oil and gas industry that it sent this Province and its residents into a deep economic tail spin that lasted well into the 1990’s. During that time thousands of Albertan’s lost their jobs (including me) and many lost their businesses and homes.

In my travels I had the opportunity to explore a great deal of the history of this province. Until oil and gas development came of age in this province we were one of the poorest places in Canada, lagging behind Newfoundland during the early years. Oil and gas is the key industry that made this province the relative land of economic opportunity that it is today. Not many places in North America can claim to be free of a provincial or state sales tax. Oil and gas development made this possible for Alberta and made this province, in spite of the problems that we all have been dealing with, one of the best places in the world for the average person seeking opportunity and a chance to earn a prosperous life.

It is unfortunate that my industry has done such a poor job educating you as to how this industry operates. An oil and gas company does not have a licence to print money. Take a quick trip through downtown Calgary and note the names on many of the buildings. The Home Tower, Dome Tower, Canterra Building, etc… all stand as tombstones to oil companies that no longer exist. Of all of the companies that I have worked for in my 30 years in this industry, only one, my current employer still exists.

The reality is that the Royalty Review Panel didn’t dig deep enough and missed a lot of information. In my position I see the cost figures, the expense reports and the royalty statements. All of these indicate that while the price of oil and at times, the price of natural gas, is going up, in real dollar terms these price increases are not keeping pace with costs. In terms of head office operating costs alone, even though most companies operate on a very “lean & mean” approach to business, these costs have increased by as much as 44% over the past 24 months. In terms of field operating costs, the three largest components of any oil and gas operation, manpower, fuel and electricity, have sky rocketed in Alberta (those of you who have looked at your electricity bill occasionally over the past few years should understand this). In terms of material costs, steel, the main component in every tool, pipe and piece of equipment that we use, has suffered a 50% cost increase in the past 5 years.

Those who claim that we aren’t “getting our fair share” seem to overlook the fact that Alberta no longer has significant amounts of high quality light oil reserves. What we are left with are declining gas reserves and lots of heavy crude oil/oil sands. In comparison to light oil such as a Saudi Sweet Crude (which is almost light enough to be used as oil in your car engine without refining), Alberta’s heavy crude and bitumen range in quality from sludge the consistency of thick molasses to roofing tar. Alberta heavy crudes sell for less than the WTI price that we are all familiar with (usually from $3 - $16 per barrel less) and cost 3 to 6 times as much to produce and transport to market.

To understand the magnitude, try reviewing the quarterly and annual reports of a number of oil companies who have oil/gas production operations in both Canada and other countries. In the past 30 years as I have reviewed the reports for the companies that I have worked for I have noted an interesting figure, known as “net back” in each report. The net back reflects the before income tax return on the investor’s dollar after taking into account finding and operating costs, including royalties and production taxes. Without exception I have noted that the net back for operations in Alberta are lower than the net back for operations in areas outside of Canada. This means that an investor can make more money per dollar invested by investing someplace other than here.

The only reason to invest here is political and economic stability. Political stability is obvious. However economic stability has been largely based on Alberta having a stable royalty and tax regime, thus making it a good place to do business. Take this away and suddenly the balance shifts towards investing elsewhere.

Like it or not, most of the economic development and prosperity enjoyed by those of us who live here is the result of people from outside Alberta being willing to invest their money in our Province, primarily in oil and gas development. As our collective experience from the days of the National Energy Program should have taught us, take away that investment and it is the people of Alberta who suffer.

So many Albertans seem upset that they are not receiving “their fair share” and point a finger at the companies who have generated the very standard of living that we all enjoy in this Province. In all of the hoopla we seem to forget that the goose that laid the egg is not the problem. Instead we should be looking at the farmer who tends the goose or in this case the Provincial Government and ask them what they have been doing with the money that they received from the eggs that the goose laid. For the past several years this province has enjoyed huge budget surpluses that have seemingly disappeared. Why are we still paying personal provincial income taxes when the royalty and tax revenues paid by our oil and gas industry has provided a surplus to the government? Alternatively why isn’t the government paying out these surpluses or at least a portion thereof to each resident of Alberta (like they do in Alaska)? Given the past and current track record, do you really think that any of us will benefit from any additional revenues that that government collects even if they could successfully increase royalties and taxes on the oil companies, without killing future investment?

So unless you want to relive the misery of the past when our economy, personal income and government revenue collapsed as a result of investment fleeing this province, I suggest that you reconsider and focus on the real problem, which is the way the Government has managed the revenues that it has collected from oil and gas development.

Left with stability the industry will continue to pour billions of dollars of investment into our province generating a bright and stable economic future for all of us. Left to their own devices the politicians regardless of party colors, will try to deflect our attention away from their conduct by creating an issue where none exists, even if it means sacrificing our future.

Anonymous said...

You obviously have no idea what you are talking about as some of these companies are not threatening as Crescent Point has completly pulled out their 150 mill. Alberta budget. Also if you do some homework these public companies are required by law to follow through with news releases

Anonymous said...

While everyone is complaining that they are not getting their "fair share" from oil and gas revenues, it is an irony that so many of us will buy a bottle of Dasani water or Aquifina water, paying many time the price per litre for our own tap water than we do for the gas that we purchase at the pumps for our vehicles. Even though the Coca Cola company and Pepsi Cola company are simply filtering and bottling our native municipal tap water, I don't hear anyone demanding that they should be paying royalties or production taxes to you and I ("the people" who own the water resource that they are bottling). After all we the tax payers paid for the municipal water systems and treatment plants that these soft drink companies are benefiting from in producing their product (unlike the oil companies who pay for, build and operate all of the infrastructure required to find and produce their product).

Wonder how many billions of dollars we are losing out on because we are not getting our "fair share" from the sale of bottled tap water?

Anonymous said...

RE: "you have no idea"....to the literary giant responding to my blog, perhaps you should have someone read a financial newspaper or two to you. The responses and press releases from the companies that have responded thus far indicate that Alberta will lose approx $20Billion in investment if the government goes ahead with the Panel's recommendations. The views of the companies are backed by a number of key analysts and financial institutions.

When the NEP was announced similar statements were made by the companies. Canadians thought that they were bluffing and ignored them. The companies weren’t bluffing then and they aren’t this time.

Just to add a little color here, when the NEP was announced, the day after, my employer laid off a large chunk of its staff putting over a thousand people out of work. The rest of us had to endure a large salary cut to stay on. A couple of years later my father was laid off by the major oil company that he worked for in Calgary for 33 years. A few years after that I was laid off, along with all the people in the department that I worked for (we were working for a major oil and gas company in Calgary at the time).

Just out of curiosity have you ever actually worked in the oil and gas industry in this province? Are you old enough to even remember the 1980’s and early 1990’s?

colbert said...

DON'T try to pull the NEP BS on this one. The NEP was not just about royalty increases, nor was that the reason for the economic collapse.

The NEP was designed to promote oil self-sufficiency for Canada, maintain the oil supply, particularly for the industrial base in eastern Canada, promote Canadian ownership of the energy industry, promote lower prices, promote exploration for oil in Canada, promote alternative energy sources, and increase government revenues from oil sales through a variety of taxes and agreements.

The royalty issue is more similar to 1972 with Peter Lougheed standing up against the same BS calls of bankruptcy and withdrawal if royalties were raised. It was BS in 1972 and it's BS now.

Anonymous said...

From "the literary giant"
The message was meant for Michael from Calgary who seems to think this is all scare tactic. I have been around the patch my whole life and for those who don't get the message they are beyond help.

Anonymous said...

C'mon all you so-called experienced oil and gas industry professionals, don't you realize you work in a cyclical industry. Hearing comments about people with 33yrs of experience being laid off...go cry a river somewhere else. She's a boom and bust industry, whether dictated by geopolitical, local political or natural selection...the good times can't last forever. The real problem lies with the Alberta government back peddling for an apparent mismanagement and misunderstood industry. The industry operates within the laws and regulations put forth by our political representation, if they collect money, they better know how to manage it. The oil and gas industry is no different than any other entrepeneur endeveour, they are here to make profits...plain and simple. Governments are nothing more than a welfare instituion, collect money from hard working people and have no foresight in making money. If the exisiting Alberta government is so concerned about my well being, let them become a business and generate some income to benefit us. Fact is, politicians are of below average IQ and if forced to run the government like a business...they would all be out of work.

Anonymous said...

-The cyclicity of this industry is not caused by a royalty review.

-If you even work at Tim Horton's right now in Calgary, you'd better be worried. So many people bitch and complain about hospitals roads...well I drive by Foothills, Rockyview and Peter Lougheed a lot and all three have big cranes up and are expanding.

-Just because the government gets the money is no guarantee your going to see any of it.

-So Taft is saying that we missed out on billions...then ten seconds later, tens of billions...so in his arguement, he would liked to have seen this money go to an "inept" government? Doesn't really make sense does it? Do you really think Alberta would be debt free if the Liberals were at the helm? And Klein did it without all this royalty money...go figure.

-I wonder, is the Alberta government going to subsidize the Oil Industry if oil prices drop to $10 a barrel? I doubt it.

-If the full review goes through, that means 20 000 jobs in the blink of an eye...instantly, those people are not buying lunch or their coffee at Timmy's all of the sudden. New houses are not being built. Big Oil companies are no longer around to be sponsors of large projects and charities (and they donate a lot of money, with not enough recognition) This is greed at its finest, it's finally come to biting the hand that feeds you, until your blindsided and lose your job without even realizing that if you live in Calgary, there's a pretty damn good chance your job is affected by the Oil and Gas Industry.

Jkwaldie said...

Pretty scary how fast people jump on the "me too" band wagon.....I continue to be amazed by the prevalent Canadian attitude that the best holder of wealth is "Government"......I continue to be more fearful of powerful government than powerful corporations.....at least corporations offer wealth creation....the best government can do is take from peter and give to Paul.

The Royalty report is flawed because the panelist only looked at the single question.....are Albertans getting their fair share of the royalty money.....

By their measure, the answer is no....but lets see how much there is to go around once the investments, jobs and wealth of the companies developing the resource are gone.....what has followed every boom in Alberta's history....can you spell BUST!!!

I mean, better companies spend money than an already rich government hoard it!!!

Thank you. JKW in Calgary....

trent said...

Time in increase royalties and give Albertans what they deserve!

Patrick said...

Can you believe that out of the 100% of tax revenue that could have been collected from Alberta businesses last year that only 100-x% was collected? That is outrageous! I want those businesses to pay more for me! More for you! Because I am in need. I need, therefore, those who have, should give to me!

Why?

uh...because I am in need and I have a gun, after all, I am the people, I am the government. And you oil companies work for me...

...hey, where are you going?! ...you work for me...


(This may seem a bit extreme, but isn't this the same logic that is being used? Maybe a bit more moderate answer is to stay competitive and not go right to the maximum amount in the Royalty Review, but implementing the review over a longer period of time to see what will happen with the economy? Small steps of economic reform?)

Michael said...

The playing out by all sides, "right" or "wrong" to "change or not to change" your perspective is only secondary to what is at the heart of this whole debate. Albertan's are simply not into planning things. Anyone can get mad, it is not a set of skills. Your bigger issue is that your province and those in it have essentially fumbled this one and had done so quite a long time ago. The rest as they say "is life", better luck next time.

Anonymous said...

Hey, in light of the $2B "free money" by raising royalt rates, I have an even better idea. Let's raise corporate income taxes by 20%. It's not like tax rates and profitability affect companies doing business here, right? Heck, profitability is not an issue when it comes to companies deciding to how many people to employ, or whether to expand, right?

Provincial income is the product of the government's percentage (including taxes, both personal and corporate) times the amount of work done. If the work is cut by 50% but the royalties go up by 20%, you do the math.

Look around the province. Work has steeply declined in the last 2 years because the price of doing business is too high. What do you think will happen projects that are just barely economic today, then gross revenues are whacked by 20%?

Is no one seeing that the net revenue to the province will go DOWN?

colin said...

I'm glad to see the Liberals take the position they did on the royalties situation. I suspect, in light of what the Premier hinted at last night, that Taft has positioned the Liberals between the Tories and the NDs, arguably not a bad place to be.

Anonymous said...

If your going to get rid of the PCs then vote liberal don't split the vote with the NDP, this is not about idealism-it's about taking out the trash- the 6 0r 8 billion the tories failed to collect would have easily covered a lot of social shortcomings in this province, such as elimination of health care premiums.