I Have A Problem With These Estimates

While I'm not particularly opposed to the restructuring of Alberta's resource royalties, there's a problem with could have been estimates and declaring them as "losses".

n a 2006 report, the department estimated that since royalty rates were capped at certain price levels, Alberta had lost between $1.3 billion and $2.8 billion in "uncaptured economic rent" for natural gas alone in 2003 and 2004, or between $700 million and $1.4 billion a year.

It's a little like saying that if I didn't get a pay hike of some percentage last year, that I "lost" however many dollars that hike represented. The simple fact is that I didn't earn that money ... period.

In other words, the estimate describes the dollars that Alberta did not realize as a result of the royalty regime at the time. Using the term "loss" is quite incorrect.

If this latest debacle tells us anything, it is really more about the lack of transparency and accountability that Albertans have from the government in Edmonton. These numbers should have been public a long time ago, as this is a matter of public policy that requires information to be put into the public arena.

The information, inadvertently released by Alberta Energy, demonstrates the lengths to which the provincial government went to hide the fact that it has known for years Albertans weren't getting their fair share, provincial Liberal energy critic Hugh MacDonald said Friday.

As the public debate in recent months over the royalties discussion has shown, there are multiple aspects to this discussion, and all of the stories need to be put forward reasonably. When major chunks of information are withheld, it is extremely difficult for people to make reasoned assessments of the issue - and we should be very worried when we are told "you wouldn't understand" by both industry and political players.

This Is a Good Sign

Apparently Ted Byfield has decided that he doesn't like Stelmach's reworking of the royalty scheme.

Given Mr. Byfield's illogical arguments on so many other topics, it probably means that Stelmach actually took a step in the right direction.

Sez Ted:

He has turned Albertans against the industry that has made them prosper and has made their province great.

How else can you interpret his new royalty regime, imposed without negotiation on the province's central economic engine?

I've said this before - governing is about a lot more than just money. It's about people, and the interests of the people. The oil patch has had a great deal of say to date in the royalty arrangments in this province, and has slowly and steadily wormed into the minds of people like Mr. Byfield that it would be a "Bad Thing"(™) to touch anything to do with the oil patch.

What has been made clear is that the free lunch of profits at the oil trough is over. Remember, those resources belong to all of us, not the oil companies per se. They may sulk for a while; and a few may well stomp off in a huff and move their focus elsewhere in the world. It's not a bad thing - slowing down Alberta's economy right now would be good from several standpoints - like trying to hire staff for smaller businesses.

If the oil sits in the ground a bit longer, what's the big deal? It stays, and the odds are that the prices will go up on the resource as supplies begin to run out. So, from an investor/taxpayer perspective looking a little more than next quarter down the road, I have to ask myself just what we lose? Not much. Get it out today at today's prices and a higher royalty fee, we win. Leave in the ground for a while and get it out at higher prices due to reduced availability, and we still win.

Unless the world's need for oil drops dramatically in the next few decades, we come out ahead either way.

Somehow, I think I'll put a little more stock in what Peter Lougheed comes up with over what Byfield tries to pass off as wisdom.

Interesting ...

I'm a little surprised to hear Lougheed taking a public stand on the Oil Royalties.

Lougheed's assessment seems to align with my own initial thoughts - namely that it can't be all bad if none of the lobbying stakeholders is happy:

Speaking of his own experiences, he said: "When you make a major announcement and you've got both extremes distressed with you, you say to yourself, 'Maybe we got this right.' "

Not that this means I'm likely to vote for Stelmach - I still believe the province needs a major amount of change in Edmonton.

Alberta's Petroleum Royalty Changes

It's going to take a while for me to sift through the details of the revised petroleum royalty regime unveiled last night by Premier Ed Stelmach.

Just listening to the news driving into work this morning - which was one long "what don't you like" session from speaker after speaker on differing sides of the fence - I came away with the impression that Stelmach may have hit the perfect political compromise - nobody seems to be overly happy with it.

The biggest "stinker" that I see in it is the government reopening the Syncrude and Suncor contracts that were slated to run until 2016. I have some difficulty with opening contracts that are already in play on little more than government fiat. (That said, if the contract and circumstances weren't amazingly generous to the companies, you might find that the company would be standing at the government door with their hand out looking to reopen the contract.

The wailing from the oilpatch players on CBC this morning tells me that the oilpatch didn't win their lobbying war. (I expect that the PC's are going to see a big drop in their "donations" revenue in the coming fiscal year).

Similarly vocal complaints from the environmental lobby and others who wanted a much more aggressive royalty scheme implemented suggest that Stelmach has tried to hit some kind of "middle ground".

I'll reserve a more detailed analysis of Stelmach's changes for when I have time to sift through the gobbledygook and convoluted equations.

Stelmach and the Royalty Review

Ed Stelmach has just been handed his first leadership challenge as Premier of Alberta - a Royalty Review Report that has the oilpatch getting positively "scared" (read - they are dragging out the "nobody will invest" zombie from the closet). You'd have to be the village idiot to believe that one. Alberta's oilsands represent one of the largest sets of reserves for fossil hydrocarbons in the world - the world's need for that energy in the short to medium term is such that it cannot afford to not invest.

Stelmach has a bit of a sticky problem though. If he overhauls things too radically, he will annoy the oilpatch which has been rather generous in its funding of the Alberta PC's. On the other hand, if he doesn't stop the perceived giveaway of resource revenues into foreign-held oil firm coffers, Stelmach stands to look as though he is beholden to the oilpatch and not to Albertans.

Alberta's royalty regime has long been one of the cheapest in the world for oil companies, and in recent months people have started to ask (rightly so) whether or not we are getting our collective "fair share" in this province.

A lot of what I've seen in the reports on the royalty review leaves one particularly vile little wart in the mix - keeping the 1% royalty in place on tar sands projects until "capital costs" have been recouped. The problem with doing this is simple - it's far too easy for the accounting to be juggled and shuffled in order to make it look as though there is a great deal of unrecovered "capital cost" for a very long time. Unless oil prices suddenly crash to pre-1990 levels, which seems quite unlikely, the tar sands remain profitable - even at full royalty costs.

There is a fundamental dishonesty in the claim that "investors won't invest" - it's a form of threat that has little or no validity. While a change in the royalty regime might cause some ripples for a while, it's not like the province can't do with a small slowdown right now.