Sunday, September 23, 2007

Here is a Great Blog on the Alberta Royalty Review - "King Ralph Shilling for Big Oil."

I can’t say I always agree – or even agree very often - with fellow Alberta Blogger Eugene Plawiuk. But Boy oh Boy I have to admire his work on the post he just did on the Royalty Review Report and reaction to it.

This post is an example of the Blogosphere at its best. Great piece of work Eugene – I will read it carefully and with great interest - once I finish the report itself.

For those outside of Alberta - I suggest you will want to read the Royalty Review Report too. 60% of the billions being invested on oil sands development gets spent outside Alberta in the rest of Canada.


  1. Thanks Ken you make me blush. Really, though you do appreciate the hours of work it took to research and write that. In fact it took me a couple of days worth of work. So again thanks for the nice comments and the link.

  2. Anonymous4:02 pm

    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

  3. Anonymous5:48 am

    Over to you, Ken

    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

  4. Anonymous8:50 pm

    Excellent post, Anonymous.

    Ken, what do you say to that? Or the Tristone report? Or the thousand engineers who've been running petroleum economic models showing the impact of this new fiscal regime?

    I found a better website than Eugene's

    It has lots of good facts on it.