Thursday, September 20, 2007

Hunter Royalty Review Reaction Shows Some in the Oil Patch Just Don't Get It!

What is it that some oil executives and certain investments brokers in the oil patch do not understand about the natural resources belonging to Albertans? Based on media reported comments in the past two days, since the release of the Hunter Royalty Review Report, it appears that some of them don't understand anything around that reality.

The Hunter Royalty Review Report evidence indicates oil industry types seem to think that they are the one who control and dictate the provincial energy resource policies...from top to bottom. From some of the Hunter Royalty Review Report findings, it looks like that has essentially been the way things have been operating in the oil patch with the Klein government apparently just going along with it. I hope the former Premier and his Ministers of Energy will be able to prove to Albertans that this is not - and has not - been the case.

Someone in the Calgary-centric energy investment community is also reported as saying in an
E-mail to clients entitled “Caracas on the Bow River” that if the Hunter Royalty Review Report "is enacted investment decision will be impacted." Duh! Isn't that is what this is all about? The impact is about the appropriate rents and rates Albertans should get from granting a social licence to oil companies to operate in OUR resource base and who is most appropriate to be trusted to develop those resources. This broker claims the Hunter Royalty Review Report “…reads a bit like a Chavez-style manifesto.” Boy is this attitude off base and out of touch with reality.

Then we have news reports of some energy CEOs meeting in London calling for a new National Energy Program demanding an increased federal role in their industry. Interesting timing in the face of a royalty review don't you think?

It was the NEP that killed the Liberals in Alberta 25 years ago and the myths remain. If that were to ever be seen as a possibility then Peter Lougheed’s predictions of a constitutional crisis that would make the old NEP look like a picnic would actually come to pass. Harper needs to win Quebec and not lose Alberta in the process. It is not going to be smart politics for Harper to be revisiting the NEP of Trudeau times especially since he is an old-style Reformer at heart. Stranger things have happened. Harper has flip-flopped before - think Income Trusts!

The oil and gas industry, the Alberta Department of Energy and past Energy Ministers since 1995 have a lot of explaining to do about how they calculated, accounted for and ensured the right royalties have been paid. That reassurance is something that needs to be done in addition to settling the question of how the rates should change and how much they should increase.

Perhaps the Auditor General Report on Royalties due in mid October will shed some more light on this or at worst point to more clouded mystery of perpetually poor accountability that needs to be fixed.

In any event this situation will either lead to Stelmach's finest hour as Premier or his final hour as Premier. Everything is at stake. Stepping up to the plate and hoping to hit a single will not cut it.

Stelmach has to step up to the plate and point to the fence and then swing for a home run. Nothing less will do. Hunter has given him a perfect pitch with this report. Over to you Ed - and here is a tip - keep you eye on the ball!

All eyes in Alberta are soon going to be watching the Premier. They ready to cheer or boo - depending on how well he deals with this. No pressure is just about good government and appropriate politics.


  1. Anonymous10:01 am

    Not so much Ken, this truly is the most draconian plan since the NEP. The numbers are devestating.

    If the NDP, Pembina, Parkland are all in favour do you really think that's going to be good for the province?

  2. ken chapman12:14 pm

    Have you read the report Anon? Do you think representative government should represent the public interest? Do you believe that energy and other natural resources are the Constitutions birthright of Albertans?

    The "numbers" propose to put Alberta royalty rates in the middle of the global pack. In a stable safe political and economic environment of Alberta compared to where 80% of the rest of the world's oil reserves are - how is that devastating?

    If you think this is a partisan issue you are sadly mistaken.

    I have a lot of time for the Pembina Institute - Parkland not so much and the NDP is just another political party. What do they have to do with anything about this anyway...other than another voice that ought to be free to speak out and you can choose to listen or you wish.

    This is now about leadership and political accountability of government to Albertans. It is about if we had proper stewardship of our natural resources birthright, economically, ecologically and socially from the Klein days.

    Do you have an credible evidence that royalty issues were handled properly by government in those days? Please share it with us. Government could use the confidence boost.

  3. Anonymous12:19 pm


    Read the data appendicies. Look at the impact on IROR and NPV. Get informed!!!!

  4. Anonymous12:30 pm


    If the competence of Alberta Energy is under question as you infer, why is the Panel and Dr. van Meurs relying on the models prepared by Alberta Energy to generate the projections of government take. Perhaps if we just tightened up the current system, government take would be comparable with other jurisdictions. By the way, how can you compare the oil sands to any other jurisdiction. It is unique to Alberta.

  5. ken chapman12:32 pm

    Why not share your position with us Anon-what is your comment on the implications on impacts on the IROR and NPV.

    Why are you commenting anonymously?

    I will be reading the report in detail over the weekend.

  6. Anonymous12:43 pm


    I would direct you to pages 105 and 110 of the data appendicies. At $60 per barrel, for an integrated project, IROR declines from 14.07% to 13.56%, or 0.5% and NPV declines from $0.69 to $0.48. That represents a 31% decline in NPV, an NPV on the low end of average according to page 15 of the sensitivity analysis. I am just pointing out the facts. That's what Albertans deserve. Di you agree?

  7. Anonymous1:16 pm

    Which investment brokers, Ken?

  8. Anonymous1:34 pm

    The name of the Broker is in the link - half way down the story.

  9. Anonymous3:41 pm

    Thanks. Peters and Co. Can't comment on the Email (most unfortunate), but Peters and Co. are very highly regarded by everyone. I think what is more important is to access their analysis.

  10. Anonymous4:02 pm

    Will they share their analysis - I doubt it! Will they show what data they relied on in order to draw their comparisons between Alberta with Venezuela too?

  11. Anonymous5:47 pm

    Who is they, the Panel or Peters and Co.? Peters and Co did not do an analysis of the government take between Alberta and Venezeula. I believe Peters and Co. recognize that comparisons of government take between jurisdictions is somewhat misleading since different jurisdictions have different fundamentals.

  12. Anonymous5:49 pm

    Actually, I believe Peters and Co would have no problem sharing their analysis. I suggest you give them a call.

  13. Anonymous5:53 pm


    Are you going anonymous on us?

  14. Anon - I actually have a large project deadline tomorrow and am trying to keep focused on it.

  15. Anonymous8:19 am

    "...At $60 per barrel, for an integrated project, IROR declines from 14.07% to 13.56%"

    A half percentage point decline on a long-term rate of return calculation is de minimus. There are so many factors that go into a discounted cash flow calculation, that you can easily get a variation of that magnitude. In addition to oil price, you need to look at exchange rate, capital expenditure assumptions, taxes, and ultimate resource recovery... none of which you will actually know with certainty.

    I'm sure the analysts are doing their best, but if you think a Calgary-based energy investment bank doesn't know which side butters their bread, then you are delirious.

    The oil companies have to take a hard stand. No CEO is going to say "oh, yeah, we really should pay more", because that would go against their duty to shareholders. So initially, they say the sky is falling, hoping to water things down a little. I find it quite amusing that these companies were all too ready to consider an adviser to the Panel an expert, when Van Meurs 1997 study showed Alberta taking a high share of the "take", but now repudiate THE SAME GUY's analysis, when he shows Alberta at or near the bottom in 2007.

    I am not saying the report is perfect, but it is a well-reasoned, well-research analysis.

  16. Anonymous5:21 pm

    It is the confluence of various factors which have affected the IROR. From a high of 27.5%, the IROR for a generic mining project has declined to around 14% and likely lower based on current cost data. The reduction in IROR is due to a 2.3 fold increase in capital costs, an 13 cent increase in the exchange rate from 72 cents to 85 cents, an increase in the long-term escalation factor, a two fold increase in operating costs, a three fold inrease in sustaining capital, phase out of the ACCA and climate change cost impact. This does not include the recent run-up in the exchange rate from 85 cents to 95 cents, which probably will slice another 0.5-1.0% off of IROR. Eventually you reach a "tipping point". Someone who is familiar with the economics of an oil sands project would understand that.