Tuesday, October 09, 2007

DOB Magazine On-Line Article Shows Insight

Here is a very insightful article on line and from the DOB magazine on the impact of the oil industry growth at any cost mentality. Nice to see this perspective being published in an industry publication. Maybe more in the energy sector will come to realize that what they are enjoying is not good for everyone. This article is a testimony to that reality…and written from a Calgary consciousness.

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October, 2007
Alberta Royalty Review
Fairness And Envy: Human Factors That Fuel The Royalty Debate
By Mike Byfield
Six months ago, the topic of higher petroleum royalties rarely cropped up in coffee shop chatter or the mass media. Now most Albertans are aware of the subject, and a large majority appear to favour drawing more energy dollars into the public treasury. "I'd like to see more funding for education and environmental protection," says Bertram Rampersaud, a Calgary masseur and father of four. "I'm not too concerned about hurting the oil and gas business, it's very rich. The people who drive those Porsches and Ferraris will still be parking them in their driveways after the province collects more money."

A handful of randomly chosen individuals - interviewed in Calgary's 17th Avenue Hard Disk Caf� and the Chinook Mall - conceded without exception that they knew little about Alberta's royalties system. Their attention focused mainly on high salaries and bonuses, cited repeatedly as irrefutable evidence of the petroleum industry's wealth. "I'm no expert in this field but I think the oil companies will make money whether or not royalties are raised," says Don Ward, who markets medical equipment to hospitals and clinics.

Several interviewees prefer to reveal only their first names. Among them is Donna, an energy service company bookkeeper who comments, "My husband and I have known a number of managers in the oil and gas industry, some of them as neighbours. Every one of them has made a fortune. Even when they got laid off in the busts, they got paid a bundle each time and none was ever out of work for more than a couple of months. Please don't tell me that those companies can't afford to contribute more to the community."

The prospect of an economic slowdown doesn't much perturb Stan, a construction estimator. He believes the oil and gas boom has intensified Calgary's cost of living, traffic jams and crime rate. "Service has gotten much worse. The buses are so late that it's a joke. Overall, our quality of life has deteriorated drastically in the past few years, especially for anyone who isn't pulling in big money," says the semi-retired builder. He also notes that Alberta's economy remains manufacturing-poor and overdependent on the energy sector.

Joanne, a middle-aged executive secretary with an oilfield manufacturer, says her employers have made personal fortunes since oil prices began surging three years ago. Although the firm moved into the red recently, she suggests that higher royalty payments from producers might help spread wealth more evenly. "I'm all for rewarding hard work, really I am. But there should be more balance. A single mom raising a couple of kids is working just as hard as anyone."

Bernice is a veteran administrator with a municipality outside Calgary. "Local governments have been struggling so hard for a long time to keep pace with the growth," she says. "The petroleum industry has new equipment and they spend very freely. If the province shares its extra royalty revenue with local governments, the result would be better for everyone."

David sells safety gear, mostly to oil and gas clients. "My sales are still okay but less than last year for sure. I think the companies are regrouping now. They're still building a lot of rigs, it looks to me like some big projects are being prepared," says the thirtyish Calgarian. He does not favour higher royalties, though. "Governments get too much money as it is. They're wasteful and higher royalties would just encourage more waste."

In fact, skepticism is common concerning the likely benefits of higher provincial oil and gas revenues. "The companies will lay off people to protect their profits so I doubt that the there'll be any overall benefit to ordinary Albertans," cautions Don Ward. Rampersaud agrees, "It would be wonderful if my children would get a better education but very little of that money is likely to get through to families that feel fortunate to go out for pizza once a week," the masseur comments.

Despite that cynicism about who benefits from public sector spending, polling by Leger Marketing over the past month indicates that 88% of Albertans favour higher royalties. Premier Ed Stelmach's personal popularity has risen to 45% on the strength of this issue, up from 39% in June. Two thirds indicated support for a 20% increase in oil and gas royalties and other recommendations from the recently released report of an Alberta royalty review panel. The industry's response - that higher royalties could trigger an economic downturn - does not appear to have generated much public alarm.

Brent Applegate, technical director for a roofing materials manufacturer, acknowledges that higher royalties could prompt a pullback in new capital investment. "Housing prices in Calgary are already off by 10% over the past few months and we've never seen so much new product for sale," says the former president of the Canadian Association of Home and Property Inspectors. "Prices could go quite a bit lower if the energy sector retreats in terms of new investment." On the other hand, Applegate suggests that lower house prices would improve affordability and he personally leans toward a modest raise in royalties. "The oil isn't going to go anywhere, it will likely be worth more later in any case and the producers will come back."

Norman Ward (who's not related to Don, above) wrote an oil and gas royalty review for the Western Stock Growers' Association (WSGA) earlier this year. The rancher recognizes that Alberta's economy could take a steep nosedive if the provincial government drives out too much new investment. "I haven't forgotten the 1980s, when the population of Brooks fell from 8,000 to 4,000," the rancher remarks. "Because energy and agriculture are entwined in so many ways, higher royalties could have both good and bad effects on our industry."

Specifically, the WSGA wants petroleum producers to pay market value (as opposed to agricultural value) for surface rights. "If the province takes a lot more money, agricultural operators are not likely to get more," predicts Ward, who sits on the association's board of governors. On the other hand, he notes that oil and agriculture compete directly for labour, machinery parts and some other services. "If the oilsands and drilling back off, the guy who's been making $40 an hour in the patch will work on a ranch for $15," the southern Alberta rancher says. "On balance, I'd estimate that what's bad [financially] for oil and gas probably benefits our industry."

Municipal politicians are campaigning for their upcoming election on October 15. Morris Flewwelling, running for his second term as mayor of Red Deer, says citizens of his city have distinctly mixed feelings about higher royalties. "Everyone sees big money being made in oil and gas. We've seen young businessmen who've accumulated millions in Red Deer, and no one wants the government to leave public money on the table," he points out.

On the other hand, the mayor acknowledges that oil and gas underpins much of Red Deer's economy. "No one wants the government to cripple the oil and gas industry. My own sense is that the balance is tipped slightly toward the energy sector, although I have no clue where the right point actually lies," Flewwelling says. "People are still confident that Stelmach will figure that out for them and make the right call."

Wayne Ayling, hitting the hustings for a third term as mayor of Grande Prairie, says voters seem pleased that Stelmach has conducted an unfettered, open review of royalties rather than cut an inside deal with the industry. On the other hand, it's clear to him that the main players on both sides "need to go into a room and make a consensual change. No one wants a war." Ayling does not feel that the popular temper has reached a boiling point which might impede a rational economic decision on the part of politicians. "As I go door knocking around the city, the royalties issue has not come up," the mayor reports.
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