Friday, October 19, 2007

No Royalty Review Panellist Has Broken Ranks on the Recommendations.

OK I have read the Ross Smith Royalty Review Report and the Calgary Herald and Edmonton Journal stories on it as well. The media stories and the Ross Smith document all seem to run into the classic problem that the Headline sometimes neglects to capture the true essence of the story.

Dr. Dwarkin is quoted in the MSM as saying nothing in the Ross Smith Review is contradictory with her work on the panel or the framework, themes or structures that were recommended by the royalty panel. She also reaffirms that she agrees with the entire “Our Fair Share” Royalty Review framework, themes, structures and recommendations.

I have to wonder, therefore, if the slant and timing of this "story" is not just another “issue framing” and political posturing exercise. Is this another industry attempt to attack the credibility of the “Our Fair Share” Royalty Review by some power players in the energy sector? It is obvious no such motivation can be attributed to Dr. Dwarkin based on her reported comments.

Lets deal with some of the substance of what the Ross Smith Report says. They claim that the natural gas royalty recommendation for the Albertans as owners take increase of 5% for conventional natural gas is too high. This is not a 20% so-called recommended increase as some in the industry would like to have you believe.

The recommendation is to move from 58% to 63% and that according to Ross Smith “…is too high in our opinion.” It still leaves a 37% share for the developer and puts Albertan’s share below the standard 2/3 rent levels promoted by former Premier Peter Lougheed. Besides

The rationale as to why this is too high is “Due to the maturity of the resource base, it can’t generate the level of economic rent to justify this level of take.” They note that “Alberta’s conventional resource sector is at an advanced stage of depletion.”

Maybe it is time to accept the reality that the conventional oil and gas sector is past its peak and that it is becoming a sunset industry in Alberta. Why are no industry analysts pointing out that reality and advising the Alberta industry to adapt? Why are they not suggesting more use of new technologies for enhanced recovery of current wells? We have shifts happening towards coal bed methane and syngas as alternative natural gas sources. Why is that not mentioned in any industry analysis or reports in response to the Royalty Review?

The Ross Smith Report is entitled “Looking for Rent in All the Wrong Places” but is only focuses on rents from on source of conventional gas, "Foothills gas."

In essence Ross Smith are recommending a similar royalty holiday for Foothills gas as for deep well gas plays based on drilling depth and related costs. OK fine, but that is hardly an analysis of "looking for rents in all the wrong places." Cute title but it is dangerously misleading.

The Ross Smith Report says it agrees with some of the Royalty Panel fundamental findings. They say that “…the current Alberta royalty formula for natural gas is obsolete and long overdue for overhaul. They agree with the Royalty Panel’s recommendation that bonus bids, the prices paid for lease at the biweekly land auctions, should be excluded in any royalty rents calculations.

They don’t agree however that lower producing gas wells should be getting a lower royalty take and higher producing wells paying more royalties. They feel this recommendation will “encourage large-footprint, low-impact shallow development drilling and discourage higher risk and higher impact exploration.”

They provide no analysis or evidence to support this conclusion but they are quick to call it “dumb resource management.” That eloquent conclusion without evidence to support it are not very helpful to the Stelmach Cabinet in its efforts to make a wise decision on the real issues.

So in summary Ross Smith’s Report, and the media on it, confirms the panellist who is employed by Ross Smith has not broken ranks with the Royalty Review Report and in fact reaffirms her support of "Our Fair Share" recommendations. The Ross Smith Report is not in fact a criticism of "all rents in all the wrong places" as expressed in its title but rather a suggestion that one specific royalty for Foothills gas should be covered by yet another royalty holiday.

And finally they think to reduce royalties on lower producing wells and to have the owner's take focused on more revenues from higher production wells as recommended by the Review Panel of experts, including their own expert, is “dumb resource management.” OK, I think I get it now!