Reboot Alberta

Monday, October 08, 2007

Toronto Investment Banker Say Alberta's Auditor General's Comments on Royalties is Outside His Mandate

I see in the Edmonton Journal editorial pages today another institutional broker has taken a public position on the Alberta energy royalties. This time at least the article is not calling Albertans stupid but instead they have targeted Fred Dunn, the Alberta Auditor General.

The writer is reported to be a Calgary broker for Westwind Partners Inc., a Toronto based investment bank, which according to their website, just sold out to an American firm.


The article is accusing Dunn of commenting “well beyond his mandate” and saying he is “irresponsibly poured gasoline on the funeral pyre of Alberta’s free-market boom.” Pretty romantic prose for a broker.


For clarity Section 29 of the Auditor General Act says: "The Auditor General may, at the request of a department, Provincial agency or Crown‑controlled organization or any other organization or body of which the Auditor General is the auditor, provide advice relating to the organization, systems and proposed course of action of the department, (emphasis added)Provincial agency or Crown‑controlled or other organization or body."

Dunn is accused of over-reaching his authority by commenting and assessing the quality of our political leadership. A plain reading of the AG Report on the Department of Energy royalty system audit shows Dunn is clearly within the scope of the Auditor General Act. As for leadership assessment, Dunn merely outlines the role of the Minister of Energy at page 91 when he says:

“The Minister of Energy is legislatively responsible for designing, operating, monitoring and adjusting royalty regimes. While the Minister takes advice for a variety of stakeholders and needs authorization (Cabinet approval) to make regime changes, he has the final responsibility for the stewardship of Alberta’s oil, gas and oil sands resources. The Department of Energy supports him by analyzing royalty issues and regimes and implementing royalty policy.”

Dunn goes further to explain and confirm he is operating and commenting within his mandate in his report also at page 91. Noting that the Department’s advice to the Minister “beginning at least three years ago” that the Alberta royalty share had “fallen below stated government revenue targets” and that an additional $1B per year in royalty payments could be charged “without stifling industry profitability.” This is just stating a fact.

In the paragraph on page 92 of the Auditor General’s Report, entitled “Why have changes not been made?” Dunn is again careful to point out “the Minister of Energy has final responsibility and is accountable for these decisions.” (on royalty regimes). Dunn then appropriately notes “Our audit mandate does not extend to auditing or judging policy decisions such as changes to the royalty regime. However, we do report on systems where sound analysis of Albertans’ most valuable physical asset does not appear to have le to timely action.”

Dunn then goes on to make five recommendations directly related to “…strengthening the Department’s royalty review system and enhance accountability for the resources stewardship.”

So J.P. Veitch I disagree that Dunn is assessing political leadership in his audit. He is making systemic recommendations for more accountability, transparency, and better stewardship of Alberta’s “most valuable physical asset” and that is within his legislated mandate.

Citizens of Alberta will assess Dunn’s report and its findings. We are already looking at our government’s actions as our Trustees of our natural resources. Just read the letters to the editors of Alberta’s newspapers and the comments on the Blogosphere for proof of that happening. Citizens’ will assess and judge the quality of our political leadership and resource stewardship and decide what to do in the next election. Albertans are fully engaged and not amused by the actions of the industry and very unhappy about the exercise of our government’s role and responsibility as well.

One final point on the Westwind Partners Inc. piece needs comment. That is the allegation that the Royalty Review Panel is “engaged in visiting editorial boards across the province, spending taxpayers’ money in a public relations exercise designed to promote its view of the world…” I have spoken with the Chair of the Royalty Review Panel, Mr. Bill Hunter and can assure J.P. Veitch that the panellists are commenting and clarifying the issues in their “Our Fair Share” report on their own time at no charge to the taxpayers of Alberta.

On the other hand I fully expect the energy industry’s current full-court-press public relations campaign and lobbying costs will be designated by them as project costs. As a result the lobbying and PR money being spent by the industry to scare Albertans will be used to reduce their project net profits and thereby reduce Albertan’s royalty share as a result.

Remember Albertan’s royalties are calculated on NET PROFITS only. In short, Albertan’s should not be surprised if their non-renewable resource tenants are charging all of their current lobbying costs to the citizens of Alberta.

Ironic wouldn’t you say?

5 comments:

  1. Anonymous6:52 pm

    Ken:

    I prefer to comment on the specifics of the Veitch article. I believe that the Auditor General had evergy right to comment on shortcomings as it relates to trhe collection of royalties as per the Auditor General's Act. However, he overstepped his bounds by suggesting that there was room to increase the government take beyond what the Panel recommended. Public policymaking is the preserve of those who are elected to serve and are directly accountable to Albertans. If the Auditor General is interested in making public policy, he should resign his post, and run for public office in the next election.

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  2. Anonymous9:29 pm

    Ken Chapman betrays his ignorance on the Alberta Royalty issue:

    "Remember Albertan’s royalties are calculated on NET PROFITS only. In short, Albertan’s should not be surprised if their non-renewable resource tenants are charging all of their current lobbying costs to the citizens of Alberta."

    Sorry Ken, royalties are NOT calculated on "NET PROFITS"; they are calculated on production volumes and commodity prices. Extraction costs, whether operating or capital, are paid by the producing oil company. A small exception to this is the Gas Cost Allowance (GCA) in which the province pays its share of processing the natural gas after it has been produced.

    IRONIC, WOULDN'T YOU SAY?

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  3. Anon at 9:29 - saying don't make is so...what is your proof of the allegations that Net Profit is not the basis for royalty calculations?

    I relied on the Auditor General Report and ARRP "Our Fair Share." Let's not be ironic - lets be factual and accurate.

    Wasn't it Reagan who said to Gorbachov, "Of course I trust you. Now lets verify"

    Over to you Anon.

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  4. Ken - the anon was correct. You are incorrect.

    To further your understanding and to simply read the facts and not tripe like the Hunter report, this document will be of assistance:

    http://www.energy.gov.ab.ca/Tenure/pdfs/FISREG.pdf

    As you study the various regimes you may want to do some calculations to see if Alberta is much different than Saskatchewan or BC. In general, it Alberta is higher.

    Fair share indeed.

    Anon forgot an additional place where cost deductions occur in royalty calculations, in oilsands after payout regime some deductions can occur. With that small exception they are correct.

    As you actually understand the issues, you will come to understand why the oil and gas people are so upset.

    Until you gain some understanding on the topic my best advice to you is to refrain from acting as if you are knowledgeable on it. I'm sure you are a fine fellow with lots to add to this province's discourse so please don't sully your reputation by talking about what you don't understand.

    I'm going to blog to this matter on my blog.

    I don't want to get into a fight with you (I'm sure we'd hit it off in person as I'm a progressive too on most matters), but just use it as an illustration of how badly people on the Hunter side of the fence are misinformed.

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  5. Ian - thx for the comment. I have reflected and agree "anon is correct" in terms of conventional Oil and Gas royalties. They are not calculated on net profits and I left that impression in my comment back to him.

    BUT the oil sands royalties are calculated on Net Profits. We have to be careful to keep that distinction between conventional and oil sands clear.

    I was thinking oil sands royalties in my rebuttal of Anon and upon reflection he was only talking about conventional oil and gas royalty calculations.

    I am a citizen who is not expert in this field but who is trying to make sense of it. When I see a blatant political positioning and spin that is misleading I will challenge it to the best of my ability. That said I appreciate when corretions and clarifictions can be made.

    Speaking of which, we will be posting some clarifications on the various royalty regime workings for both conventional O&G and oil sands - showing the difference...this will be on www.policychannel.com next week.

    Thx again for your observations and clarificatons. I am looking forward to your Blog posting on this stuff too.

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