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Wednesday, October 31, 2007

New Poll Asks If Stelmach Has Met Public Expectations on Royalties.

I love polls. The latest offering from Leger for CanWest was done from Oct 26-29, immediately after Stelmach’s Royalty Review Response was made public is interesting. The earlier Leger poll found 88 percent of Albertans did not think we were getting our fair share of royalty revenues and two-thirds of us wanted the Hunter Review Panels recommendations fully adopted. That didn't happen and apparently slightly less than half of us are on side with the government's response to the Our Fair Share recommendations.

Since the Hunter Panel report was made public, time passed, positions were taken, threats were made, we had explanations and clarifications. And there was a barage of accusations and predictions about dire consequences if the "Our Fair Share" recommendations were accepted. Through it all the Stelmach government did it own number crunching and made up its own mind.

The Leger results show more about how Albertans were “feeling” last weekend about the Stelmach royalty response. After all it is a complex set of issues and an opinion poll taken immediately after the Stelmach response and done over a weekend is most likely to engender an emotional and reactive response instead of a reflective and considered opinion.

So here is what Leger found about how Alberta "feels." First off we don’t yet have a breakdown between Edmonton, Calgary and rural replies and that is needed to get some better context on the answers. That breakdown will provide more “heft” to the results in terms of the political usefulness of the poll results too.

Secondly I am struck that about 1 in 5 Albertans didn’t yet know how they felt about the questions being asked. That could be because they need time to consider and understand the Stelmach response. It would be interesting to do the same poll this week and that would get a better sense of were Albertans are really at now that they have had time to digest the response and talk to people and read some of the commentary about it.

Thirdly, it is pretty obvious based on my Blog hits, that only 150 people showed up at the CBC Forum on the issue last night and recent conversations with my group of contacts tells me that Albertans have moved on. It seems that royalties are being regarded as a done deal - or - maybe they are merely catching their breath before further engagement. Time will tell.

The Lougheed Test of good policy decision of if all vested interests in the decision are still upset, you probably “got it right.” Seems to be the case here based on these poll results. The key question of did Stelmach get it right we have 47% agreeing, 33% disagreeing and 20% who don’t know. that seems to prove the Lougheed Test of "getting it right."

The most conclusive opinion in the poll was that 61% said the “…industry over-inflated the negative consequences of higher royalties….” 21% sided with industry’s positioning and 18% didn’t know. This is a serious issue for the energy sector now. Albertans don’t believe the industry and the industry can’t rely on the old contacts within government to protect or insulate them from the public (any more). This is especially true after the Auditor General’s Report and his scathing assessment of some aspects of the Department of Energy.

Our own polling has preliminary results showing a full 44% o fus do not trust any of the political party leaders to manage growth in Alberta. So as we go deeper into the election "red zone," our politicians are going to be much more mindful of meeting the public’s expectations as to their trustee role around resource development. Deals on royalties done behind closed doors will see politicians punished in the polls and at the ballot box – no matter who is in office.

Of course if Albertans go back to being passive and impotent- nothing will change. It is up to the citizens of Alberta to continue to become better informed and more engaged.

We need to start acting like an owner and behaving like a voter. An election is coming.

Tuesday, October 30, 2007

Lougheed Endorses Stelmach's Royalty Review Response.

The personal endorsement by Peter Lougheed of the Stelmach Royalty Review Response is a big step forward for our new Premier. Lougheed stepping up in support of the recent royalty announcement is significant. Lougheed is an influential voice all over the province and he comes from the small group of Alberta political leaders who have made such difficult decisions in the past. He knows how tough it is and his approval of Stelmach’s decision speaks volumes.

Lougheed has been openly advocating for a slow down of energy project approvals because of the damage they are inflicting due to the overheated pace of growth in Alberta. His big concerns have been damage socially and environmentally but also on fiscal pressures on the province and municipalities to meet the public infrastructure demands in this current pace of growth.

Lougheed’s advice and response is in sharp contrast to the warnings of former Premier Klein last month. Klein was commenting that the energy sector was not happy and therefore royalties were best left well enough alone. Stelmach wisely left that bit of advice alone.

So Lougheed has clarified one thing. Stelmach’s government is definitely not an extension of the Klein regime. There are some who think Stelmach's kindness, politeness and graciousness are shortcomings for the bloodsport of political leadership. They see him as still having the potential to be a Harry Strom, especially if he were to trip up in the pending election.

So what does this tell us about the governing philosophy of a Stelmach governed Alberta? To me it is more evidence of a Stelmach government embracing a progressive social political philosophy. He is about to engage in a more conservationist approach too as we shall see the roll out of some new environmental initiatives and the start up of an integrated land use management strategy.

The fact that a commitment to deal with homelessness as the follow up policy initiative right after the royalty decision is further proof of this shift away from the former neo-con fiscal and social policy agenda. Today in Alberta we have a spending problem due to a premium cost for public infrastructure in this over heated economy. We also now have a revenue problem too – as pointed out by the Auditor General.


Alberta's Auditor General Fred Dunn said some past Ministers of Energy were not collecting all of the energy royalties that were due - even in the old model. In fact those same Ministers of Energy seemed to be even uninterested in doing their duty of ensuring the appropriate royalty revenues due to Albertans were actually being realized.

I think that is about to change - big time - and we will see Premier Ed Stelmach as his own man and with his own style of leadership. Yes, he is not be the slick and polished veneer pre-packaged politician. He is not the product of the professional media trainers the mainstream media is so used to. Yes - he is no orator either...and while he can't "lift the words off the page," he has shown that he can bring clarity to complex issues like royalty regimes.

But no one can doubt Ed Stelmach’s capacity for caring, nor his compassion nor his sincere commitment to Alberta and her people. He is also different because his focus is not just the Alberta of today…or basking in the glory of an Alberta of yesterday. He has a much broader and longer vision of the province and how it should be governed.

Now the lingering question is – is Stelmach capable of doing the job of Premier to the satisfaction of Albertans? He has been on the job for 11 months already and that question is still being asked. Well my guess is we are about 100 days or so away from an election. Those 100 days is more than enough time for Albertans to come to know Ed Stelmach for who he is – as his own man and with his own style of leadership.

Once the election is called it will be up to Albertans to decide if Ed Stelmach can do the job of Premier – and if they want him to do that job. Remember campaigns matter and it is not how they start, but how they finish that really counts.

Besides, Peter Lougheed obviously likes him and that goes a long way in my books.

Monday, October 29, 2007

What Political Leadership Qualities and Skills Do We Really Want and Need These Days?

I am intrigued by the Ipsos Reid poll of October 16th where 1001 Canadians gave Stephen Harper a 63% positive rating for “leadership qualities and skills” and they gave Dion a 36% positive rating on the same question. I wonder how many phone calls they made before 1001 people would answer. I wonder how many cell phone numbers were used to capture the opinions of younger citizens.

I wonder what criteria the poll participants had in mind and used for determining “leadership qualities and skill” when they were answering those questions. I wonder if they applied the same criteria to considering Dion as they did to Harper when they answered. How much of the value drivers behind the answers for each candidate were the same or different and why? Were Albertans using different criteria than Maritimers when they answered the questions?

The levels of "Don’t Know" response around Dion shows he is relatively unknown. One wonders how much of this is poll result driven by name recognition. Does it really give us any meaningful assessment of leadership qualities and skills of the various party leaders?

What are the criteria we should or could be applying to judge the leadership qualities and skill of political leaders like Harper, Dion and Layton? Should we vote mostly by "what is in it for me" in what the leaders are promising? Are we driven more by group interests of our community, town or special interests? Are we deciding based on altruism and how a leader reflects our own ideals and principles and how much we trust him? What are the value drivers in our choices around "identity politics?"

Do we like a dominant, assertive ambitious personality types and someone who likes conflict and aggression as our leader? Is a more inspiring and persuasive personality that will be more attractive to us as a leader? Do we find a leader who is of great character, with carefully considered and well thought out and clearly stated opinions to be more appealing? Are we keen on someone who is reflective and caring about citizen’s personal aspirations individually and for our country as well as giving good value for our tax dollars?

Are we at all attracted to leaders who are insightful, adaptive and wise with relevant knowledge, experience and one who is skilled at adaptive governing for our rapidly changing times? Or are we all about choosing a leaders who is pure hardball politics where winning isn’t everything, it’s the only thing. Are we attracted to party leaders where clever and sharp political players where power politics always trumps good governing?

Do we like leaders who see it all as a game where personal pride and power dominates the motivations. Do we seek out and choose a "win at any cost" kind of politician and do we see any other more collaborative and inclusive approaches to leadership as a weakness?

My guess is there a lot more going on in the minds of Canadians when they really sit down and evaluate the leadership qualities and skills of our political leaders. I think an ordinary opinion poll asking us to choose between a political “Coke or Pepsi” is not going to give us much useful information or insight. We need to look deeper into those larger and more meaningful questions about qualities and character and style issues around political leadership as we seriously consider granting our consent to be governed at the ballot box.

Citizens need to be considering bigger questions and seek a deeper understanding of what we want in our leaders as people and personalities and political decision makers. We need more definition and deliberation about leadership before we will get anything meaningful in the answers we would give to pollsters. This especially true around complex issues like what leadership qualities and skills do we really want and need and if either leader "X" or "Y" actually meets those needs.

Stelmach Stakes Out His Leadership of the PC Party With His Royalty Review Response

I never made it to Calgary for the PC Alberta Policy Conference but all reports tell me it was a very successful event, well attended with lots of enthusiastic delegates. Premier Stelmach’s message on royalties was well received as was his replies in the open mike session Sunday morning.

For over a month it has been royalties and nothing but royalties that have dominated the Alberta political and policy agenda. The Premier has made it very clear that the royalty decision has been taken and he is moving on with some other policy agenda items as well. Homelessness is one area he has indicated action is needed, as well as the unfunded liability for teachers’ pensions will be getting resolved sooner than later. There is a crime strategy that is soon to be announced as well.

I expect more environmental announcements in the near future on integrated land management and conservation policies coupled with sustainability and responsible resource management requirements. Support for environment related innovation and new efforts for setting realistic standards for air and water in the face of the growing economy are likely to be forthcoming too.

The Premier said that the 20 year capital plan will be settled before an election is announced. That work will likely renew some interest in reviving the 20 Year Strategic Plan for Alberta too. Contrary to what the former Premier said, there was a Plan. The 20 Year Strategic Plan was a framework document that was prepared from a consultation approach. It was accepted by government as policy and then promptly shelved in the Klein days of doing nothing.

So this weekend policy conference showed that the wounds from the leadership campaigns are healing well. Some Party members have quit picking at the scabs and are moving on with a renewed focus on the future. There is a new sense of cohesion coming back in the Alberta PC party as its membership hunkers down on nominations, election readiness and starts thinking anew about the future of the province.

While some mainstream media and the NDP are "reading entrails" and parsing the Premier’s language for signs of an early election, it is pretty clear that we are going into a spring election.

Premier Stelmach is going to be busy between now and the spring election. He is putting a lot more on his political plate beyond the royalties issues. He knows there is more to do to be sure of an effective royalty policy implementation but he has to also ensure there is a new openness and accountability on royalty rates and revenues too.
We need to be sure the Suncor/Syncrude deals are aligned or the playing flied is level for other projects. We need to get into a real market model for butumen pricing. We need to look into project overruns and what costs are legitimate to set off on projects so there is no gold plating that ends up costing Albertans foregone royalty revenues.

I am going to be watching very carefully that execution and review of the royalty monitoring and reform that former Auditor General Valentine is doing is public and promulgated. We Albertans have to keep out vigilence up and the momentum up on this aspect too so. It is up to citizens to be sure the owners’ interests are protected. To do that citizens have to underatke the personal responsibility to get become and stay informed...just like they have in the past month on royalties.

This is going to have to be a cultural change around oil sand royalties monitoring and collection. This is going to be a challenge for some administrators, and some old-school politicians too. Culture change is never easy but it is definitely necessary in this situation. I will be watching and reminding our government of Einstein's observation that you can't solve a problem with the same consciousness that caused it in the first place. Changes have to be made!

Friday, October 26, 2007

The Energy Industry Credibilty in Alberta is in Shreds.

So the polls showed Albertans did not believe Big Oil as to the “sky is falling and we are leaving Alberta rhetoric of the “Our Fair Share” Royalty Review. The Stelmach response on royalties shows the government did not believe Big Oil either.

And today the markets showed they did not believe Big Oil either. The markets were normal in the face of this “catastrophe,” even as of some “analysts” engaged in a pending disaster feeding frenzy to the business media claiming the markets were destined to be a disaster due to a new royalty regime.

So the energy sector has a credibility problem now. Not all of the companies in the sector deserve the growing public disdain that has been brought on the energy sector but tar and feathers are not often discriminating and tend to cover the entire sector.

So now the energy sector in Alberta might be well advised to do some serious soul searching and maybe engage in a bit of real honest communication with their landlords. Not any campaigns based on slick PR exercises or full page media ad-buys based on misinformation and “messaging.” I am talking about a genuine and authentic effort to reach out to Albertans to understand how the industry is perceived. I am talking about the Alberta that is outside of Calgary, and about Calgarians who are outside the industry.

It is time the energy industry started focusing on proving to us that they are appropriate and responsible resource developers and know what sustainable stewardship of this public nonrenewable resource is. For example, if the drilling is down now why are you not focusing on catching up on some long over due well site reclamation and site contamination clean up. There will be rig workers looking for work I hear. Why not use them and start a renewed focus on responsible stewardship fixing your shredded image in this way

The Alberta forestry industry has made that shift in consciousness to responsible, sustainable stewardship already. Surely the mighty energy industry in Alberta is at least as smart and as capable of adapting as the “Lumberjacks.”

Thank You to the Expert Panel for the "Our Fair Share" Royalty Review Report.

The government's announcement yesterday is truly historic, and marks a new beginning in Alberta's stewardship of its natural resources. We Albertans owe a great debt of gratitude to the citizens who served on the panel and the various consultants, advisers and Alberta government administrators who helped them.

The final decision of the Stelmach government decision on the royalty review recommendations is historic. Part of the historic nature of the decision is how very closely it aligned with the major themes of the “Our Fair Share” Royalty Review Report recommendations. For example the province decided to implement the 20% recommended royalty rate hike but in a slightly different mix than suggested by the government appointed Expert Panel.

Overall, the government changes vary little from the goals of the Expert Review Panel. The new Stelmach framework will boost government take for natural gas from 58% today to 60%, rather than 63% as recommended by the panel; for conventional oil, government take goes up 5% to 49%, which is what the panel proposed; for oil sands, government share increases to between 57% and 66%, when the panel was recommending an increase to 64%."

The move to a price sensitive base royalty is largely the same thing as the Panel’s recommendation for a Severance Tax with a slightly different trigger price and a few other technical differences.

The months of intense research, review, revision and rehashing and yes I expect lots negotiation between the panel members would not have been easy. They researched, wrote and presented a comprehensive frank and forward thinking document. It is an esay read, full of clarity and sound analysis, and in the end it proved to be a quality piece of work reflecting a great deal of collective wisdom.

Another historic event was when Premier Stelmach immediately released the report upon receiving it. That early non-traditonal report released pioneered a new and novel openness to modern democracy and enabled an informed debate in Alberta. That unprecedented move fueled a province-wide discussion and dialogue amongst Albertans in all walks of life about the future of their province.. It empowered people and encouraged them to become informed. It created a wave of citizen engagement amongst Albertans in their democracy that you don’t even see at election time.

However, the “Our Fair Share” Royalty Review Report obviously spoke volumes to the people of Alberta and the Government of Alberta. The Stelmach response shows he accepted the essence, pith and substance of the Royalty Review Report findings and made only minor modifications to the final recommendations.

Even the opposition Liberal party came out endorsing it. In addition, virtually unanimous agreement on the key issue outlined in the report amongst all of the political parties of note in this province. That range of political support is historic too.

So, as one Albertan to the Panel, I what to say thank you to all those who worked so hard, long and effectively on the “Our Fair Share” document and especially the six experts who lead the effort. And thank you Premier Stelmach for embracing the concepts and adapting them so effectively for the future prosperity of Alberta. In my mind almost equally as important was the way Premier Stelmach openly enabled and encouraged the inclusion of Albertans and how we Albertans became informed and engaged so effectively in the future of their own province.
I smell some real democracy in the clean fresh Alberta air again...and it is about time.

Thursday, October 25, 2007

Stelmach Finds the Balance in the Response to the Royalty Review

OK – I have to say I am very pleased with Premier Stelmach’s response to the royalty review process – for sure at the economic level. I am also very relieved and comfortable at the political level. There is an election coming up and my money is on March 2008

I have spoken with Bill Hunter tonight and he is very pleased with the government’s response to the Royalty Review Panel’s recommendations as well. There is still some devil in the details and quibbles but the former can be worked out and the latter are nothing to get worked up about. I like the January 1, 2009 start date. It gives enough time to retool the computers and create the software programs needed to calculate the new sliding scale, market price royalty rates and for government to make the necessarty legislative and regulatory amendments. It give industry time to adjust too. It is not so long as to take an sense of importance and urgency away from getting these changes made either.

One detail is that undoubtedly some pundits and politicians will accuse Stelmach of leaving ½ Billion on the table because the Panel calculated a $2B larger government take on their model and the government today said they estimate a $1.4B increase in take. I didn’t think this meant the government was leaving money on the table so and I confirmed my understanding with Hunter tonight.

The difference is that the Panel did not account for the conventional gas Deep Well and Flaring royalty holidays in their calculations and the government put them back in. The government was clear they were reaffirming both subsidies and that is the difference between the “government take” numbers. Conventional gas gets more form the government decision than the Panel recommend.

That is a policy decision to stay the course to continue the help for conventional gas they currently enjoy in these two programs. Notwithstanding, I expect Big Oil will be officially ticked and say so for the next days. Some may be reckless enough to lay off people in the next few days for dramatic effect and making their employees pawns in a tawdry political game. I hope that doesn’t happen but given recent history, I would not be surprised.

I like the fact that there is going to be a negotiation between Suncor and Syncrude now over there current agreements. Stelmach has confirmed no grandfathering but also that these contracts with these two companies are going to be honoured - unless of course they are amended by mutual agreement.

I think those companies will see that while they are in the unique position of having have a better deal right now, but in 2016 it is over. They are in the oil sands for 50 – 60 years so an extended time of more royalty certainty will no doubt be attractive.

There are lots of issues to discuss from the Stelmach royalty response today and I will do so in a series of subsequent postings. For now I can say Ed Stelmach did not get caught in the CAPP versus Review Panel game…that was never where the “balance” had to be found. There was and is so much more to consider in arriving at the right balance and Stelmach has done that.

What Premier Stelmach has taken is to take the Panel’s input, the consultation process input, the various pieces of advice (and threats and insults) since he made the “Our Fair Share” report public all into consideration. Then he applied some of his own thinking and principles and he has designed a very solid and sensible strategy that does take care of Alberta’s interests and provides fairness and firmness to the energy sector. Well done Ed…now lets get down to work and make this response well understood by Albertans and lets be sure they get accurate, timely and regular reports on how well it is working.

When It Comes To Trust and Truth on Royalties - Who Will Albertans Believe?

Every now and then you get a concise and comprehensive discussion of complex issues and how they inter-relate. It is well known that the communications cure for complexity is clarity not the KISS approach to merely making it simple but inevitably inaccurate.

Such is the case with the wonderful clarity of Derek DeCloet’s column in the Report on Business in today’s Globe and Mail. The key message is in the closing sentence where he says most Albertans don’t believe the doom and gloom messages of the oil patch. They also don’t appreciate the name calling and intimidation tactics they used.

At Cambridge Strategies we are in the middle of a major discrete choice modelling survey on Albertan’s value and attitudes about responsible and sustainable oil sands development. So far we have over 1300 Albertans telling us which of the current Alberta political party leaders do they trust the most to responsibly manage Alberta’s growth. The winner at 43% was NONE OF THE ABOVE.

Now it is over to the Stelmach government who was in second place in the survey with 33% trusting him. What will he say today about his government's approach to non-renewable resource royalties? What will it matter if most Albertans don’t believe or trust him or any of the other political leaders either?
The content of what Stelmach says today is going to be very important. But so is how he says it and if his presentation resonates with Albertans and and I am talking substance here - not speaking style. Equally important is how authentic Albertans perceive him to be when he announces his decision.

Today is indeed going to be a watershed day for Alberta, Albertans and political leaders from all parties to whom we have given our consent to govern us.

Wednesday, October 24, 2007

Premier Stelmach Brought Progressive Conservative Politics Back to Alberta Tonight

OK I heard Premier Stelmach’s TV speech tonight – and I took notes. Overall impression is that the Progressive Conservatives are back and governing the province of Alberta and it is high time.

Tonight Ed Stelmach outlined a fulsome and a comprehensive set of social progressive and fiscal conservative values, principles. He covered a wide range of issues that, as Premier, he wants to deal. And, by the way, he spoke very well too.

He accepts that the management of our growth by the government has not been good. Bloody awful growth management has been the governing hallmark in the past 8 years if you ask me. In fact at Cambridge Strategies Inc. we just completed the first phase of a large discrete choice modeling survey project we are working on and we polled on this issue.

We just asked 1200 Albertans in an on-line survey conducted between October 17 and 22, “of the current political party leaders in Alberta, whom do you trust the most to responsibly manage Alberta’s growth?” This sample size has accuracy within ± 3.0 percentage points, 19 times out of 20 BTW.

Guess who won. None of the above! That is right. The actual results were 43.02% answered ‘none of the above’. Ed Stelmach and the Progressive Conservatives garnered 32.9%. Kevin Taft and the Liberals received 10.7%. The NDP earned 6%; the Greens, just over 5%; and the Alliance, 2.2%. There is lots of room for improvement – in every party and for every leader. We will post more on this survey on Policy Channel tomorrow at www.policychannel.com

Our political leadership, regardless of party, is not seen by Albertans as being properly engaged in effectively managing Alberta’s growth. This is going to be a ballot question next election, as is environment. The only thing to change the ballot questions is if the Premier misses the mark on the royalty and related issues tomorrow. Then openness and integrity in government will take centre stage as a ballot box question. That will be because Albertans will react to the Ralph Regime reality of poor royalty monitoring and lax collection practices plus former Ministers of Energy refusing to revise the royalties, even when recommended, for seemingly pure political reasons.

Based on what I heard Premier Stelmach say tonight…he is going to be right on the mark on royalties tomorrow. Tonight he was talking full blown Transformational Option #4 that I described in my blog posting earlier today. Will he go as far as I suggested in today’s post? Time will tell but his heart has always been there and, based on what he said tonight, his head is clearly and concisely there too.

With that approach and that agenda he can move the 43% from “None of the above” into supporting a positive Progressive Conservative policy agenda in the next election. This political philosophy change away from a far-right paternalistic, passively indifferent approach to governing is long overdue in Alberta. That change is coming and it was confirmed tonight as Ed Stelmach decisively distanced himself from the old style politics of the Ralph Klein Regime.

Tomorrow is another day and at 3:00 pm I expect to hear an even more assertive and affirmative Ed Stelmach on royalties. I expect he will lay out a comprehensive, integrated, open, accountable, fair and long term royalty decision that will serve all Albertans well.

Good start tonight Mr. Premier. Now seal the deal tomorrow.

What Are Alberta Ed's Royalty Review Options Tomorrow?

So here we are, two days away from an event that could change the culture and consciousness of Alberta for at least a generation. Premier Stelmach is going live on the Internet to present and explain his government’s plans for the stewardship and management of our non-renewable energy resources.

Every engaged and influential Alberta citizen will be watching his TV address tonight. Many more will be glued to the Internet at 3:00 pm tomorrow to here in detail what he has to say about royalties. In any event by the end of the week Albertans will have finally come to know who Ed Stelmach really is. They will make up their minds as to what kind of character they think he is and what kind of leader they think he will be.

I sure don’t know what the outcome will be on Thursday. I have done some “what if” thinking about some options and the political implications in each case. I think there are five paths open to the Premier to take on royalties.

1 He Blinks! This is an approach based on minimalist tinkering and timidity with no substantial change. The conclusion will be that review process was just an exercise of "going through the motions" and fear of change and the industry are the guiding principles. This will be interpreted as a big industry win and voters will be angry since polls show 88% want changes made. Albertans who are now “Thinking like Owners” will begin “Acting Like a Voter” and we end up with a minority government – likely PC but no guarantees.

2 He Creates Confusion! He cherry picks pieces out of the “Our Fair Share” Report. As a result no one owns the ideas and nobody can understand what exact the policy goals are or what the proposed implementation means are to get there. This will seen as a big industry win and will be characterized by the pre-payout royalty going up to 3% and no severance tax and a post payout royalty of less than the 33% recommended by the Review Panel. Politically this will be interpreted that Ed is just a Ralph Rerun. Voters will disengage again and harbour grudges. PC supporters will stay away from the election in droves resulting in a minority government.

3 He Reacts Like A Progressive Conservative! He accepts the “Our Fair Share” recommendations as a package In addition his Progressive focus will be on new opportunities like synthetic gas from coal, Coal Bed Methane extraction, biomass and tying together with a major push for funding for Greening of the Growth as the overarching principle for the next Alberta energy strategy. His Conservative side will announce major policy changes to ensure accountability and transparency in the relationships between the owners and the tenants in the energy sector. He will outline stricter policy initiatives for calculating, monitoring and collecting royalties in response to the Auditor General’s recent report. This gives industry certainty and cleans up the governance mess in the Department of Energy.
Politically Albertans will be encouraged but will wait to see if the actions align with the rhetoric. If no authentic action is taken before the election PCs will abandon the party under his leadership. It will be worse than Ralph in 2004. I expect as many as 350,000 previous loyal supporters and volunteers will stay home through the campaign and on election day. Advantage Taft but this election he will have to earn our consent to govern. He cannot just wait for Ed to lose it.

4 He Goes Bold and Transforms the Province! In addition to option #3 he initiates the environment and technology fund idea in the Afterward of the “Our Fair Share” Report. He announces a major policy moves towards a comprehensive integrated economic, societal and environmental approach for the future of Alberta. He moves into a transformational mode and weaves in the Water for Life, Clean Air and Integrated Land Management strategies into the emerging Energy Strategy. He repositions the consciousness from today were the society is there to serve the economy to where the economy is more focused on meeting the needs of the society.
He balances revenues between short term infrastructure needs and savings for the long term aspirations of Albertans. And he puts conservation back into conservative politics and by protecting wildlife habitat and watersheds and water supplies and pushing for more and faster energy industry land reclamation. Ed defines the next Alberta and imbues the province with a new consciousness that emphasizes sustainability, responsibility and openness. He calls an election in February and wins a majority government based on fresh ideas and lots of fresh faces in Caucus and Cabinet. Alberta becomes recognized a leading force in energy, environment, innovation and investment.

5 The Nightmare Response! The nightmare scenario is “The Muddle of the Road.” This is not a variation of the Blinking or Confusion option. It is all of them together with the added instability of confusion trumping clarity, uncertainty over sureness, deconstruction of complex concepts instead of integration of related initiatives. There will be no definitive leadership statement declaring obvious goals and a game plan to get there. We would not have any articulated sense of the direction and preferred destination by the government arising from the royalties and the review. This will be the worst of all possible worlds for the industry and investment, for governing and politics and ultimately for the people and families of Alberta.

So which way is it going to be under Premier Stelmach? I have no idea but I am pulling for the transformation of Scenario #4. That said, I know one thing for sure. No matter which way this thing goes on Thursday, we Albertans are well advised to fasten our seat belts – it is going to be one hell of a ride.

Tuesday, October 23, 2007

Stelmach Plans a Live Webcast Thursday Afternoon on His Government's Response to the Royalty Review Report

Looks like my armchair quarterbacking post last week on what would transpire this week on the "Our Fair Share" Royalty Review process was pretty accurate. I said the Stelmach government would do their final government policy decision making today, as I predicted. In the TV presentation tomorrow the Premier will only deal with “principles” around the royalty changes, as I predicted.

On Thursday there will be the big event. That will have live streaming video coming out of Calgary (the belly of the beast?) of the Premier and the Energy Minister outlining the government’s response to the “Our Fair Share” Royalty Review Report.

That live web cast is scheduled for 3 pm with phone calls able to come into the event from all over North America. For 2 hours prior there will be a media lock up (just like in a Budget) so they can go over the documents and get briefings on the response details. I called that too but not the live streaming video – that is cool.

Friday will be media frenzy feeding reaction time and on Saturday the Premier faces his party in a Policy Conference to explain the whats, wherefores and the whys (wise?) of the response.

I see five possible outcomes on Thursday’s event and I will blog on them and some possible political implications for each on Wednesday morning.

I have no idea what the Premier is going to say except there will be higher royalties since "the status quo is not an option." What else is included is being closely held - as it should be. In Ralph's day something like this would have had trial balloons floating for weeks before. They like to set the expectation levels "properly" (meaning low) and then actual announcement was pretty pro forma.

Stelmach is a very different politician. He is not manipulating the media message, nor is he preprogamming the expectation levels. His challenge will be to bring clarity out of the complexity. His personal challenge is to communicate the plan effectively. He sees all the nuances and implications of a policy issue and he is comfortable exploring all of them - in public, usually orally and rambling...kind of like this blog - on occasion.

This is going to be interesting. I smell open and transparent and accountable democracy in the air...and it is about time.

Some Thoughts From a Lougheed Cabinet Minister on Royalties

Yesterday I received an email from a friend and a former Lougheed Cabinet Minister. His observations on the royalty issues of 2007 compared to the same stuff in 1972, when Lougheed raised them are interesting. The observations and comparison are as follows:

“I submit four comments re: royalties -- First, the extent of change
recommended is barely half of what was done under Lougheed in the '70s -- so it should have been an easy and immediate decision for the Stelmach gov't. I think the recommendations are timid, so no deviation no doubt which way…is acceptable to me.

Second, if the Premier felt time was needed why the hell not have a "Committee of the Whole" public hearing in the Legislature -- exactly what was done in December 1972 (I was there). Then Big Oil could have its say, but to the public at the same time as the gov't, not behind closed doors; others had their say too, and many did.

Three, I don't think the energy industry problems are so much additional cost (which no one would like) but the uncertainty (which anyone making an investment hates).

Finally, Ed's big problem is that he failed to call a general election instead of those bye elections last summer. The Premier's moral authority is hobbled by still being the Klein gov't, though with someone else warming the chair.”

My friend sure has added more grist for the new and positive political mill that Alberta is quickly turning into. I like the idea of a “Committee of the Whole” but it is too late now...but who knows , we are going into a legislative session in early November, it could still happen!
If the “Our Fair Share” recommendations are “barely half of what Lougheed did, then it is arguable the “compromise” is already in the Royalty Review Report…that is my belief. I think Stelmach will enhance the Royalty Review recommendations to provide some ecological incentives as outline in the "Our Fair Share" in the "Afterward" comments.

I think Stelmach will redefine are reframe "the balance" beyond the industry seeking status quo and the Royalty Review recommendations to include social, environmental as well as economic concerns and a balance between short and long term approaches.

Certainty is certainly more critical than additional costs given that Alberta is still going to be in the most competitive half when it comes to royalty costs internationally. The fast we provide a long term stable governance structure that is not available in many other oil producing places and you don’t need a private army to protect you assets or you people seems to be lost in the cost comparisons.

As for the election call, I disagree. Ed doesn’t need and election now and he did not need to call one instead of the by-elections either.

One thing for sure is the response to the Royalty Review will be definitive for Premier Stelmach. The Stelmach government response is going to determine, in the public mind, if he is merely “warming the chair” for the continuation of the Ralph Klein government or is he his own man. My money is on the latter.

Monday, October 22, 2007

Bill Hunter Speaks Out On the Dr. Dwarkin Incident and the Alberta Royalty Review Report.

I got an interesting email on Saturday night from Bill Hunter, the Chair of the Premier’s Royalty Review Panel. He has been a friend and a client for many years and we have had a number of chats since the “Our Fair Share” Royalty Review Report came out. That said he sent me what I think is an important email and we had a chat about it Sunday night.

There has been an unfortunate set of circumstances around the controversy caused by Dr. Dwarkin, one of the review panelists. It arises from her subsequent co-authoring of a “Royalty Review Report” entitled “Looking for Rent in All the Wrong Places” done by her employer the Ross Smith Energy Group. That document detailed some criticism over specifics in some conventional gas aspects of the “Our Fair Share” document. Some differences of opinion were stated as well as some points of agreement with the “Our Fair Share” findings and recommendations were also noted.

But some of the observations, language and representations in the review seemed intent on casting aspersions as to the capabilities of the expert panelists. Ironically that would include Dr. Dwarkin, herself an expert panel member. The Ross Smith Energy Group allege that “short cuts” were taken, the modeling methodology used by the Panel was not proper, the panel lacked “requisite industry expertise” and they did not have enough time to do the job.

This approach could be interpreted as another attempt to undermine the credibility and capability of the panelists as well as cast doubts on the reliability of final Royalty Review Report. Ross Smith Energy Group is not the first to use or be seen to be using, these tactics. They are, however, the first to do so with the aid and apparent abet of one of the expert panel members, who just happens to be in their employ as well.

It leaves one wondering, what was the motivation behind the Dr. Dwarkin’s co-authorship of her employer’s document? She also seems to be trying to disavow its content and context in subsequent media and other comments. This is all the more strange when you consider that she was the panelists who led the Royalty Review’s work on the conventional oil and natural gas aspects review, analysis processes findings and recommendations.

With all the examples of intimidation and coercive tactics that we have been seeing from some energy industry players, questions naturally arise over the circumstances and the context surrounding what Dr. Dwarkin did. Why did she do it at all under the circumstances? You have to questions the timing as well. I wonder why it was done just before the meeting of the Panel with the Premier.

The facts seem pretty clear and complete surrounding the context and content of the Dr. Dwarkin and the Ross Smith Energy Group "review" incident. I will leave it for others to interpret and pass their own judgment as to the consequences, motives and implications of those facts and the parties involved. Citizens will no doubt draw their own conclusions. I have no further comment on those questions and issues other than what appears in my previous postings in this Blog.

So in light of all of that, here is the email Bill Hunter sent me on Saturday night. For the record, he has never asked for an advanced look see on anything I have written on this Blog including the Royalty Review Report. He has never asked for me to write anything about the Royalty Review Report either. That said he read this Blog and gave me permission to publish this email.

I suggest Albertans also consider Bill Hunter’s words in any judgment and conclusions they choose to reach about this incident. Albertans need and are entitled to have confidence in the appropriateness and thoroughness of the royalty review process. They must be able to respect the capabilities of the expert people involved. There has to be authority, authenticity and reliability in the analysis and methodology used in reaching the “Our Fair Share” Royalty Review findings and recommendations. I believe there is no reason for Albertans to have any doubts whatsoever about any of these points notwithstanding the Dr. Dwarkin incident.

So here are Bill Hunter’s opinions and observations on those matters.

"My friend

The Our Fair Share report is a culmination of learnings, analysis, debates, arguments (for and against), thoughts and personal believes … in the future of Alberta through some stringent Terms of Reference, asked of Albertans.

Six extraordinary (extraordinary because they gave up their lives for 7 months to volunteer to participate in a Panel to ascertain whether Albertans get their fair share of revenues from “their” non-renewable energy resources) Albertans, many of which are North America’s top minds when it comes to; Royalties, Taxes and Fees, Business, Economics, Sustainability, Production and being Albertan … elected to design and deliver a report that came from a position of what they believe is compromise and balance.

Each Panel member brought unique and solid strengths to the mix of intelligence and compassion for the topics being discussed. Judith Dwarkin is an example of that strength; her careers and exposure to/and in the Energy world were critical to the balance we found in our deliberations, I am indebted to her contribution and appreciate her ability to represent the industry’s positions.

Today, Oct. 20th, 2007 … I feel that there are still 6 Panel members who stand behind their report and its intent to be a starting point for the launch of a new regime that embraces “continuous improvement” and will ensure Our Fair Share for the Owners, the People of Alberta!

Proud to be an Alberta Royalty Review Panel Member and it’s Chair,

Bill Hunter"

Sunday, October 21, 2007

This Time an Eastern Business School Prof Warns Albertans over Royalty Rate Increases

Here is a Calgary Herald Editorial page piece written by a Queen’s University business professor that says Albertans should not be to “grabby” over royalty rates. It makes you wonder if he even read the “Our Fair Share” Royalty Review. Grabby it is not. It even recommends a final royalty rate below the benchmark 66% in all cases and provided incentives for new technology adoption and setoffs for upgrader investments, to name a few non-grabby features.

He seems not to know of the Alberta government largess that was given to the oil sands sector in 1997 with the introductions of 1% royalty until project payout and then 25% on NET PROFIT royalties…when oil was under $20, not the $88 it is today. Albertans have been sharing the risks of these projects for a decade but they are not participating appropriately in the royalty rewards under that old regime.

The rapid growth in the energy sector is driving the inflation, making housing unaffordable for middle class people and the competition for staff and materials is stifling the rest of the Alberta economy, and destroying the capacity of social service providers to do their jobs.

He also says: “To compound matters, such companies extract stuff that belongs "to the people," so claiming the people ought to get their fair share strikes a populist chord that governments find hard to ignore. It's a wonder the province waited as long as it did to do the review. The energy industry is perceived to be where government can extract wealth, and be rewarded politically for do so. The temptation to increase the take from a booming energy sector is almost impossible to ignore.”

Damn straight, but this is not about an overreaching “grabby” Alberta public and a hard done by energy industry. The Alberta industry has enjoyed record profits over the past 5 years, and currently record share prices. They have the benefits of dealing with an Alberta government that is democratic and sometimes responsible. They have stable long term leases in place, with a skilled well educated workforce. In Alberta they can develop their projects without needing a private army to protect workers and assets as are required in many other part of the oil world.

This is not about being grabby. It is about citizens of Alberta today and for future generations, getting a fair return of economic rents for this non-renewable resource with a one-time revenue stream. The “Our Fair Share” recommendations would even put Alberta in the lower half of the “take scale” relative to the international royalty marketplace in the world today. Grabby is not what the "Our Fair Share" Royalty Review recommendations are all about.

This royalty issue is more about good stewardship and trusteeship of government and the Auditor General has recently shown just how pathetic a job our government has been at honouring that responsibility. They have not even monitored, calculated or collected the correct royalty amounts under the current regime.

I agree the industry needs to be rethought. The industry players individually need to reconsider what they need to do to justify its continuing social licence to operate in Alberta. We need to look to investments and market from beyond North American sources. We need to find ways to make this sector sustainable in the sense it must be green and profitable the same time. It is not an option it is a requirement for the Alberta energy sector going forward. That is the big “re-think” that has to happen within the Alberta energy sector right now.

The citizens of Alberta are way head of the government and some of the industry, in this thinking. They will elect a new government this spring that will align with and act on those ends. Premier Stelmach knows this as does every other political party leader except of course for all the old die-hard Reform types and their Libertarians friends. They want to eliminate any government role entirely out of the energy sector revenue equation.

Saturday, October 20, 2007

Here is a Calgary Guy who Gets It.

Here is a new Blogger out of Calgary that is worth a read and perhaps a following...and he is not anonymous. He is thoughtful, articulate, adds value and puts context on issues and even with all that heavy and heady stuff - he is a damn good read. I recommend you visit and even follow Drew Anderson.

Here is Dr. Dwarkin's Apology Letter to Fellow Royalty Review Panel Members

Thanks to Graham Thomson’s Blog in the Edmonton Journal Albertans have access to the letter of apology from Dr. Dwarkin written to some fellow “Our Fair Share” Panel members. This is because of some of the content and tone of a review she apparently “co-authored” and released by her employer Ross Smith Energy Group (RSEG) out of Calgary.

The Royalty Review panelists are a group of quality people of great character with a great deal of individual and collective experience and expertise. The final report they released proves they have done an exemplary job in a critical and complex area. Since they released the document, they been ridiculed, insulted, called names and vilified as part of an overall well planned intimidation and misinformation strategy.

In the face of all that, some of them are continuing, on their own time and at their own expense, to speak up, clarify and very ably debunk the misinformation and fear mongering campaign that is being put forth by some powerful forces in the Alberta energy sector.

There is a lot at stake here and, as important as that is, it is not just the money and how it is to be allocated and controlled. There are lots of very powerful special interests and self-interests at play and from people who are very used to having their way with our government and it seems to have been happening mostly behind closed doors. The “Our Fair Share” Royalty

Review Report made those points very precisely and they fixed the blame for it too. Then they went to work on recommending how to change it.


The royalty review panelists are personally bearing the brunt of some pretty serious pressures from those powerful sources and forces. The content and context of this letter by Dr.Dwarkin shows how the powerful sources and forces play the influence game, even at the personal level. It has a clear message to all Albertans that there is a serious problem with the balance of power in our provincial democracy. The Royalty Review said it and the Auditor General said it too.


Premier Stelmach set up this process and he is to be congratulated for doing so. It now falls on him to show the proper respect for government’s role as trustee of Albertans natural resources and to reaffirm industry’s place as the tenant on that public property not a tyrant trying to intimidate our citizens.

The best way to do that is to accept the recommendations of the Royalty Review Panel. Then Premier Stelmach, you need to clean up the culture of contempt for responsibility that is owed to the citizen’s of Alberta that has been found in some corners of your government.

Dr. Dwarkin’s letter shows just another example of how this power imbalance is practiced and applied on some people. Here is what Dr. Dwarkin said in her letter of apology yesterday to some of her fellow panelists.


Hello Evan, Andre, and Sam:


I very much regret how things transpired yesterday and understand completely your disappointment/surprise. I am sincerely sorry for not getting the RSEG report to you in advance, and providing you with the context for it in advance.


As I said in my note yesterday after the fact, I planned to send it to the panel when I got back from Edmonton (the final version was being finalized while I was in Edm.), together with the context in which it was done and more information about how things are done at RSEG . Unfortunately, things didn't happen this way and I am very, very sorry for this.


I also am really distressed and sorry about the way the report is being portrayed by the media as some sort of repudiation of the panel's report. This is absolutely untrue. RSEG endorses the panel's report, the thought process that went into it, the principles used to develop the recommendations.


RSEG is suggesting a refinement to one of the (dozens of) recommendations. My contribution to the work product was to share my personal view on this particular aspect.


Please know that there are some observations/characterizations in the RSEG report that I strongly disagreed with - for example, the one about 'short cuts’, that Texas isn't a good comparable for Alberta, the reference to lacking the requisite 'expertise'.


The report's other authors don't have all of the information about how the analysis was done because it isn't in the public domain, and they weren't convinced by my insistence that it wasn't an issue of 'industry expertise' or incorrect methodology.


I was horrified when I got back to my office late on Wednesday afternoon and saw that the final report had gone out with this stuff in it. If it's of any comfort to you - and I understand it probably isn't - please know that I wrestled several other unfair criticisms out of the report before that.


The language in RSEG's report is provocative in some places. If you were familiar with RSEG reports, this wouldn't surprise you. I did request it be toned down before this report was sent out but was over ruled. What everyone - especially the media - needs to appreciate is that one of the remarkable features of the panel report is that it reflects a BALANCE of views on a very complicated topic.


No one particular viewpoint dominates the recommendations. This is why the govt constructed a panel whose members came from a variety of backgrounds - it wanted to understand the BALANCE of views. The other remarkable thing about the panel report - that each of us emphasized during the meeting yesterday - is that it sets out a set of principles, concepts and framework to guide the government's decision.


The report has moved the debate to a fundamentally different place. As I said yesterday, this is a sea change.


In my dealings with the media, I am focusing on these points and that the RSEG report is a suggested refinement to a very solid proposed structure.


If any of the comments here would be of use to you in your own dealings with the media or others, please make use of them.


Judith Dwarkin

Chief Economist

Ross Smith Energy Group Ltd.

Friday, October 19, 2007

Stelmach' s Royalty Response Coming by the End of October

My Blog post yesterday and my armchair speculation about what will happen next week is proving to be true. Premier Stelmach confirmed today in Calgary that the television presentation on Wednesday “… deliver only basic principles of the government’s response to the controversial royalty report – with specific details to come at a later date.

The “Our Fair Share” Royalty Review is mostly controversial in Calgary from the replies I get to this Blog.

Cambridge Strategies' Most Recent Column for LaPresse

Here is our regular column that was translated into French and published in LaPresse in Montreal yesterday. We introduced them to some of the realities around the Royalty Review. We have received some interesting replies from Quebec already.


What do socialist regimes and Alberta have in common? Quite a lot, if leading voice in the energy industry are to be believed.

From the Canadian Association of Petroleum Producers to Deutsche Bank Securities to the President and CEO of the government-created energy giant EnCana, there is strong and resolute opposition to an expert panel’s recommendation that Alberta revise its energy royalties.

In an article entitled “The Bolivarian Republic of Alberta,” Deutsche Bank compared the findings of the Oil Sands Royalty Review to something out of Hugo Chavez’s Venezuela. This is an astonishing reaction to a government-commissioned report produced by economists and business executives, which recommends reducing royalties on most conventional oil and gas and increasing royalties on oil sands development.

The logic behind the recommendations is underlined by Alberta’s Auditor General Fred Dunn. His report, following on the heels of the royalty review, noted that Alberta’s current royalty system isn’t working. Dunn found that the Alberta royalty share had “fallen below stated government revenue targets” and that an additional $1billion per year in royalty payments could be charged “without stifling industry profitability.”

Industry is threatening to pull investment from Alberta unless Premier Ed Stelmach rejects the royalty review – and the conventional wisdom has it that the premier will bow to industry pressure.

Yet the premier has nothing to lose by standing up to the industry bullies. Stelmach, the Ukrainian-speaking premier who was taught English by nuns while recovering in hospital from a boyhood accident, isn’t the kind of leader who would ever be at ease in Calgary’s elite boardrooms.

After the failure of their favoured candidate Jim Dinning to win the premiership, the Calgary elite spoke sneeringly of “Farmer Ed.” Now that disdain (mepris) has turned into alarm. The Calgary elite and their apologists all their accusations, ignores the basic fact: Albertans own the resource, the energy companies are tenants who have been granted access rights.

Citizens of Alberta have never been so focused, so furious, at so many levels and in so many ways over their government's incompetence and the arrogance and intimidation efforts by some energy industry players.

The energy industry strategy going into the province-wide royalty hearings was flawed. Some of their presentations appeared to be intentionally misleading. They cited an expert consultant’s report that was 10 years old. The royalty review panel led by retired forestry executive Bill Hunter asked the same expert consultant to update his report and he found the Alberta royalties were among the lowest in the world.

If anything, the “Our Fair Share” report from the Royalty Review Panel is conservative in its recommendation of the “fair share” Albertans ought to draw from the natural resources they own. That goes beyond adjusting royalty rates. It comes down to smart, efficient stewardship of the resources that belong to Albertans – now and in the future.

If the royalty review recommendations are adopted, Alberta will remain extremely competitive in the global market. Charging a fair-market rent will give us a much more flexible opportunity to design and build a future of sustainable prosperity. Alberta’s unique value proposition lies in supplementing today’s hydrocarbon wealth with alternative energy, green energy, and clean energy. We can use additional revenues to aggressively pursue carbon capture and sequestration, clean coal technology (including gasification, hydrogen production and coal bed methane extraction), and biofuels/biomass energy.

That said, Premier Stelmach needs to be exceptionally skilful in securing Albertans their fair share or the energy economy, without derailing investor confidence in the province. He must respond to the public desire for enhanced environmental standards and value-added processing of Alberta’s resources. The threats by energy companies could indeed lead to some short-term economic turmoil – but the premier has already said he will not be intimidated by anyone.

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!

RBC Capital Markets Weigh In On Royalty Review With Same Old Argument

The RBC Capital Markets analysts have weighed in on the “Our Fair Share” Royalty Review Report and see it as “Short-term Gain for Long-Term Pain.” By way of full disclosure the RBC is my bank and they are a great institution. However, I have to say they don’t "get it" about the "Our Fair Share" Royalty Review based on their recently published analysis.

This RBC Capital Markets report is well written but it is a perfect example of the old adage that if your only tool is a hammer, every problem looks like a nail. The RBC focus is only on the economics and they ignore the environmental and societal tolls the rapid uncontrolled growth the energy sector is having on Albertans outside the oil patch and the oil sands.

The energy industry, and their advisers, like the RBC Capital Markets, needs a more robust set of analytical tools in their kits going forward. They have to broaden their perspective and deepen their understanding using a more integrated model of how they impact the world around them. They have to start thinking in terms that are more complicated and comprehensive and have goals greater than just getting rich quickly.

I want to challenge the RBC report's stated assumption that the Royalty Review recommendations are at cross-purposes to maintaining current relationships between government and the energy industry. They say “If it is the intention of the Province to maintain its current relationship with oil and gas industry, global capital markets, the other province, and the Federal Government, we believe the Panel’s recommendations are at cross-purposes, and the implied policy shift away from working in Partnership with the oil and gas industry is not in the best interests of Albertans.”

First off I think it is up to Albertans to decide what is in their best interests, not RBC Capital Markets. Secondly it is not the intention of the The “Our Fair Share” Review Report to maintain the current relationhip. The Panel answers this comment fully in the Review Report on page 7. It is the opening paragraph of the Executive Summary. It says that the current relationship with the industry should not be maintained but should be changed. It is not about cross-purposes with the status quo…it is about changing the status quo.

The Review says the formula and royalty rates “…have not kept pace with changes in the resource base and world energy markets.” It puts the “onus” on the government to “re-balance the royalty and tax systems so that a fair share is collected.”

The Panel makes it explicit there needs to be a policy shift on royalties. It is not making an “implied policy shift” as suggested by the RBC. The change needs to reaffirm the fundamental principle that it is all ALBERTANS who own these non-renewable natural resources and that is their right pursuant to the Constitution of Canada.

The Royalty Review clarifies that the Government of Alberta is the trustees for the citizen's natural resources and they are mandated to protect the interests of the citizen’s of Alberta. The energy industries are tenants who are granted permission through the EUB regulatory approvals to do business on the public’s property and to exploit the public’s resources for the greater and common good as well as their own self interests.

The RBC comment on the need for a sharing of “risk and reward” is a tad ironic. This “sharing” benefit has not been fair for a long time – and the rewards have mostly been in industry’s favour, especially with the current high commodity prices and unbridled growth that is spurred by the current inadequate royalty regime. The new severance tax is a perfect example of the Review Panel recommending a risk-reward sharing model. This new tax has recommendation an oil commodity floor price of $40 before it kicks in and then maxes out at $120 per barrel oil. That is a true risk and reward sharing regime than anything that exists at present.

As for reward sharing, according to the Auditor General's recent report, we had an Alberta government that, for years, did not even bother to correctly calculate or collect the royalties due under the current regime. Albertans end up taking all the risk, the energy industry reaps the rewards and it is all government's fault under that scenario. Not good stewardship. Not good trusteeship. Not good enough!

The relationship between the energy industry and the government from now on will be open, public, transparent and accountable. Citizens will see to that in the next election. Any politician, regardless of party affiliation, who wants to continue to govern this province, had better start living up to their trusteeship and stewardship responsibilities relating to resources, environment and societal needs.

The past model of these decisions being made behind closed door and the inappropriate cosiness of the energy industry with some of their passive and compliant political friends is over. How can that true “partnership” between the industry and the government be anything but healthy and better serve the common good – especially in the long term?

Thursday, October 18, 2007

An Armchair Look At Premier Stelmach's Coming Week As He Announces the Royalty Review Decision.

So here is what next week looks like on the Alberta energy policy and royalty review scene. I have no inside information but experience and common sense makes this set and sequence of events seem logical.

Tuesday the Cabinet meets and the final decisions are made about the official response to the “Our Fair Share” Royalty Review Report. I’ll bet there will a quick taping to edit in of some additional commentary by the Premier for his scheduled televised speech on the government’s position.

On Wednesday in the Premier's televised chat do not expect the official royalty review announcement. Mainstream media are salivating that this will be when it happens and some still think he will make an election call that night. Astonishing!

The issues on the royalties are too complicated and critical a decision for a pretaped TV presentation. Besides there are lots of other issues that need to be covered in the TV event too. I expect he will say something significant to Albertans about the royalty review and that is he will say that his government has come to a decision and stay tuned for the announcement.

On Thursday morning there will be media lock up and detailed briefing on the “Our Fair Share” Review and the government’s response. There will be a late morning or early afternoon new conference with a full statement and rationale for the decisions and that is when it will be announced. There will be lots of announcement details and updates with web links for Albertans to get direct unfiltered and unmediated access to the decision. There will be backgrounders that gives the thinking and analysis behind the decision. The Premier will have to be ready to give reasons for the decision and to sell it.

Friday will be action and reaction day with a media feeding frenzy looking for controversy and conflict. Stupid things will be said, and of course reported on. Thoughtful commentary will be limited and delayed because it takes time to study and reflect on the implications of the decision.

Saturday morning the Premier will spend an hour at the Progressive Conservative Party Policy Conference in Calgary. He will be walking his party membership through the panel process, the government review process and the principles that were included in the “balance” he is looking for and he will answer questions from the floor. That will not be an easy time.

There will be lots of talk about the need for balance in the announcement. Balance is not going to be about a compromise between the “Our Fair Share” recommendations and the fear mongering from industry as most media are currently seeing and over simplifying the issues and trying to define the "conflict." It will be about designing, defining and deploying a balance that is much more complicated than that.

It will be about balancing the pace of growth and the impact on the environment and the ecology of Alberta. It will be about balancing the needs of high growth and slow growth communities as well as big cities and other communities. It will be balancing competing labour needs and shortage between various sectors of the economy and how to meet the social infrastructure deficits that uncontrolled and rampant energy sector growth has caused.

It will be about the need for short term and long term balance. It will be about balancing continental energy supply demands with the limited capacity of the province to respond in an even faster pace than now. It will be about inter generational fairness and how to preserve these once in a life time non-renewable resource revenues in the current and future context.

For Premier Stelmach, next week will just be another day at the beach – but he will be able with the tsunami on the horizon. He just won't know for a while how big it is or how fast it is moving..but hi will know it is coming.

Wish him well and pray that he, along with all the rest of us rank and file Albertans, will have the courage and conviction to do the right thing - and not to blink. There will be lots of heat coming out of the government royalty review decision next week. Let’s hope there is some enlightenment too.

Is Desperation Setting In as Some Try to Discredit the Hunter Royalty Review?

A comment on another post on the Blog about CAPP's claim in an Edmonton Journal Letter to the Editor that the Royalty Review Review Panel is no longer in full agreement on their recommendations is worth a post in itself. the anonymous commenter thinks because a consultant's advice on striking a balance between royalties or tax increases was not accepted by the Panel that the credibility of the whole report is suspect.

The commenter challenges me as to if I have even read the van Meurs Edmonton Journal piece. I have read the van Meurs op-ed and have it in front of me as I write this post.

Mr. van Meurs is not, and never was, a panel member or an author of the report. He was a consultant retained by the Review Panel to give advice. He wanted to see a higher severance tax and lower royalties as the approach to take to give Albertans their "Fair Share."

The expert panellists, who were actually tasked with the review job and appointed by the Premier decided a lower tax instead of a higher royalty was the best way to go.

So what? They disagreed but the process worked and a unanimous set of recommendations came out of the review panel.

Thanks to van Meurs' authenticity and integrity, Albertans got to see some of the differences and the range of options considered in the review. That is reassuring to me as to the quality of the deliberations.

This review process is a very different approach to openness and transparency in government than the cosy industry arrangements done behind closed doors in 2004.

Back then there was an internal review and a recommendation for royalty increases but they were refused by the Minister. Why? Because he felt there was enough cash flow into government already -not if is was fair to Albertans and no consideration of the resource ownership issues and the breach of the public trust such an attitude displays.

Or even consider earlier this year when the Energy Minister said, in the Legislature, that he had done an updated internal royalty review. Now we see that the AG finds out it that was not the case at all. Shame!

Remember also the intellectual dishonesty of some in the energy industry that used van Meurs' report on Alberta royalties from 10 years ago. They quoted old data at the public hearings on the Royalty Review to justify the status quo.

Yes. that is right. They had the gall to stand up in public and based on such outdated 10 year old information to say that there was nothing that needed to update royalties in Alberta. As if 1997 reflected 2007 realities and current public policy purposes.

The industry today says the panel used incorrect and non-current information in arriving at its recommendations. Too bad the Review Panel couldn't have put some industry players under oath at the public hearings to see if they would still so blatantly misrepresent the facts.

This attitude by some industry players - not all - is simply trying to play Albertans for suckers. It has been a successful industry strategy under the old Klein regime but it is not going to work anymore.

CAPP Incorrectly Claims "Many of the Authors Appear to No Longer Support"...the Royalty Review

Honourable people can disagree…and it happens all the time. Pierre is a knowledgeable and an accomplished spokesperson for the energy sector in Alberta. I know Pierre Alvarez the President of the Canadian Association of Petroleum Producers to be an honourable man. However, today I have to disagree with him, based on his letter to the Editor in the Edmonton Journal today.

The CAPP response is a classic example of “framing an issue” to fit a preconceived position and to be selective in presenting the facts. Mr. Alvarez takes two points and seeks to make them out to be major issues that ought to result in a conclusion that the “Our Fair Share” Royalty Review process and report is fatally flawed.

Firstly he suggests there are “revelations” from earlier comments of review panellists to be distancing themselves for the reports recommendations as they relate to elimination of deep gas and enhanced royalty programs. In fact the Panellist’s comments were that the Royalty Review was not intending to eliminate the deep well gas incentives and confirming that they ought to continue.

On page 68 of the Royalty Review this incentive is described as a lower royalty rate for deeper wells that do not achieve productions rates sufficient to compensate for the additional drilling costs. The Review notes the program is scheduled to end August 31, 2012.

On the same page the Review deals with the EUB flare management framework designed in 1996 to “reduce gas flaring volume reduction targets from 1996 base levels by 50% for 2002. This program provides a royalty waver “to natural gas that is produced from oil wells where it is uneconomic to conserve.” I for one, have to wonder if that is an appropriate policy to continue in light of the current environmental concerns and context in Alberta.

Otherwise the Review notes there are a bunch on incremental programs in the conventional gas area that are “patches on patches” designed to address specific problems and situations. The royalty regime is said to “not appropriately reflect the unique costs of certain developments or to facilitate special policy direction determined by government.”

The goal is to make the royalty regime simpler and CAPP’s Technical Review section 2.1.2 agrees with that recommendation.

The letter also deals with comparisons with Norway and Alberta and I will save that for another post.

Finally Pierre makes a huge leap in the final paragraph of his letter to conclude that “It was only three weeks ago that Albertans were asked top accept a report that many of its authors appear to no longer support.” Boy that is a stretch of the facts and a misrepresentation of the reality. The Panel has clarified one issue on its continuing support for deep well subsidies and made some minor revisions to correct some graphs in the report. That does not suggest that “many of its authors no longer support” the review recommendations.

Citizens are not going to take spin as gospel and it behoves the industry to avoid it at all costs. This is especially true if the industry wants to rehabilitate the public’s confidence and convince Albertans’ that they have the right stuff to be worthy of a continuing social license to operate their businesses on the public’s property.

Wednesday, October 17, 2007

More False Assumptions Over Alberta's Royalty Review Report.

Interesting piece in the National Post suggesting the Canadian oil and gas stocks are not “surging” as they apparently are in the US. The blaming is being put on the “Our Fair Share” Royalty Review, in part.. It also mentions that the loonies’ rapid rise (more correctly put – the US dollars significant decline) in value being up 20% in 2007 already and breaking parity with the US may have something to do with this.

The Canadian energy sector stock prices have been at or near record price levels before and after the royalty review report. Interesting today that Suncor is trading today over $103.00 – over the record high of $100.00 it enjoyed just before the Royalty Review came out.

People are entitled to their own opinions – they are not entitled to their own facts. In fairness, things are moving pretty quickly in the world these days and everything is so interlinked it is difficult to isolate causes and effects.


That said, it is at best a stretch to blame some minor stock volatility on a review report that has not been commented on by the government yet. Just more scaremongering and political positioning as I see it.

The Chinese Are Coming! The Chinese Are Coming!


ALBERTA ENCOURAGES CHINESE INVESTMENT:
Oct. 1ALBERTA 17, 2007 (China Knowledge) – Canada's Alberta encourages China to increase its investment in the oil province with many oil sand reserves, said a senior official from Alberta on Tuesday. Iris Evans, Alberta's Minister of Employment, Immigration and Industry, revealed in a press meeting at the Canadian Embassy in Beijing, that the more Chinese investments are expected to pour in.

CHINA’S CITIC BIDS FOR BEAR STREANS STAKE: REGULATOR
BEIJING
— — China's CITIC Bank Corp. Ltd. is bidding for a stake in Bear Stearns Cos. [BSC-N], a senior Chinese regulator said, in the first official confirmation of media reports that the state-run bank was a potential suitor for the smallest of Wall Street's five big independent brokerages.
Bear Stearns is among the institutions hardest hit by the U.S. subprime mortgage crisis, and Chief Executive James Cayne said earlier this month it would consider selling a stake to an investor from China or the Middle East if the deal created value.


ALBERTA IS GOING TO BE PLAYING A NEW ROLE IN THE GEOPOLITICAL REALITY AROUND ENERGY SUPPLY AND INVESTMENT: The new normal of globalization on markets and investments and the demand for energy in the developed and developing world will put Alberta's oil sands in the cross hairs of geopolitical strategic issues. We Albertans better beef up our Intergovernmental capacity.

Gary Mar going to be Alberta's guy in Washington is a good step in the right direction. There is lots more to be done and some changes need to be made - including changing the Minister - for us to be ready for this new normal.

More Good Marketplace News in Alberta's Energy Sector "...regardless of what happens with the royalty review."

Oops! More good news from the marketplace on oil sands investments. How could this be happening when there is so many who are warning that the Alberta sky is falling on the energy sector?

Synenco Energy (SYN/TSX) is reported to have had a 13% one day rise in share prices now at $11.37. One analyst tagging it as a player to “outperform” and has a target share price of $15 on this company. Synenco Energy holds a 60% interest in the oil sands play known as the Northern Lights Partnership and they will be the operator of the Northern Lights project. They also hold a 100% interest in another adjacent oil sand project. They are also active in developing an upgrader just outside of Edmonton. These guys are not bit players.

The really interesting info on the Northern Lights Partnership is the other 40% partner. That is the SinoCanada Petroleum Corporation, an indirect wholly owned subsidiary of Sinopec – the large China based oil company. Again we see more confidence in the Alberta energy sector from non-North American sources. Why is that?

Mr. Bouchard, an analyst with Raymond James is quoted in the Financial Post as saying “Based on our analysis, current trading levels simply don’t reflect the value of the assets – regardless of what happens with the royalty review. (emphasis added.)

Some business writers (including this National Post piece) are still of the opinion that the “Our Fair Share” Royalty Review has caused the Alberta energy sector to “have taken a hit.” I presume they are talking share prices mostly. There has been some share volatility, off record or near record highs for most companies since the release of the Royalty Review on September 18. That volatility has been in a relatively narrow range that is more likely tied to oil prices being up and down on a daily basis...and setting new record highs this week.

For some more perspective, I see in the Globe and Mail Report on Business today noted that 4 out of 5 of the TSX Index Lifters are energy companies – all of whom are engaged extensively in Alberta oil sands activity. Curious wouldn’t you say? The sky is not falling. It looks to me like it is raining money.

Tuesday, October 16, 2007

Marathon Oil is Buying Into Alberta - What Are They Thinking?

So Marathon Oil is clearly out of it. They are buying into the Alberta Oils Sands when the conventional “wisdom” is that the industry should run away from Alberta investment - at least according to some of the existing Alberta energy “players.”

They have been saying they can’t make a go of it with the second largest oil deposits in the world with oil at a record $86 per barrel and having to suffer with a province that imposes a stable democratic government with a strong currency, a skilled work force and located next to the largest market for fossil fuel energy use on the planet. That has to be a tough scenario in which to do business and make it work. Yes sir!

The “smart money” in the Alberta oil patch that is saying it is leaving Alberta and/or no longer investing because royalties will move from 25% of Net Profit to 33% of Net Profit. Yes that is a royalty based on Net Profits, meaning the dollars subject to royalties are not determined until after the projects have first paid all their operating costs including. They say that is 20% increase – which it is – but it really moves up 8 points and is based on net profits before taxes. Give me a break!

Marathon must be a fly-by-night operation run by a bunch of unsophisticated rubes to be going forward and investing in Alberta’s oil sands now of all times. Check out their website to see just how not true that is!

They operate in 18 countries and are engaged in exploration and production, including integrated gas, marketing and transportation and happen to be the 5th largest refiner in the United States. What are they thinking - coming into Alberta?

They should just ask Encana for advice to see how much of a mistake they are making by coming into the Alberta energy sector. Oh yes Encana has the “Our Fair Share” royalty review recommendation’s figured out all right. They are leading the mythological parade out of Alberta due to the Royalty Review which they say is destined to wrought devastation on the energy sector investment market for all Alberta for all time.

Get this. They said they were pulling out a $1B of capital activity in Alberta because of “uncertainty” caused by the royalty review. Get this too. Two weeks later EnCana said they are going to be investing a cool $1B into an oil sands play. Coincidence…I doubt it. Hypocrisy is more like it.

Investment actions speak louder than political intimidations in my book.

Marathon you better think twice about coming into the Alberta energy sector because of enterprises like Encana is allegedly doing the opposite. And whatever you do – don’t talk to Warren Buffett about investing in Alberta’s oil sands…he just may talk you into it.

Oil Sands Project Cost Double and CAPP Accuses the Royalty Review Panel of Using "Incorrect Costs!"

I have done a quick read of the CAPP Technical Review Executive Summary of the “Our Fair Share” Royalty Review Report. CAPP is a very professional and respected organization with expertise available in it and to it to do such a Technical Review of the “Our Fair Share” report. I, on the other hand, am just a layman, and have not yet read the full report. However, I do find some representations in the Executive Summary curious.

I don’t know on what basis they say “Flawed Data” and that “The Panel did not take into consideration all of the data made available to them through the review process.” How could they know that, even if it were true? How do they know what was available to the Review Panel and what was not considered? We need a bit more evidence of this allegation, and it may be provided I the body o f the Review. I will definitely be looking for it.

The Panel based their recommendations on “severely understated industry costs.” The accusation is they (the Panel) used as range of between $4 – 6 Billion for a typical oil sands project. CAPP claims, and rightfully so, that such projects are ending up costing between $10 – 11 Billion. However CAPP omits the fact that all of those costs are totally recoverable by the industry during the 1% royalty rate until full project recoupment. In fact this 1% royalty rate until all project productions costs are recovered means less rigour is put on management to review and reconsider a project when costs are doubling as would be the case in a normal business model.

At record oil prices many projects have fully recovered these excessive project cost overruns in as little as 4 years. In any event, it is Albertans who are actually paying for these extreme project cost overages by virtue of our deferred royalties. So why is industry taking issue with this a saying the Panel is making a mistake of using “incorrect costs?”

I am inclined to have such projects that will do not meet presented budget targets in the original EUB process for approval go back to the EUB to show why their original project budget was so inaccurate. It is Albertans, after all, who are paying for these additional costs because of the 1% royalty rate until all such project costs are recovered. Albertans get no say in how much a company decides to pay or overpay in the end, once the proponents have an EUB project approval. That makes little sense.

Why don’t we require such projects to do a study and hold a further hearing to satisfy the EUB on what the cumulative impacts and secondary consequences are from such cost overruns? What do they do to the availability and increased costs of trades, supplies, equipment and materials? What impact will such excessive project overruns have on the costs of other necessary projects like schools, roads and hospitals who have to compete on price with energy companies?

Perhaps a project that is so inaccurately budgeted should have to justify the additional costs and perhaps even have to adjust the timing of the project so they don’t skew the labour and construction costs for other sectors. The astonishing cost escalation of the 23rd Street Overpass in Edmonton to some $250M in less than a year is a case in point on how this behaviour affects other sectors. Property taxes will also have to go up in Edmonton to pay for this inflated overpass project costs. This is because of the increases caused by competition with energy projects for everything from labour, to supplies, equipment and materials.

So the energy projects can blithely pay whatever they wish so long as oil prices stay high and Albertans eventually pay such additional project costs by our deferred royalty regime. The taxpayer gets it in the ear again by increased taxes or borrowing costs for much needed public infrastructure or the local government end up deferring those other very necessary projects hoping prices will come down.

And in the face of this the Technical Review accuses the Panel of using “Incorrect Costs?” Ironic isn’t it!