Monday, November 16, 2009

Oilsands Investments Return 1 Year After Industry Threatens to "Leave Alberta"

Interesting to see all the big oilsands players announcing that they are reinvesting billions of capital once again into oilsands projects. A year ago they were all pulling out of Alberta as the played political gamesmanship over the new royalty rates. Albertans should not forget that pure political posturing of the industry that was nothing less than bullying and bluster by some of the corporate elites in the energy sector.

They sure spooked our Premier. He folded about four times on royalties since January 2009. As a result we now collect even less money than we would have if we left the old royalty regime intact. The tenants are acting like owners and dictating the terms. Instead we need Albertans taking the responsibility to ensure our oilsands are giving future generations the benefit of the resource and that we are not "giving it away."

Speaking of "giving it away" I just returned from a great time in Austin Texas on a project. It reminded me something that Murray Smith the first Alberta Envoy, said to a meeting in Austin in 2006. I have a copy of the transcript of his remarks. Here is the most remarkable part of what he said to an American energy audience: "The model that has worked so well for us is that the royalty structure for oil sands is 'give it away' at a 1 percent royalty structure and share the risk of these great ventures and great investments. As soon as they reach payout, the royalty take goes to 25 percent of net."

That was a necessary model in the early stages of oilsands development in the late 1990's when extraction and upgrading costs and capital costs were higher than the commodity price of the product. That is not longer the case so why are we perpetuating this old model of "giving it away" when Alberta is the best place to assure secure and a safe supply of hydrocarbons?

When we charge royalties on net returns, how do we know we are not getting screwed on cost allocations within companies? When we allow royalties to be deferred until all capital costs are recovered how do we have any control on the project costs? Does this indemnity to recover costs from foregone royalty make the companies who are building the project really care that much about controlling costs?

At the record oil prices of last year controlling cost didn't seem to matter too much. Once the recession was acknowledged in September 2008 the future projects were shelved instantaneously. Well that was then and this is now and the projects are all coming back. Go figure!

BTW - Here is the link to Vue Weekly interview with Green Oil author Satya Das. Green Oil emphasizes the point that Albertans own the oilsands and have the obligation to ensure the stewardship of energy industry players who our government licenses to exploit this non-renewable resource on our behalf.