Tuesday, December 29, 2009

Why Are We Giving Away More Royalty Rents?

The most critical decision Premier Stelmach has had to face since winning the PC leadership will be the pending Cabinet shuffle expected around January 11.  Now we have the added opportunity to give away more royalty rents to the energy sector.

The writing on the wall, based on past reactions, is the Stelmach brain trust will make Cabinet recommendations that will move the government more to the right to respond to the rising Wildrose influence. The loss of Ron Stevens as Deputy Premier and the run of royalty retreats has not appeased the Calgary oil patch. Stelmach can't even buy love in Cowtown...using taxpayer money to boot.

Now we see even more royalty giveaways and industry subsidies be contemplated by the Stelmach government. An Energy Department lead review of natural gas royalties that is driven by anticipation of US shale gas extraction providing competition for Alberta gas supplies.

Here is a key quote for the Calgary Herald story today: "Premier Ed Stelmach has vowed his government will make further changes to energy royalties -- hinting major restructuring is coming on the natural gas side -- something battered producers and the man overseeing part of the review said is desperately needed.

"There's a whole bunch of stu will have to be addressed," said former Nexen Inc. vice-president Roger Thomas, who is heading the fiscal side of the study with former Royal Bank of Canada investment banker Chris Fong.

"You don't want to give the farm away, but you've got to be positioning yourself with like companies to remain competitive. Ultimately, you've got to be at the top of the list of competitive jurisdictions," said Thomas.

This is more political squandering of a non-renewable resource rents and perfecting the past instead of ploanning for the future.  Natural gas prices were soft in 2009 falling form a January high of $6.07 per million BTUs to $2.51 in September and averaging about $4 over the year.  Market conditions should dictate here, pure and simple.  A foregone royalty now cannot be recovered later and it is a waste of the birthright of future generations to allow our government to forego a fair rent.   Prices came off extreme peaks as the recession reduced demand, there was lots of inventory supply and service costs were  high and out of cntrol coming out of the overheated market of the prior years. 

Cost have come down about 30% off the peak but is that enough to comply with market realities?  What are costs now compared to say 2004 and 2005 before the spike in gas commodity prices?  Those were hardly hardship years for the energy sector.  My bet is they are still out of line.

Natural gas prices today are in the $6 range and that is not shabby.  Things are improving  and that again is the magic of the supply and demand interplay of the free markeplace.  Sharper industry pencils on costs and a reasonable rate of return, not windfalls, are acceptable.  Albertans already have given over $2B of royalty relief last year, and that is too  much to my mind.