So here is the link to Charles Frank, the Business Editor of the Calgary Herald that some anonymous commenters on this Blog think is the most balanced informed and intelligent print voice on the issues surrounding royalties. Well he is definitely more balanced and informed than Lorne Gunter of the National Post but he is no more thoughtful or intelligent than Thomson and Pratt – or Lamphier on the issues and implications of past and future royalty issues in Alberta.
I would like to explore and agree with some observations and take issue with some of Mr. Frank’s other “Truths.”
Oil Industry Strategy at Royalty Public Hearings Badly Flawed:
1 Mr. Frank is right the oil industry strategy going into the province-wide hearings was flawed. They were not used to having to make their case to government in public and they are proving that they are not used to not having their way. The presentations they made were intentionally misleading. They were based on outdated information like a 10 year old expert consultant’s report. The Review Panel used the same expert consultant to update his report and he found the situation on the Alberta royalties was not longer amongst the most expensive, the just opposite now. The industry was caught with its pants down, and this was not the only time they were found to be misleading and embarrassing to themselves in this process.
2 Some oil industry presenters represented there businesses were in serious trouble but when asked to submit their Annual Reports they were showing record profits and describing the future in glowing optimist language. Again there were some in the oil and gas sector who were intentionally misleading and disingenuous. There are other examples showing that attitude continues to this day from some of the players in the patch. That was (and is) definitely a bad strategy especially when everyone is watching and you have qualified and knowledgeable Review Panel who are prepared to verify representations.
Review Panel Had Its Own Agenda:
3 No sir it didn’t. It had a mandate from the Premier with specific terms of reference and timelines. In fact the only “own agenda” the Panel had was actually discussed by them in the “Our Fair Share” Report. It noted that most of the public’s presentations were on growth, infrastructure and environmental problems with the oil industry. That was outside the Panel’s terms of references and they said that exclusion was an unfortunate limitation on the Royalty Review Panel’s work. If they had “their own agenda, it was also the Premier’s agenda and, based on presentations form citizens, it was the publics agenda too. If Big Oil doesn’t see that they are making another strategic error.
The Panel’s Expectation That Their Report Be Adopted in Total:
4 Mr. Frank takes exception to this representation. However he fails to put this representation in context. The Panel was to look at the entire current and future fossil-fuel energy sector from conventional oil and gas and oils sands but also including Coal Bed Methane, Syngas and even biomass to some degree. The various elements form and integrated systemic energy industry. The Panel dealt with it as an integrated systemic whole in its Report. That balancing and integration of interests is well represented in the final Report. To politically cherry pick and prefer one sector without looking at the implications for the rest is dangerous. We have just sent the disastrous impact of such selective politically driven ideological decision making in the Affordable Housing Task Force. Again we have all the interests and an expert panel provides an integrated whole-system solution that needed to be seen as in entirely. Politicians picked parts and pieces and the result was no real solution – just throw more money at the problem. The Royalty Panel’s approaches are a take it or leave it systemic option for the policy makers. It is complex stuff but the Panel brings clarity to the issues and concerns. Cherry picking recommendations based on politics is not going to resole the complexity or solve the problems. It will only make it worse.
5 To suggest the Panel “may not have considered all the relevant financial and economic data is obfuscation of the worst kind. They had full unedited access to all the data on the energy sector in the hands of the government and the regulators, except of course for individual corporate proprietary information. They had full unfettered access to the senior government administrators and all the third party consultant reports commissioned and provided to government. They were able to hire their own outside consultants without political interference. To see those industry titans and their hired hands now revising their stance using different data and different methodologies in an attempt to discredit the Panel’s work is not surprising but it is disappointing – and again a flawed strategy. If the industry had this better information and methodology, why did they not present it at the hearings? Are they holding back critical information from government? Are they making it up as they go along? None of this adds to the credibility of the industry or enhances the confidence of the public that they have anything except their own interests at heart as they exploit OUR resources.
Finally I agree with Mr. Frank hat the Alberta economy is not bullet proof. Much of investor confidence is based on mass psychology so we must be careful. That said we also have the current negative mass psychology that we are growing too fast, without a plan and no defined end targets or objectives other that to go as fast and furious as possible at any cost – so long and the oil prices can handle it. The Calgary Belt-liners live in this latter logic bubble and they have lost touch with the rest of Alberta. The bullet that can do in the Alberta economy can be not enough growth but it can also be too much growth too fast.
I have more observations on Mr. Frank’s “Truths” but this posting is already too long. I can assure you I will definitely be an avid reader of his from now on.
I would like to explore and agree with some observations and take issue with some of Mr. Frank’s other “Truths.”
Oil Industry Strategy at Royalty Public Hearings Badly Flawed:
1 Mr. Frank is right the oil industry strategy going into the province-wide hearings was flawed. They were not used to having to make their case to government in public and they are proving that they are not used to not having their way. The presentations they made were intentionally misleading. They were based on outdated information like a 10 year old expert consultant’s report. The Review Panel used the same expert consultant to update his report and he found the situation on the Alberta royalties was not longer amongst the most expensive, the just opposite now. The industry was caught with its pants down, and this was not the only time they were found to be misleading and embarrassing to themselves in this process.
2 Some oil industry presenters represented there businesses were in serious trouble but when asked to submit their Annual Reports they were showing record profits and describing the future in glowing optimist language. Again there were some in the oil and gas sector who were intentionally misleading and disingenuous. There are other examples showing that attitude continues to this day from some of the players in the patch. That was (and is) definitely a bad strategy especially when everyone is watching and you have qualified and knowledgeable Review Panel who are prepared to verify representations.
Review Panel Had Its Own Agenda:
3 No sir it didn’t. It had a mandate from the Premier with specific terms of reference and timelines. In fact the only “own agenda” the Panel had was actually discussed by them in the “Our Fair Share” Report. It noted that most of the public’s presentations were on growth, infrastructure and environmental problems with the oil industry. That was outside the Panel’s terms of references and they said that exclusion was an unfortunate limitation on the Royalty Review Panel’s work. If they had “their own agenda, it was also the Premier’s agenda and, based on presentations form citizens, it was the publics agenda too. If Big Oil doesn’t see that they are making another strategic error.
The Panel’s Expectation That Their Report Be Adopted in Total:
4 Mr. Frank takes exception to this representation. However he fails to put this representation in context. The Panel was to look at the entire current and future fossil-fuel energy sector from conventional oil and gas and oils sands but also including Coal Bed Methane, Syngas and even biomass to some degree. The various elements form and integrated systemic energy industry. The Panel dealt with it as an integrated systemic whole in its Report. That balancing and integration of interests is well represented in the final Report. To politically cherry pick and prefer one sector without looking at the implications for the rest is dangerous. We have just sent the disastrous impact of such selective politically driven ideological decision making in the Affordable Housing Task Force. Again we have all the interests and an expert panel provides an integrated whole-system solution that needed to be seen as in entirely. Politicians picked parts and pieces and the result was no real solution – just throw more money at the problem. The Royalty Panel’s approaches are a take it or leave it systemic option for the policy makers. It is complex stuff but the Panel brings clarity to the issues and concerns. Cherry picking recommendations based on politics is not going to resole the complexity or solve the problems. It will only make it worse.
5 To suggest the Panel “may not have considered all the relevant financial and economic data is obfuscation of the worst kind. They had full unedited access to all the data on the energy sector in the hands of the government and the regulators, except of course for individual corporate proprietary information. They had full unfettered access to the senior government administrators and all the third party consultant reports commissioned and provided to government. They were able to hire their own outside consultants without political interference. To see those industry titans and their hired hands now revising their stance using different data and different methodologies in an attempt to discredit the Panel’s work is not surprising but it is disappointing – and again a flawed strategy. If the industry had this better information and methodology, why did they not present it at the hearings? Are they holding back critical information from government? Are they making it up as they go along? None of this adds to the credibility of the industry or enhances the confidence of the public that they have anything except their own interests at heart as they exploit OUR resources.
Finally I agree with Mr. Frank hat the Alberta economy is not bullet proof. Much of investor confidence is based on mass psychology so we must be careful. That said we also have the current negative mass psychology that we are growing too fast, without a plan and no defined end targets or objectives other that to go as fast and furious as possible at any cost – so long and the oil prices can handle it. The Calgary Belt-liners live in this latter logic bubble and they have lost touch with the rest of Alberta. The bullet that can do in the Alberta economy can be not enough growth but it can also be too much growth too fast.
I have more observations on Mr. Frank’s “Truths” but this posting is already too long. I can assure you I will definitely be an avid reader of his from now on.
I suggest that you add Deborah Yedlin to your reading list as well.
ReplyDeleteKen:
ReplyDeleteI'm pleased that you decided to post your comments on the piece by Charles Frank in the Calgary Herald on Saturday. I believe Mr. Frank is more thoughtful and intelligent than Thomson, Pratt and Lamphier because he is balanced and does not bring a ideological perspective or slant to the issue.
Let me deal with a couple of points in your posting:
1. I agree that the oil industry strategy to advocate for the status quo was flawed. But to suggest that the oil industry, or the public for that matter, was given full access to the consultant's reports is incorrect. The reports by van Muers were posted on the Alberta Energy web site far after the public hearings process was completed. If the Panel had been true to the principle of full openness and transparency, those reports would have been posted prior to the release of the Panel report so that all Albertans could have considered them.
2. Some members of the Panel, and I stress some, have relied on the Wood MacKenzie studies, but misrepresentred the conclusions of the Wood Mac reports. While, it is true on a government take basis, that Alberta moves from 11th to 44th place in terms of government take, what some of the Panel failed to mention is that Wood Mac also stated that the Panel's recommendations would reduce oil sands project IRR to less than 10%, making projects such as Fort Hills, Northern Lights and the AOSP expansion, "uneconomic under the proposals". If it was the Panel's intent to slow down or stop over $20 billion in new investment, so be it, but at least it could have present all the facts and not cherry picked from Wood Mac. After all, some members of the Panel are relying on Wood Mac for justification of their recommendations.
3. The issue of whether the Panel considered all the relevant financial and economic data is most interesting. I followed the hearings very closely and read all the submissions. It is clear to me that the Panel, and I stress some memmbers of the Panel, seriously underestimated the curent cost structure for oil sands and conventional natural gas in particular. Anyone with even a cursory knowledge of the industry knows that Ziff Energy collects cost data on natural gas from the producers directly and has for a number of years. Ziff's F&D and opex costs are close to $5 per mcf., but the Panel chose to use $3.72 per mcf as its upper bound. Integrated mining projects (mine and upgrading) have a cost of $100,000 per free flow barrel of oil, but the Panel chose $83,382 as its upper bound. PetroCanada, Shell, and Canadian Oil Sands Trust all presented up to date cost and profitability data as part of their submissions at the hearings, and Synenco's data waas made public in May, but the Panel didn't acknowledge this information in their report. Why?
I could go on and on to talk about such issues as the Nationak Oil Sands Task Force , the deep gas royalty holiday program, the Auditor General's Report, etc, etc., etc., but in conclusion, I will not quarrel that royalties have to be increased somewaht on the oil sands and perhaps on conventional oil, but if some members of the Panel, and I stress some, wanted to make a more credible case for their recommendations, they had a fiduciary duty on behalf of the owners to present all the facts. The fact that some members of the Panel, and I stress some, have been so aggressive in defending their report tells me something. If the recommendations could stand on their own, there would be no need to defend them would there, Ken.
I appreciate this comment even from an anonymous source... I still wonder about its authenticity. That said - here are some observations on Anon's observations.
ReplyDeleteThe disclosure of the update of the van Muer consultant report post hearing is a red herring. This was a pubic hearing not an administrative tribunal so what is the necessity to present that report during the proceedings?
If the review had been a quasi-judicial administrative tribunal it should have required some industry presenters to be under oath. In that case some would have been found at least to be misleading in their testimony and perhaps even perjuring themselves on the "facts" they alleged. Like using a 10 year old van Muer report in representations before the Panel as evidence of today's reality. They should be ashamed of themselves and their hypocrisy is breathtaking when they suggest the Panel did not use up-to-date data in coming to its recommendations.
Shame on them. You can go to the Review Panel's website and read the presentations and see for yourself who these culprits are.
As for Wood Mac and the Recommendations making the IRR at 10% for some projects therefore making them marginal - so what? Not every project is guaranteed a go and the marginal projects should be shelved...especially since my citizens IRR is based on royalties on projects that have healthy NET PROFITS. No Thinking Albertan wants high cost, low margin risky projects to proceed. We have enough good ones we don't need to take a risk on marginal projects. And we are dealing with a non-renewable resource. We screw it up in the front end there is no recapture or recover. We have to get it right for Albertans today and those of future generations.
Slowing down $20B of projects out of a total of some $140B will be a good thing. Perhaps it help reduce the 20-40% premium my hard earned income related tax dollars (not royalty rent payments) are paying for school maintenance and new municipal infrastructure projects needed in government efforts in trying to catch up to the excessive growth demands.
As for Ziff's analysis of natural gas F&D (whatever that is) and opex costs at $5 per mcf I have no sympathy. Alberta subsidized citizens when natural gas costs hit %5.25 per mcf. If the industry is so uneconomic and it is based on those cost calculations then it needs new management to come in and reduce costs.
Albertans did that kind of cost cutting in government starting in 1993 as a society with an aggressive debt and deficit reduction strategy. Surely the private sector is at least as capable of cost controls as the public sector. Get real.
On Synenco - which has been on the sale block for months and your representations on integrated mining project costs - please disclosure your data source and details before you ask why of the Panel.
I could go on too. But thx for the intelligent discussion. So why are you anonymous? With this apparent insight the conversation could benefit from you disclosing your identity and add to the credibility of your comments. If you are afraid of losing your energy sector job with such frankness – tell us and tell us why.
As for Deborah Yedlin I sense she is suffering from the Stockholm Syndrome. She is so "captured" with the belief that business is always right and government is always wrong that she can’t conceive that big business isn’t always and for all reasons the most enlightened perspective on the planet.
ReplyDeleteBusiness is self-interested and profit focused. That is a pretty simple world when you compare it with what governments have to contend with.
I hear her on a CBC Radio Business Panel in Edmonton all the time and I used to read her in the Globe. She is too unreflective for me and to much of a cheerleader for Big Oil form what I have been exposed to Kind of like Lorne Gunter without the far-right Reform Party baggage. But I am sure she is a nice person.
Business writers all too often come off like sports writers...too afraid to criticize the team or its management for fear of being cut off and not allowed in the post game locker room where they only get the pro forma "we gave it 110%" superficial interviews and stories anyway.
You make these arguments to the worker who loses his job because of government intervention. We live in a Conservative province and, unlike Liberals, we do not interfere in the marketplace lightly.
ReplyDeleteWhere was the Lefty Hancock when the government should have been capturing over $1 BN of royalties? Did he know?
You are right we Progressive Conservatives do not interfere in the marketplace lightly.
ReplyDeleteHowever the energy industry is private enterprise it finds itself working almost exclusively in the area of public property.
In this case they have been given permission to exploit the non-renewable, never to be seen again once in a lifetime, fossil fuel based natural resources of the citizens of Alberta.
The private sector should no longer take the trusteeship and stewardship responsibility of such access lightly either. Anyone who does not act responsibly or even worse, in a misleading and threatening manner, like happened in some cases in the Royalty Review hearings, should reconsider their position.
The energy industry has access to the citizen's natural resources on the basis of a grant of social license to operate. That is the essence of all energy based lease deals all through Alberta in whatever areas of the industry we are talking about.
Our government is to blame for this too. It has been found by the Auditor General to be incompetent in its trustee responsibility to Albertans over collecting appropriate returns for that resource access.
The government of Alberta under Premier Klein has also been found to be in breach of that trust when it comes to serving the best interests of current and future generations of Albertans. This is evident in the lax and secretive manner in which they managed and stewarded of our non-renewable energy resources.
Unless both groups start meeting their responsibilities and focus on serving the greater good of society as well as being responsible sustainable and profitable, I expect citizens will see to it that things will change even more dramatically in the next election.
As for "lefty" Hancock knowing about the $1B of unrealized royalties...it is actually estimated at $6B unrealized according to the Auditor General.
You should ask him if he knew. He is part of your government, presuming you are an Albertan. We can only guess if you are since you choose to be anonymous.
And while you are at it, ask Ralph Klein and all the rest of the Calgary Caucus who were apparently (sic) running the province in those days, what they knew about this too!
Thanks for your comments on my posting, Ken. I prefer to remain anonymous at this time, but I can assure you I do not work in the energy sector.
ReplyDeleteI just wanted to briefly address your comments to my post. Given that you are now in contact with the Chair of the Review Panel, perhaps he could clarify. It would be very useful to all Albertans if you were able to post the Chair's response on your blog.
1. The Alberta Energy technical reports and the van Muers reports were supposed to all be made public prior to the release of the Panel report. Openness and accountability are mentioned often in the Panel report. The Panel had access to these reports many weeks prior to Albertans. I don't believe that is fair. Perhaps the Chair can address.
2. I agree that there was misleading information provided by a number of industry presenters. But that also applies to other presenters as well. Those groups, including ENGOs, know who they are. Perhaps the Chair can address.
3. Wood Mac...Some members of the Panel used Wood Mac as justification for their recommendations. That would have been fine if they had presented the complete picture. I would refer to the Wood Mac news release of October 2, 2007 for further background. I don't believe in cherry picking some information, but ignoring other pieces of relevant information. Perhaps the Chair can address.
4. Cost data. One of the objectives of the OSST is to discourage excessively high cost upstream projects as part of a policy to modestly reduce the level of overall activity. Fine. While this is elegant in a theoretical context, actual experience is limited at best. The Panel seems to define the threshold for a high cost integrated mining project to be $66,706 free flow cost per barrel at $60 WTI. This would seem to make any new integrated mining project that is proposed in Alberta, uneconomic. Since the cost of raw materials is driven by factors beyond Alberta's borders, I assume the Panel's recommendations are designed to reduce labour input costs. Perhaps the Chair can address this issue.
5. Ziff Energy. F&D refers to finding and development. Ziff collects cost data from natural gas producers. Once again, I assume that the Panel is interested in reducing labour inputs as a means of influencing the cost environment in the natural gas sector. I would assume that the Chair is aware that Ziff collects actual cost data. Perhaps the Chair can address.
6. Synenco. The May 1, 2007 news release and backgrounders are contained on the Synenco web site. I assume the Panel had access. Again, the Chair may be able to provide further clarification.
7. Fort Hills, Northern Lights and the Syncrude expansion. The PetroCanada and Canadian Oil Sands Trust presentation to the Panel provide additional information on project economics. Northern Lights is the aforementioned news release and backgrounders from Synenco.
My interest is to ensure that Albertans, as owners of the resource, have access to all the information that the Panel had access to, other than confidential company information. I assume the Chair shares that view.
For the record, Deborah Yedlin's husband is a senior partner at FirstEnergy, a Calgary-based investment bank. Nothing wrong with that, but it does add some context to her writing ;-)
ReplyDelete