Reboot Alberta

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.


  1. Anonymous3:34 pm

    Mr. Chapman,

    You're all over the place with this post. Royalty adjustments made since the NRF was announced have had nothing to do with oil sands and you know it. Or you should, if you guys are putting a book out on it. They have been entirely on the conventional oil and gas side.

    Re: oil sands cost allocation. There is a big binder that describes exactly what is and is not an allowable cost for purposes of calculating the pre-payout and post-payout royalties. Again, someone writing a book on the subject should have a handle on this. Oil sands operations are much different than conventional oil and gas, and the approach to royalties appropriately considers this, in my view. Conventional oil & gas are well-by-well decisions, and under most pricing scenarios have a investment payout timeframe measured in months. Oil sands, whether mining or SAGD, is a much longer payout profile, even under current royalty rates.

    I'm not disagreeing with you that the big oil companies are bullies. They have, and will continue to exert considerable pressure on the government, both in this province and in others. After all, they've just bought and paid for a so-called "populist" party in the form of the reconstituted WAP.

  2. Thx Anon for the comment. If there is a Big Book on Oilsands Royalties, has it got the right concerns in it and is it being followed. Our Auditor General is concerned enough to comment on that issue in his last report.

    As well, I suggest the Big Book be changed for oilsands. Do we need to be covering all project costs before we collect partial and full royalties?

    Also we now see that bitumen prices are rising as a percentage of WTI spot prices. The Royality Review pointed out serious problems about how bitumen prices were set. Now we see them rising. I was just sent some data by an Economist who know this stuff. Here is what he discovered from the public records.

    Jan 2000-Sept 2007 we only got 53% of WTI spot prices for bitumen. Oct 2007 - August 2009 that percentage wat 65.5% of WTI.

    Comparing bitumen to average prices of light and medium crude oil in Alberta the numbers are: Jan 2000-Sept 2007 56.7%, the October 2007-August 2009 it soared to 71.1%

    Funny how that changed all of a sudden? Ever ask yourself who sets those prices?

    As for conventional - you are right but it is a sunset industry. We need those boys to start cleaning up their reclamation act on old sites before we give any more leases. Otherwise we will have to put milllions of taxpayer dollars into reclamation after they abandon Alberta well sites.

    It is all about Albertans acting like owners. Glad to see you are engaged as one. Why are you writing such a fair comment as "anonymous" in a free and democratic country? Doesn't that concern you too?

  3. Anonymous4:22 pm

    I'm not disagreeing with you that the bitumen price needs to be monitored. My understanding is that there is an interim price mechanism being used while something more permanent is calculated. A problem with that issue is that there is no transparent market for bitumen. Ironically, only a market for "un-upgraded" bitumen sold out of Alberta - or sold to independent upgraders - would establish that. I'm all for upgrading at home, but having some bitumen sent out of province is of some benefit, if it establishes a better indicator of the "market" price.

    I'm not surprised to see the differential between WTI - which represents high quality light sweet oil (40 degree API) - and bitumen vary over time, with bitumen as a % of WTI rising. Heavy oil prices, a closer comparison to bitumen, have also been rising as a % of WTI, as traditional heavy oil suppliers to the United States (Mexico, Venezuala) have seen their output decline, to be replaced in part by Canadian heavy oil. There is also the issue of shipping, since bitumen needs to be diluted with natural gas liquids and/or lighter oils in order to enable pipeline transportation. The cost of these items may impact the price relationship of bitumen to WTI.

    Reading over my original post, it may have come across a little harsher than I intended. As for my reasons for posting anonymously? Well, suffice to say I have some. I am not, however, an employee of government nor do I work for an oil company (no shame in doing either).

    I would add, on the "bullying" theme, is that those most positioned to benefit from any pressure applied to government on royalties (and other things) are also more often than not the ones most intent on creating a schism within the ruling political party in this province to better influence the outcome. If I may be so bold, I see nothing to be gained by assisting them in their efforts.

  4. Ken,
    Reclamation after abandonment is being done. Did you know it takes a couple of years for the GOA to issue a certificate after it is completed. This whole time the landowner must be compensated by a company with no producing well for income.
    Do you ever read the regulations regarding reclamation and how much they change year over year? Probably not as most people do not understand the industry that make these false claims.
    In the last two years the old drill sumps now need to be dug up and the dirt transferred to a landfill.
    If you did a stripper well and budgeted $100,000.00 for abandonment and reclamation, this new regulation alone has tripled the cost of reclamation. Many companies can't afford the new regulations and simply fold.
    How do you expect business to run here when the government is constantly changing costs. If I tripled your cost of business could you carry on? It is this type of thinking that has many opting out of continuing to do business here.
    Where you place your blame is your choice, however I can see where the true problems lie.

  5. Hello AA:
    Of course reclamation takes time and money but ought not be delayed becaue of that. Some sites are "adaquately" reclaimed by simply cleaning up the surface and putting grass seed in. NOT nearly good enough. I think conventional sites that were forest ought to be replanted to be forests again. Why not restoration where possible?

    The variable costs of reclamation depend on levels of contamination, and that is more within the control of the companies. Send us a link to the reclamation regulations and show us how they change year over year. Constant improvement is a good thing don't you think?

    The government only needs to be blamed for low standards, lax enforement and not demanding upfront security to ensure that reclamation is done by the tenants and not foisted on the owners later.

  6. I will gather up some links for you. Improvements are good, however we need to ensure that we are up front on expectations, not change the rules halfway through.
    There are securities paid which are abandonment bonds, mandatory contributions to the orphan well fund,and a licencing fee for operator status. Many leases I have been on actually do replant trees, maybe you could go on a site tour of some of our reclaimed leases in Alberta and then make comments.
    As far as contamination requirements they should also apply equal in all industry. The salt content in our soil along hiway ditches would warrant digging it up and hauling it away to disposal if it were on a lease. I geuss it is OK if it is government or for our enjoyment.

  7. HI again AA - love to visit some conventional oil and gas reclaimed sites and those in process. Also any road reclamations would interest me too and stats on how many sites are abandonded and left to the province ot fix up. You have those numbers?

  8. Here is a link for you

  9. Here are the numerous changes regarding abandonments and reclamations. Too many for me to list on your site.


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