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.
Royalties are simply too high and BC and SK are benefitting. You can't trust these "Phony Conservatives" to run the royalties properly. Time for a Wildrose alternative.
ReplyDeleteKen,
ReplyDeleteI disagree with this stand on the royalty issue. I worked at Syncrude, north of Fort McMurray, in 2005-06. I came out this way as a traveller from Saskatchewan and, at the time, things were booming and jobs were plentiful. I made enough money as an insulator to pay off my student loans and get myself completely debt-free. What has the royalty tinkering done except drive business out of Alberta? Last time I checked, there are no calls in the union hall here in Calgary for insulators. I worked at Syncrude when they put out calls for workers worldwide. The royalty rates never should have changed, in my opinion. The only thing I can agree with is continuous tinkering with what those rates are makes it difficult for companies to estimate costs and commit to projects, which again drives away business. I recently heard that southern Saskatchewan and southern Manitoba have larger oil reserves than the oilsands. Who could blame companies for going there? The oil benefits no one if it remains in the ground - something Saskatchewan's previous NDP gov'ts seemed to ensure.
George, I think you are confusing two very different issues.
ReplyDeleteThe downturn in the oil patch that has occurred recently is not because of the royalty review, it has to do with the general economic downturn and lower oil and gas prices.
The reason for the boom was low royalties. The reason we had to put out worldwide calls for workers is because the energy companies couldn't get the oil out of the ground fast enough, they didn't want to waste any time collecting their billions. As long as we are not regulating or charging a fair share for OUR oil, Alberta will always be beholden to this massive boom and bust cycle. That does not benefit Albertans long term, not even the oil workers. Let's starting looking at Norway and even Alaska for how we can be developing our resources in more responsible sustainable ways.
Not long ago, about 5 years ago, Alberta had multi billion surpluses with $5 gas and $70 oil.
ReplyDeleteThe "downturn" argument does not wash with me.
The problem are abusive changes to royalty structures and a failure to honour existing royalty contracts with existing producers that drove away the industry. That and wasteful and irresponsible government spending.
Further tinkering with royalty rates is the last thing we need right now. What we need is for current MLA's to vote non-confidence in their own government and bring on an election.
Let a new government with some credibility negotiate any new royalty structures.
What's wrong with a boom/bust cycle? It should be entirely regulated by the free market. The PC's say they are free market but just spend spend spend. The Wildrose Alliance seems to be the only party of freedom by the looks of it.
ReplyDeleteThanks, Atypical Albertan, you've made me see this issue from a different perspective. I don't like the idea of government interfering with the free market, but your points make sense. Having grown up in a resource-rich province (SK) that refused for so long to do anything with many of its resources, I suppose I have been a little rigid in my thinking. Thanks for the rebuttal,
ReplyDeleteGeorge
Anon @ 2:51 obviously isn't an oil and gas professional. Sure the prices look good but the volume is way, way down as a result of the global econmic downturn. Sure it's coming up, but at least our province saved over $30 billion in the bad times. The other guys would have spent it all.
ReplyDeleteWhy can Saskatchewan balance its budget and Alberta cannot if "volumes are down"?
ReplyDeleteAtypical Albertan,
ReplyDeleteThere is much more to the royalty system you have failed in looking at. If you feel the need to look at Norway and Alaska you had better get all your facts. I did a simple post in November that shows the difference in your argument. If interested you can find it here.
http://thealbertaaltruist.blogspot.com/2009/11/get-real.html
Anon @ 12:51: Saskatchewan did NOT balance its budget and is running a much higher per person deficit than Alberta.
ReplyDeleteAnon Alberta Altruist: Norway has a 25% valued added tax and top income tax rate of 54% (Alberta's combined federal/provincial rate is 39%). Alaska has much higher royalty rates. Neither jurisidction has to pay equalization like Alberta does. Next argument please.
Saskatchewan deficit is $1 billion or $1000 per person.
ReplyDeleteAlberta deficit is $8 billion or over $2000 per person.
I don't know about the SASK deficit but the estimated 2009-10 Alberta deficit is nowhere near $8B. It is such a moving target and so inaccurate an estimation based on volatile assumptions that it is only a useful political number - not much help at supporting any intelligent policy making.
ReplyDeleteThe extrapolations and guestimates of gas prices goin forward plus the artifical assumption that the market meltdown paper losses in the heritage Funds should some how be considered as a real cash loss even without selling the equities - makes a mockery of the Alberta deficit calculations.
Then add the $17B in the Stability Fund designed to smooth out the commodity price volatility of our resources and you have a hard stretch of logic to say we have a deficit at all.
Spending may need to be curtailed somewhat but no on the backs of the vulnerable. Revenues needs to be revisted like the $2B royalty giveaway to the energy sector (wth more to come by the looks of it) and for no ROI to the public purse at all. Also the ill-conceived reversal of the $180m liquor tax revenue unilaterally changed by the Premier in July because "he was not compfortable with it" and "a man deserves a cold beer on a hot day in a recession."
Worrying about drilling going to Sask or BC means we need to respond to the market. They have found fields with better quality oil and gas in shallower depths than the post peak realities of Alberta's fields. We need to adapt our industry and not try and compete by giving our conventional hydrocarbons away.
Ken has a good post except one item: we spend more than any other province in Canada by every estimation. "The most vulnerable" is a euphemism for socialism. Time that we trim down many of the bloated services and have a true free market economy.
ReplyDeleteActually Anon at 10:07 - when you consider everything, Alberta spends in the middle of the pack of Canadian provinces on health care. We are not the largest per capita
ReplyDeletespenders as some would like to mislead us.
Caring for vulnerable Albertans means socialism? When did human compassion go out of fashion? And when did caring for your fellow man become a partisan political label in Alberta?
When was the marketplace ever "free" when we subsidizes corporations who forget they are tenants with a public license to exploit the resources of the citizens of Alberta - the owners of the assets?
You want to talk socialism, everytime a reckless greedy corporatist takes a market loss due to their own bad management they expect all of us taxpayers to bail them out. That is socialism.
When was the last time we insisted the economy serve the society not the other way around?