A Critique of the Energy Sector's Oppostion to the Royalty Review

Another energy based organization has issues a news release with the same language and issues as previous announcements for CAPP, drilling contractors and EnCana. The lobbying has begun and that is a good thing in a free, open, transparent and democratic society.

I think it would be helpful to do some analysis of the news releases and the issue framing and positioning of the energy industry as they try to tell us and our government that “Our Fair Share” of resource royalties’ recommendations are “draconian.”

Let’s deal with some facts and context on the representations of the Canadian Association of Geophysical Contractors in their news release of Sept 27, 2007. In the news release they say the “wholesale changes to the process and structures of royalties in Alberta, jeopardizes investment and employment in the Canadian energy industry.”

The day after the release of the “Our Fair Share” Royalty Report, PetroCanada increased its investment in their Fort Hills project. The same day Dubai – one of the lowest cost oil production centres on the planet - bought a significant amount of our oil sands leases. What does Dubai know that the Canadian Association of Geophysical Contractors don't know abut the future of Alberta?

Also the "Our Fair Share" report does not recommend "wholesale changes to the process and structures of royalties in Alberta." They in fact recommend continuation of the 1% project development stage payment. They suggested post-development rates go from 25% to 33% but still only based on NET Profits. None of that that is either structural or a process change to royalties...and they should know that!

“Natural gas drilling accounts for 65% of drilling activity in Alberta” they say. Sure when prices are high enough and costs are in line…neither of which is true of the marketplace for natural gas today. That is not the fault of the owners of the resource – that is the marketplace. Record profits have been made in the past number of years when prices were high and royalties low. But when the market shifts and the cash flow that hid a lot of poor management choices drys up, the private sector always comes to government to bail them out.

We have also have very poor government oversight and conduct of of its responsibility in the energy sector for a decade catches up - industry and government has to adapt to the new realities in Alberta today.

“One in six Albertans work directly or indirectly in the oil and gas industry. The seismic industry reinvests the majority of its service and supply dollars in the communities of Alberta. The impact of economic downturns in our industry in this province has grave implications for the rural communities that have so strongly supported this government.”

This statement is pure political positioning and imprudent strategic posturing to boot. Ask any of those small towns about the energy sector’s level of real commitment to their communities. Calgary as a community gets big donations from Big Oil as a result of the Boardroom decisions. Look at the $1B Encana head office building project. The small rural towns I talk too, and there is lots of them, get a relative "squat" in terms of community supports from Big Oil and related operators. The energy industry tears up the local roads. They increase traffic and noise at all hours. They monopolize the hotels and motels so that communities can’t even stage regional hockey tournaments because they can’t get rooms.

Those communities see industry activity around them but no real enduring energy sector commitment in the local communities. The energy industry in small towns are the transient and “shadow" populations with demands on community services but without enough serious investments being put back into those towns by good corporate citizens.

"The people of Alberta whose 'fair share' this report professes to defend are our employees, their friends and families." This one slays me. Note to Energy Sector, this is not just about your employees, their friends and families…it is about all of us. So what about the rest of us who are not benefiting but instead suffering from the growth pressures? We can’t get our schools fixed, we can’t afford housing, our health care system is not catching up and crime and homelessness is increasing.

Our municipal infrastructure is now costing us an arm and a leg now because of the inflation you have caused and the competition for skills and materials you dominate and control. Wages have not gone up of ordinary Albertans outside the energy sector but every Albertan has seen their costs of living skyrocket.

At $80 oil you guys just absorb cost increases and foster inflation by writing the bigger cheque...because YOU CAN. AND on top of that, with the 1% royalty regime you get to charge all that increase cost back to the rest of us as differed royalties in the 1% phase. And you have the gall to complain!

Finally the last straw! They say: "Removing two billion dollars from the industry that employs so many Albertans and placing it in government coffers, as this report proposes to do, is an odd way to help people. It is Albertans' hard work and investor capital, not some government program that created Alberta's prosperity.”

This is revising history and misrepresenting the facts. IT WAS A GOVERNMENT PROGRAM THAT CREATED ALBERTA’S ENERGY SECTOR BASED PROSPERITY. Getting rid of debt and deficit in order to keep taxes low started the "Alberta Advantage." But more importantly it was the 1997 government royalty regime of 1% and the 25% rte on net profits that created the investment climate that resulted in this "prosperity."

That prosperity is not being shared on any fair basis throughout Alberta and the Hunter Royalty Review Report proves it. The Auditor General in tomorrows report will once again show the Government of Alberta's lax accountability and absence of transparency in royalty collection and calculations. Hunter underscored the incompetence and incapacity of our government to meet it TRUSTEE obligations to its citizens.

Where are these guys who are sending out these statements about draconian changes in royalties coming? One can only conclude that they are continuing to think only about themselves and only with a very short term myopic perspective. The EUB is about to change,the government is about to change and Albertans are mad as hell and not going to take it anymore. Albertans will be demanding these changes as well as more transparency, accountability in the industry-government relationship. They will be demanding a more integrated, responsible, sustainable and long view approach to our energy sector development too.

If industry thinks paying a fair share is draconian, wait until they see land, air and water policy demands. They are not too far off in the future for the emerging and changing public policy agenda for the Alberta energy sector too.

Neil Waugh and I Agree on EnCana's Bullying Over Royalties

Neil Waugh of the Edmonton Sun and I are agreeing again. This time we agree on the very inappropriate and bullying intimidation tactics of Encana on the “Out Fair Share” Royalty Review Report. Blaming a proposed 8% increase in royalties from 25% to 33% and based on net profits only. That means Encana shares with Albertans as owners of the resource after ALL capital and operating cost are deducted. And the 8% increase is being touted by Encana as the stated reason to pull back on $1B of capital investment in Alberta! That is ludicrous. See my post on Saturday the 29th to get a sense of just how well Encana is doing.

Stelmach said he would not be intimidated by Big Oil. Encana should have listened.

This is twice Neil and I are on the same page in less than a month this has happened.
I must check tonight to see if it is a blue moon. Something strange is happening…like maybe power is shifting back to the citizens of Alberta. Both Neil and I obviously see that as a good thing. I am sure we are not alone. It is our oil and we deserve a fair share.

The Stelmach government is our trustee to get this done for all Albertans now, and in the future.

EnCana Agrees with Premier Stelmach and Calls for "Cooler Heads"

Isn’t this precious…EnCana is now saying Premier Stelmach is right and “cooler heads” should prevail. Apparently there is room for some royalty increase now and the issue is actually a question of balance. The unmitigated gall and hubris behind the $1B cheap shot intimidation tactics of Encana last week was breathe taking. I am glad to see them reconsidering their attitude and tactics in responding to the “Our Fair Share” report.

Well, I agree, cooler heads and balance are good things and necessary under these circumstances. I suggest they, and the rest of the energy sector, consider that there is already balance in what is being proposed by the Royalty Review Panel for royalty and taxes.

The recommendations in the “Our Fair Share Royalty Report” are also the result of cooler heads…and some pretty competent and experienced head on good people too. They recommended a “balance” that would put Alberta just below the average for all other competitive oil and gas producer markets. How about reconsidering your strategy EnCana and considering that there already is a balance in the “Our Fair Share Report” recommendations?

Consider some other aspects that bring about balance in doing business in Alberta, like the “side benefits” of a stable government that is obviously somewhat incompetent – but it is not corrupt. That governance incompetence has played in your favour in the past too, don’t you think? You can’t ignore the sweetheart relationships the energy sector seems to have had with regulators but that is about to change - big time.

Then there is the minor advantage of an independent judiciary that is there to settle disputes using the Rule of Law. Then we have the helpful facts that Alberta has an abundant, healthy, young and skilled workforce and a pretty stable and strong currency. Those elements provide for some certainty in a risky business.

And the real kicker – we charge a mere 1% royalty until you recover all your cost – regardless of how outrageous they may be – and you even get to unilaterally decide what and who you will pay for such project costs. In fact you can even fix your own prices for bitumen between your producer side and your upgrader operations without any need to worry about how it might impact the owners of the resources.

Where else on the planet can you get that kind of certainty, a positive business environment and risk sharing for the energy sector with a such a vast amount of known deposits all in one place? The Middle East offers you the political benefits of Iraq, Iran and Saudi Arabia. Eastern Europe is a good place – if you don’t mind the political instability and the business “culture.” How about Africa or perhaps Russia is more attractive for you? They are well known entities for how they do business, if you don't mind kidnappings.

Don’t rule out the serious alternative of Hugo Chavez’s Venezuela is your first alternate choice to do business. Apparently some in your industry think Alberta and Venezuela have a lot in common so they must be a legitimate alternative. The USA is more expensive and past its peak and do you think Norway is going to treat you as well as Alberta’s 1% risk share royalty rate? Get serious!

Cooler head are definitely needed coupled with a big dose of realism and a serious focus on the bigger picture. That bigger picture includes all of us Albertans and people all over Canada actually. So when you think about balance don’t just think about benefiting yourselves. Also think about how well you have been meeting your other legally required and oft ignored related duties and responsibilities. That also has to factor into what we define as balance.

A more considered and reflective analysis of what you could and should be doing to meet your obligations for restoration and reclamation of sites, roads and seismic lines in order to continue to justify your social license to operate as tenants in the public realm of Alberta’s non-renewable resources would be in order. Remember, the way you have been doing business means you actually cut down more trees than the entire Alberta forest industry.

Balance those elements into your equation as to balance and fairness too as you cool down and think seriously about how to move forward. It is time to start thinking about how you can adapt to get along better with Albertans as your partner as we work out this complex and critical issue together. Name calling, cheap shots and silly tactics and intimidations and unfounded allegations all must be a thing of the past or else they will backfire on you big time.

EnCana Cash Flow up 55% to over $2.5B at June 2007

A quick check on Google Finance shows EnCana (ECA) reported in the 2ndQtr2007 it had a cash flow of $2.5B or $3.33 per share up 55%. At the same time it was enjoying a Net Profit Margin or 25.76%, an Operating Margin of 32.25% and an Average Return on Equity of 32.85% Very impressive. Third Qtr results are scheduled to be released on October 25. I can't wait how much more they are hurting that they can't take a mere 8% royalty increase on that 25.76% NET PROFIT MARGIN.

EnCana saber rattled this past week about reducing investment in Alberta by $1B in 2008 because of the “Our Fair Share” Royalty Review Report. Ironically the management at EnCana was telling a different story at a Peters and Co investor’s conference in Toronto a week earlier. Here is an EnCana quote from Mr. Graham president of EnCana's Foothills division in a September 11, 2007 National Post story:

"Our budget will probably be very similar to what it was in 2007, maybe a little bit higher…" "Costs have been moving down in Canada, probably flat or even better than that,"…"The rig fleet is probably only 40% busy today. We are happy to see where costs are going."

Now I wonder how EnCana can square that circle of impressive performance in the face of low gas prices and higher operating costs already in place and accounted for in their impressive results with the sudden need to cut $1B from their 2008 capital budget a week later. Can this threat be interpreted in any other way except to say it is posturing and intimidation.

The Editorial Board of the Calgary Herald from a city that is smack dab in the eye of the Alberta economic storm, is the voice or reason and responsibility today too. Slowing down Alberta a bit is a necessity and the marketplace is doing it but that is no reason not to increase the citizens fair share of their resource revenues now too.

Could it be the drilling contractors woes outlined in their recent news release on the “Our Fair Share Royalty Review” are self induced and market driven and not really about possible government policy at all?

For the record it was someone at Peters and Co. who sent an email to their client’s in response to the “Our Fair Share Royalty Review” suggesting Alberta was like Venezuela. A comment that was kindly considered as “over the top.”