CAPP obviously wanted a “further consultation” process on the final report itself given the statement in their September 24th news release. There is nothing wrong with that. Industry and other stakeholders are free to challenge the findings in a factual and forthright fashion. Lets be sure we do not turn this post-report process into an exercise of recurring reviews like Quebec's perpetual threats of independence referendums.
We hear the official word out of the Alberta oil industry is that Hunter Royalty Review analysis is flawed. The Canadian Association of Petroleum Producers, the voice of the oil and gas industry in Alberta says they want to “focus on the facts” and we can all agree with that. They claim the report recommendations will slow oil sands investment. Are we pleased with the pace of growth and how we are managing it now? They claim a report was commissioned by the Panel on relative royalty revenues in Alberta tha tis not reflective of the real world...they ought to get to comment for sure. They claim project costs were not considered. The Report deals with that most effectively. Go to page 78 of the Royalty Review Report wher they say that cost control is a management issue and besides with no significnat royalty payment due until all cost are recoved - what is the issues for investors.
The Panel was given a free hand to hire world call experts. They were given a free hand to work with government officials and their advisers. They provided background papers on royalty issues and context and specific advice to Albertans on how to participate that included online submissions, snail mail, fax or personal appearance at hearings. The panel went all over the province to meet with interested stakeholders and ordinary Albertans about their concerns. Copies of all the submissions received were published on the Panels website at http://www.albertaroyaltyreview.ca/
Albertans are clearly interested in the Royalty Review Report. I am told in the 4 days last week after it was released there were 210,000 hits on the Panel’s website. Unfortunately the government has decided to receive the post-report consultation to their own website http://www.gov.ab.ca/ so some continuity and context will be lost.
I suggest before you go to the government's post-consultation website be sure to visit the Review Panel website and educate yourself on the review process, facts and findings. Then let your thoughts be known but don't be anonymous. This is about citizenship in a free and democratic society. No Alberta citizen, acting as such, should fear their government or their employer - so anonymity is unnecessary and intimidation only works if you let it.
I hope we can trust this government, who I support, to run process. We need them to have the same honesty, integrity, openness, transparency and accountability as the citizens who contributed their time and expertise to the Royalty Review Report in the first place.
This is a critical issue facing all Albertans and we all better get involved because after all it is our resource and our children’s future at stake here.
Wednesday, September 26, 2007
Link Byfield Wants to Debate the Alberta Royalty Report With Me
Link Byfield called me yesterday with an interesting proposition. He wanted me to attend the Wildrose Party shindig at the Pioneers Cabin and to debate the Alberta Royalty Review Report with him. I was very interested but said if I participated I wanted it to be made very clear I am in no way supported the ideology of the Wildrose Party. I am a proud – if not seriously frustrated - Alberta Progressive Conservative Party member.
Yes to satisfy the need for full disclosure and to pacify my friends on the far right disclosure I am a Red Troy. I can’t stomach the Harper Cons and I have voted Liberal federally. I liked Anne McLellan as my MP and have a lot a time for Dion as well. I even joined the Liberal Party to help his leadership campaign.
In a debate with Link I would clearly be pro-report and he would have taken the side of doom and gloom and industry is always good - government is bad. I was keen to take the challenge but had a dinner meeting with clients from out of town last night so the scheduling did not work out.
Based on the Blogosphere and MSM reports this morning I imagine I would have had great time in such a debate. Thanks for the invitation Link – maybe some other time with a bit more advance notice.
In a debate with Link I would clearly be pro-report and he would have taken the side of doom and gloom and industry is always good - government is bad. I was keen to take the challenge but had a dinner meeting with clients from out of town last night so the scheduling did not work out.
Based on the Blogosphere and MSM reports this morning I imagine I would have had great time in such a debate. Thanks for the invitation Link – maybe some other time with a bit more advance notice.
A Short History of the Oil Sands Royalty Regime
The old royalty regime for oil sands was a successful public policy for its time and its stated purpose. Some 3 years ago, at a CD Howe briefing I attended, Mr. Eric Newell - the oil sands industry leader who helped negotiate the 1997 royalty regime. He put some realism and perspective into the industry intent and government policy purpose for the original oil sands royalty regime.
He said the deal, done over 10 years ago, was that industry had agreed was to invest $5B over 25 years in oil sands development in exchange for the 1% of gross revenues during construction and 25% of net profit during production as the new royalty scheme. The public policy purpose was to establish the oils sands as a commercially viable industry sector for the long term. Oil was under $20 and production costs were $18 in the 1995-97 period the deal was negotiated.
What happened according to Newell was the industry actually invested $27B over 7 years and one thought since then, until Stelmach won the PC Leadership, to revisit the reality of the regime once it had done its job. The old oil sands royalty regime was an incentive to industry not a birth right to such inducements for ever. The old royalty regime did its job and it is time to revise the royalty regime.
This is not a short term tax grab as the Wildrose Party people would like to you believe. It is a royalty – a payment for economic rents in exchange for access to our resources. It is a rent where Albertans still share the risk with industry because IT IS A ROYALTY REGIME BASED ON NET PROFITS. When do we Albertans, as the constitutionally protected owners of this natural but non-renewable resource, get optimize our revenue realization?
We took on the challenge of debt and deficit so we would not burden our children with our bad investment choices as Albertans in the 1980’s. Will you be able look the future generations in the eye if we don’t optimize the revenues from the oil sands now? This is a resource that is definitely THEIR birthright.
He said the deal, done over 10 years ago, was that industry had agreed was to invest $5B over 25 years in oil sands development in exchange for the 1% of gross revenues during construction and 25% of net profit during production as the new royalty scheme. The public policy purpose was to establish the oils sands as a commercially viable industry sector for the long term. Oil was under $20 and production costs were $18 in the 1995-97 period the deal was negotiated.
What happened according to Newell was the industry actually invested $27B over 7 years and one thought since then, until Stelmach won the PC Leadership, to revisit the reality of the regime once it had done its job. The old oil sands royalty regime was an incentive to industry not a birth right to such inducements for ever. The old royalty regime did its job and it is time to revise the royalty regime.
This is not a short term tax grab as the Wildrose Party people would like to you believe. It is a royalty – a payment for economic rents in exchange for access to our resources. It is a rent where Albertans still share the risk with industry because IT IS A ROYALTY REGIME BASED ON NET PROFITS. When do we Albertans, as the constitutionally protected owners of this natural but non-renewable resource, get optimize our revenue realization?
We took on the challenge of debt and deficit so we would not burden our children with our bad investment choices as Albertans in the 1980’s. Will you be able look the future generations in the eye if we don’t optimize the revenues from the oil sands now? This is a resource that is definitely THEIR birthright.
High-Cost - Low Margin Oils Sands Projects Can't Handle Higher Royalites - Is that Necessarily a Bad Thing?
The Experts are getting engaged in the recommendations of the Alberta Royalty Review. Wood Mackenzie issued a news release yesterday projecting some $26B on reduced value in oil sands projects could happen if the Alberta Royalty Review recommendations were adopted. Wood Mackenzie are well respected consultants in area of Energy and Life Sciences. They consult to Alberta Energy and as a result their expertise was used by the Royalty Review Panel as well.
Two different news stories and headlines based on the Wood Mackenzie release are telling and is enough to make one wonder just who you can trust to report on this stuff. A Reuters story in the Edmonton Journal today uses essentially the same headline as the Wood Mackenzie release predicting doom and gloom over a potential for $26B of lost value in the oil sands if the Alberta Royalty Review recommendations are implemented. The Globe and Mail headline based on the same news release says: “Report finds Alberta still a bargain, even with higher royalties.”
The Globe says Wood Mackenzie finds that even with the royalty hike "...Alberta would remain one of the cheaper places to do business in the world even with more money going to the government."
Two different news stories and headlines based on the Wood Mackenzie release are telling and is enough to make one wonder just who you can trust to report on this stuff. A Reuters story in the Edmonton Journal today uses essentially the same headline as the Wood Mackenzie release predicting doom and gloom over a potential for $26B of lost value in the oil sands if the Alberta Royalty Review recommendations are implemented. The Globe and Mail headline based on the same news release says: “Report finds Alberta still a bargain, even with higher royalties.”
The Globe says Wood Mackenzie finds that even with the royalty hike "...Alberta would remain one of the cheaper places to do business in the world even with more money going to the government."
Both stories are "correct-ish" but let’s look at little deeper at some facts and some context. Wood Mackenzie actually says “…higher royalties will have the biggest impact on high-cost, low-margin projects.” They calculate the Net Present Value of current and planned projects would fall by $26B based on $50 per barrel oil. The Wood Mackenzie news release it self notes that “We predict the worst affected projects would be the most marginal, or those with a start up date furthers into the future, with an average of 30% of value transferred for underdeveloped projects.”
I would like to know some more of the assumptions behind the consultant’s conclusion beyond oil at $50. What interest’ currency exchange and inflation rates did they use? Was this the same assumptions used for open pit and in situ projects and what project assumptions on environment and reclamation costs were applied in the calculations? Did they differentiate between the Fort McMurray, Cold Lane and Peace River sites…they are all quite different realities.
Not all projects are created equal and some will become more marginal as circumstances change – including economic rents, environmental requirements and new technologies are all a natural consequence of the larger concept of the marketplace. An oil sands extraction project is a very long term patient investment. If your project is so marginal at the start that a royalty increment of 8% on your NET PROFITS is untenable – the same could (and should?) be said for the project anyway.
Albertans are strained and arguable unable to cope with the economic, infrastructure and social demands caused by the current oil sands production of 1.2 mbls/day. We are being told we need to triple the production within the next 8 to 10 years. What planning is in place and being done by industry and government to catch up and be ready for the consequence of 3-5million barrels of production?
Wood Mackenzie says only marginal projects may not be economic at $50 oil but that clearly means not all projects are in jeopardy. I can live with that and I am sure Alberta will survive. After all the demand for energy is not going down and the oil sands are not going away.
C.D. Howe Institute Weighs in on the Alberta Royalty Review
I do not usually post news stories verbatim in this Blog. But in this case I wish to make an exception. If for not other reason that I am a Member of the C.D. Howe Institute (by way of disclosure) this piece brings forth some larger questions on the future of Alberta we need to start to discuss. Another quality think tank based in Alberta - the Canada West Foundation has also been posing this question for a couple of years now. I highly recommend the work of both of these organizations.
HERE IS WHAT THE C.D. HOWE HAS TO SAY:
Alberta's Royalty Review Panel released its final report on September 18, 2007, which recommended increases in provincial oil and gas royalties, particularly as they apply to oilsands extraction. In a column in today's National Post, C.D. Howe Institute President and CEO Bill Robson wonders what Alberta would do with even more resource revenue.
Alberta's chronic overrunsNational Post Wed 26 Sep 2007
The release of Our Fair Share by the panel studying Alberta's oil and gas royalties has prompted a loud debate. No surprise, with the panel recommending that the province boost its energy-related levies by almost $2-billion annually. The panel's message that Albertans should get more from their fossil-fuel resources has overshadowed its proposals to rationalize and rebalance energy taxes and royalties, while an industry already struggling with escalating costs in the oilsands naturally views the prospect of higher levies with alarm.
Premier Ed Stelmach has promised a response to the Royalty Review Panel's recommendations by mid-October. Before the provincial government acts, however, it needs to answer a question that the controversy over the panel's report risks obscuring:What would it do with the extra money?
The yo-yoing of provincial spending in Alberta as fossil fuels boomed and busted in the 1970s, 1980s and 1990s underlines this question's importance. It is all very well for the report to emphasize that Albertans own their sub-soil resources. The fact is they can only exercise their rights as owners through their provincial government. While the ways the province might use these extra dollars --further increases in provincial programs, tax relief in other areas, or saving to prepare for a leaner future-- was not part of the panel's mandate, they matter greatly for the report's ultimate larger impact.
Those who recall Alberta's misadventures with its Heritage Fund and its deep fiscal retrenchment of the mid-1990s will know that Alberta has always had trouble handling resource revenues adeptly. Experience since the mid-1990s provides a fresh lesson. In successive budgets since 1996, the provincial legislature has voted spending increases averaging less than 2% annually. But the final figures for each fiscal year showed actual spending increases averaged almost 7%. These chronic overruns had a huge cumulative effect. Rather than the cumulative spending increase of $4.5-billion anticipated in budgets, provincial spending ballooned more than $15-billion over the period. The cumulative overrun of $10.5-billion is equal to all of the province's budgeted health care spending last year.
While all Canadian governments have had trouble living up to their budget commitments over the past decade, the record of Alberta's legislative assembly is uniquely bad. The tendency for resource revenues to outpace projections, and for in-year or end-of-year spending surprises to absorb most of the extra money, has been a driving force behind this breakdown of fiscal accountability. The 2007 budget anticipated no less than a 12% jump in spending for the
current fiscal year -- even before overruns, that would make provincial spending almost double what it was at the beginning of the decade. Raising the province's take from the energy industry by one-fifth, as the panel recommends, amid an energy boom will add fuel to the fire, increasing the prospects for yet another sizeable overrun -- and for a painful mix of tax hikes and spending cuts as demographic pressures and the resources boom's inevitable fade squeeze Alberta's budget in the years ahead.
This prospect highlights an obvious point: Some potential uses for any extra energy revenue are clearly smarter than others. Lower corporate income-tax rates would enhance Alberta's attractiveness to all kinds of business -- and mute the impact of new levies on the energy industry. More personal income-tax relief would help Alberta attract and develop the human capital that can sustain growth beyond the current energy boom. Saving the funds and investing them in a diversified portfolio outside Alberta would also prepare the ground for a future with less resource revenue.
None of these options, however, is likely to appear as compelling as more spending. The resource boom has created many legitimate needs for more infrastructure and public services in the province. Less happily, it has also fuelled a sense among many Albertans that resource wealth entitles them to the best of everything. Pumping more government money into a red-hot economy will further push up costs and inflame expectations -- setting Alberta up for an even more painful fall when the cycle inevitably turns.
For this reason, the provincial government should make a fiscal plan for any extra revenues resulting from the panel's recommendations a precondition for their implementation. Although a long delay would be terrible for energy investment in the province, no long delay is needed: another panel will be making recommendations on how Alberta might set resource wealth aside for the future before year-end. A few extra weeks would help in sorting out some individual royalty and tax recommendations -- not to mention explore some of the panel's more difficult proposals about long-term stewardship and upgrading incentives. And importantly, it would set the royalty-review recommendations in a vital wider context -- as a step toward ensuring that the current energy boom reinforces Alberta's future economic and fiscal base -- and alleviate the pressure to take more revenue now, and think about how to spend it later.
Those who think the debate's "fair share" rhetoric demands faster action should take a fresh look at the numbers. The Royalty Review Panel put the revenue impact of its recommendations at just under $1.9-billion annually through the end of the decade. Even if the depressing effects of the new levies themselves reduce the take, we are talking a lot of money. Yet spending overruns since 2003 alone have absorbed three times that much! When extra money vanishes so quickly, how strong is the case for more?
-William Robson is president and chief executive of the C.D. Howe Institute.
C.D. Howe Institute67 Yonge Street, Suite 300, Toronto, Ontario M5E 1J8Phone: 416-865-1904; Fax: 416-865-1866http://www.cdhowe.org/
HERE IS WHAT THE C.D. HOWE HAS TO SAY:
Alberta's Royalty Review Panel released its final report on September 18, 2007, which recommended increases in provincial oil and gas royalties, particularly as they apply to oilsands extraction. In a column in today's National Post, C.D. Howe Institute President and CEO Bill Robson wonders what Alberta would do with even more resource revenue.
Alberta's chronic overrunsNational Post Wed 26 Sep 2007
The release of Our Fair Share by the panel studying Alberta's oil and gas royalties has prompted a loud debate. No surprise, with the panel recommending that the province boost its energy-related levies by almost $2-billion annually. The panel's message that Albertans should get more from their fossil-fuel resources has overshadowed its proposals to rationalize and rebalance energy taxes and royalties, while an industry already struggling with escalating costs in the oilsands naturally views the prospect of higher levies with alarm.
Premier Ed Stelmach has promised a response to the Royalty Review Panel's recommendations by mid-October. Before the provincial government acts, however, it needs to answer a question that the controversy over the panel's report risks obscuring:What would it do with the extra money?
The yo-yoing of provincial spending in Alberta as fossil fuels boomed and busted in the 1970s, 1980s and 1990s underlines this question's importance. It is all very well for the report to emphasize that Albertans own their sub-soil resources. The fact is they can only exercise their rights as owners through their provincial government. While the ways the province might use these extra dollars --further increases in provincial programs, tax relief in other areas, or saving to prepare for a leaner future-- was not part of the panel's mandate, they matter greatly for the report's ultimate larger impact.
Those who recall Alberta's misadventures with its Heritage Fund and its deep fiscal retrenchment of the mid-1990s will know that Alberta has always had trouble handling resource revenues adeptly. Experience since the mid-1990s provides a fresh lesson. In successive budgets since 1996, the provincial legislature has voted spending increases averaging less than 2% annually. But the final figures for each fiscal year showed actual spending increases averaged almost 7%. These chronic overruns had a huge cumulative effect. Rather than the cumulative spending increase of $4.5-billion anticipated in budgets, provincial spending ballooned more than $15-billion over the period. The cumulative overrun of $10.5-billion is equal to all of the province's budgeted health care spending last year.
While all Canadian governments have had trouble living up to their budget commitments over the past decade, the record of Alberta's legislative assembly is uniquely bad. The tendency for resource revenues to outpace projections, and for in-year or end-of-year spending surprises to absorb most of the extra money, has been a driving force behind this breakdown of fiscal accountability. The 2007 budget anticipated no less than a 12% jump in spending for the
current fiscal year -- even before overruns, that would make provincial spending almost double what it was at the beginning of the decade. Raising the province's take from the energy industry by one-fifth, as the panel recommends, amid an energy boom will add fuel to the fire, increasing the prospects for yet another sizeable overrun -- and for a painful mix of tax hikes and spending cuts as demographic pressures and the resources boom's inevitable fade squeeze Alberta's budget in the years ahead.
This prospect highlights an obvious point: Some potential uses for any extra energy revenue are clearly smarter than others. Lower corporate income-tax rates would enhance Alberta's attractiveness to all kinds of business -- and mute the impact of new levies on the energy industry. More personal income-tax relief would help Alberta attract and develop the human capital that can sustain growth beyond the current energy boom. Saving the funds and investing them in a diversified portfolio outside Alberta would also prepare the ground for a future with less resource revenue.
None of these options, however, is likely to appear as compelling as more spending. The resource boom has created many legitimate needs for more infrastructure and public services in the province. Less happily, it has also fuelled a sense among many Albertans that resource wealth entitles them to the best of everything. Pumping more government money into a red-hot economy will further push up costs and inflame expectations -- setting Alberta up for an even more painful fall when the cycle inevitably turns.
For this reason, the provincial government should make a fiscal plan for any extra revenues resulting from the panel's recommendations a precondition for their implementation. Although a long delay would be terrible for energy investment in the province, no long delay is needed: another panel will be making recommendations on how Alberta might set resource wealth aside for the future before year-end. A few extra weeks would help in sorting out some individual royalty and tax recommendations -- not to mention explore some of the panel's more difficult proposals about long-term stewardship and upgrading incentives. And importantly, it would set the royalty-review recommendations in a vital wider context -- as a step toward ensuring that the current energy boom reinforces Alberta's future economic and fiscal base -- and alleviate the pressure to take more revenue now, and think about how to spend it later.
Those who think the debate's "fair share" rhetoric demands faster action should take a fresh look at the numbers. The Royalty Review Panel put the revenue impact of its recommendations at just under $1.9-billion annually through the end of the decade. Even if the depressing effects of the new levies themselves reduce the take, we are talking a lot of money. Yet spending overruns since 2003 alone have absorbed three times that much! When extra money vanishes so quickly, how strong is the case for more?
-William Robson is president and chief executive of the C.D. Howe Institute.
C.D. Howe Institute67 Yonge Street, Suite 300, Toronto, Ontario M5E 1J8Phone: 416-865-1904; Fax: 416-865-1866http://www.cdhowe.org/
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