AG Says the Dept of Energy and Former Ministers Have a Problem

I thought is a worthwhile exercise to post and highlight some comments from the Auditor General’s Report released today on the royalty issues and the Department of Energy.

Page91: says the Department (Energy) has identified critical issues that have not been addressed publicly and they relate to higher oil and gas prices outside the range anticipated by the old royalty regimes. The Department has know for at least three years royalty revenue were not meeting government's targets. The Department, (meaning the bureaucrats) estimated that it could collect an additional $1B or more per year without stifling industry profitability. The AG notes that "...neither this information nor the reasons why changes have not taken place have been made public."

Page92: says "Readers will ask 'Why have these issues not been addressed?" The AG says those "...questions must be directed to those responsible for the royalty regimes." The AG then clarifies the point by saying "The Minister of Energy has final responsibility and is accountable for these decisions."


In those two paraphrased statements the AG has identified problem and who is to blame…various past the Minister’s of Energy! He then makes five key recommendations and they are interesting.


First the Department of Energy should clarify it royalty objectives and make them public. The current objective to "optimize Albertans' resource revenue share" is code to accept what ever we get as the target.


The Department's "technical review work" needs to be improved in terms of planning, coverage and reporting and it needs to expand the topic and issues it considers.


The Department needs to improve its annual performance measures related to the effectiveness of the royalty regime beyond the current "share the profit" measure. Again this smacks of accepting whatever shows up as royalty payments is deemed to be the target. The Department's performance measures indicated satisfactory performance of the royalty regimes FOR SEVERAL YEARS while a detailed analysis in the Department "indicated otherwise. What gives?


The Department should periodically report in greater detail on the status of the provinces' royalty regime. The AG says with better information, Albertans can ask better questions about the management of their resources.


Finally the Department needs to "improve controls for its monitoring and technical review." They need to document complex processes, reviewing and signing off key outputs and referencing final results to source documentation." This tells me the Department does not know what is actually happening in terms of records, controls and monitoring of resource revenues...and if they did they can't prove it.


Very strong parallels between the AG and the "Our Fair Share" Panel recommendations. Some past Energy Ministers have got some serious Explaining to do by the looks of it.

What has the Auditor General Said About Government's Handling of Our Royalties?

I will be reading the Alberta Auditor General Report as it relates to the Department of Energy and its capacity and competence around the royalty issues and will post my comments on it later today.

In the mean time I recommend you read the excellent piece by U of C political scientist Doreen Barry entitled "Will Alberta's Tory Government Be Able to Protect the Public Interest?"

It was published in today’s Edmonton Journal. Take your time and reflect on what she is saying. It is very important stuff and very well written.

Thank You Joe Handley: Its Election Day in the NWT

It is Election Day today in the North West Territories. That is one of the most exciting places in Canada and is home to some of the most interesting characters you will ever meet too.

I often describe the NWT as another Alberta in the making but North of 60. They can avoid and even learn from the mistakes we are making down here – if they are careful.

Thanks to retiring NWT Premier Joe Handley – a great guy who did a great job for the NWT. He also made the south aware of the northern people and its potential. In the process he taught us to appreciate Canada in a different - and better way.

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.