Cambridge Strategies' Most Recent Column for LaPresse

Here is our regular column that was translated into French and published in LaPresse in Montreal yesterday. We introduced them to some of the realities around the Royalty Review. We have received some interesting replies from Quebec already.

What do socialist regimes and Alberta have in common? Quite a lot, if leading voice in the energy industry are to be believed.

From the Canadian Association of Petroleum Producers to Deutsche Bank Securities to the President and CEO of the government-created energy giant EnCana, there is strong and resolute opposition to an expert panel’s recommendation that Alberta revise its energy royalties.

In an article entitled “The Bolivarian Republic of Alberta,” Deutsche Bank compared the findings of the Oil Sands Royalty Review to something out of Hugo Chavez’s Venezuela. This is an astonishing reaction to a government-commissioned report produced by economists and business executives, which recommends reducing royalties on most conventional oil and gas and increasing royalties on oil sands development.

The logic behind the recommendations is underlined by Alberta’s Auditor General Fred Dunn. His report, following on the heels of the royalty review, noted that Alberta’s current royalty system isn’t working. Dunn found that the Alberta royalty share had “fallen below stated government revenue targets” and that an additional $1billion per year in royalty payments could be charged “without stifling industry profitability.”

Industry is threatening to pull investment from Alberta unless Premier Ed Stelmach rejects the royalty review – and the conventional wisdom has it that the premier will bow to industry pressure.

Yet the premier has nothing to lose by standing up to the industry bullies. Stelmach, the Ukrainian-speaking premier who was taught English by nuns while recovering in hospital from a boyhood accident, isn’t the kind of leader who would ever be at ease in Calgary’s elite boardrooms.

After the failure of their favoured candidate Jim Dinning to win the premiership, the Calgary elite spoke sneeringly of “Farmer Ed.” Now that disdain (mepris) has turned into alarm. The Calgary elite and their apologists all their accusations, ignores the basic fact: Albertans own the resource, the energy companies are tenants who have been granted access rights.

Citizens of Alberta have never been so focused, so furious, at so many levels and in so many ways over their government's incompetence and the arrogance and intimidation efforts by some energy industry players.

The energy industry strategy going into the province-wide royalty hearings was flawed. Some of their presentations appeared to be intentionally misleading. They cited an expert consultant’s report that was 10 years old. The royalty review panel led by retired forestry executive Bill Hunter asked the same expert consultant to update his report and he found the Alberta royalties were among the lowest in the world.

If anything, the “Our Fair Share” report from the Royalty Review Panel is conservative in its recommendation of the “fair share” Albertans ought to draw from the natural resources they own. That goes beyond adjusting royalty rates. It comes down to smart, efficient stewardship of the resources that belong to Albertans – now and in the future.

If the royalty review recommendations are adopted, Alberta will remain extremely competitive in the global market. Charging a fair-market rent will give us a much more flexible opportunity to design and build a future of sustainable prosperity. Alberta’s unique value proposition lies in supplementing today’s hydrocarbon wealth with alternative energy, green energy, and clean energy. We can use additional revenues to aggressively pursue carbon capture and sequestration, clean coal technology (including gasification, hydrogen production and coal bed methane extraction), and biofuels/biomass energy.

That said, Premier Stelmach needs to be exceptionally skilful in securing Albertans their fair share or the energy economy, without derailing investor confidence in the province. He must respond to the public desire for enhanced environmental standards and value-added processing of Alberta’s resources. The threats by energy companies could indeed lead to some short-term economic turmoil – but the premier has already said he will not be intimidated by anyone.

No Royalty Review Panellist Has Broken Ranks on the Recommendations.

OK I have read the Ross Smith Royalty Review Report and the Calgary Herald and Edmonton Journal stories on it as well. The media stories and the Ross Smith document all seem to run into the classic problem that the Headline sometimes neglects to capture the true essence of the story.

Dr. Dwarkin is quoted in the MSM as saying nothing in the Ross Smith Review is contradictory with her work on the panel or the framework, themes or structures that were recommended by the royalty panel. She also reaffirms that she agrees with the entire “Our Fair Share” Royalty Review framework, themes, structures and recommendations.

I have to wonder, therefore, if the slant and timing of this "story" is not just another “issue framing” and political posturing exercise. Is this another industry attempt to attack the credibility of the “Our Fair Share” Royalty Review by some power players in the energy sector? It is obvious no such motivation can be attributed to Dr. Dwarkin based on her reported comments.

Lets deal with some of the substance of what the Ross Smith Report says. They claim that the natural gas royalty recommendation for the Albertans as owners take increase of 5% for conventional natural gas is too high. This is not a 20% so-called recommended increase as some in the industry would like to have you believe.

The recommendation is to move from 58% to 63% and that according to Ross Smith “…is too high in our opinion.” It still leaves a 37% share for the developer and puts Albertan’s share below the standard 2/3 rent levels promoted by former Premier Peter Lougheed. Besides

The rationale as to why this is too high is “Due to the maturity of the resource base, it can’t generate the level of economic rent to justify this level of take.” They note that “Alberta’s conventional resource sector is at an advanced stage of depletion.”

Maybe it is time to accept the reality that the conventional oil and gas sector is past its peak and that it is becoming a sunset industry in Alberta. Why are no industry analysts pointing out that reality and advising the Alberta industry to adapt? Why are they not suggesting more use of new technologies for enhanced recovery of current wells? We have shifts happening towards coal bed methane and syngas as alternative natural gas sources. Why is that not mentioned in any industry analysis or reports in response to the Royalty Review?

The Ross Smith Report is entitled “Looking for Rent in All the Wrong Places” but is only focuses on rents from on source of conventional gas, "Foothills gas."

In essence Ross Smith are recommending a similar royalty holiday for Foothills gas as for deep well gas plays based on drilling depth and related costs. OK fine, but that is hardly an analysis of "looking for rents in all the wrong places." Cute title but it is dangerously misleading.

The Ross Smith Report says it agrees with some of the Royalty Panel fundamental findings. They say that “…the current Alberta royalty formula for natural gas is obsolete and long overdue for overhaul. They agree with the Royalty Panel’s recommendation that bonus bids, the prices paid for lease at the biweekly land auctions, should be excluded in any royalty rents calculations.

They don’t agree however that lower producing gas wells should be getting a lower royalty take and higher producing wells paying more royalties. They feel this recommendation will “encourage large-footprint, low-impact shallow development drilling and discourage higher risk and higher impact exploration.”

They provide no analysis or evidence to support this conclusion but they are quick to call it “dumb resource management.” That eloquent conclusion without evidence to support it are not very helpful to the Stelmach Cabinet in its efforts to make a wise decision on the real issues.

So in summary Ross Smith’s Report, and the media on it, confirms the panellist who is employed by Ross Smith has not broken ranks with the Royalty Review Report and in fact reaffirms her support of "Our Fair Share" recommendations. The Ross Smith Report is not in fact a criticism of "all rents in all the wrong places" as expressed in its title but rather a suggestion that one specific royalty for Foothills gas should be covered by yet another royalty holiday.

And finally they think to reduce royalties on lower producing wells and to have the owner's take focused on more revenues from higher production wells as recommended by the Review Panel of experts, including their own expert, is “dumb resource management.” OK, I think I get it now!

RBC Capital Markets Weigh In On Royalty Review With Same Old Argument

The RBC Capital Markets analysts have weighed in on the “Our Fair Share” Royalty Review Report and see it as “Short-term Gain for Long-Term Pain.” By way of full disclosure the RBC is my bank and they are a great institution. However, I have to say they don’t "get it" about the "Our Fair Share" Royalty Review based on their recently published analysis.

This RBC Capital Markets report is well written but it is a perfect example of the old adage that if your only tool is a hammer, every problem looks like a nail. The RBC focus is only on the economics and they ignore the environmental and societal tolls the rapid uncontrolled growth the energy sector is having on Albertans outside the oil patch and the oil sands.

The energy industry, and their advisers, like the RBC Capital Markets, needs a more robust set of analytical tools in their kits going forward. They have to broaden their perspective and deepen their understanding using a more integrated model of how they impact the world around them. They have to start thinking in terms that are more complicated and comprehensive and have goals greater than just getting rich quickly.

I want to challenge the RBC report's stated assumption that the Royalty Review recommendations are at cross-purposes to maintaining current relationships between government and the energy industry. They say “If it is the intention of the Province to maintain its current relationship with oil and gas industry, global capital markets, the other province, and the Federal Government, we believe the Panel’s recommendations are at cross-purposes, and the implied policy shift away from working in Partnership with the oil and gas industry is not in the best interests of Albertans.”

First off I think it is up to Albertans to decide what is in their best interests, not RBC Capital Markets. Secondly it is not the intention of the The “Our Fair Share” Review Report to maintain the current relationhip. The Panel answers this comment fully in the Review Report on page 7. It is the opening paragraph of the Executive Summary. It says that the current relationship with the industry should not be maintained but should be changed. It is not about cross-purposes with the status quo…it is about changing the status quo.

The Review says the formula and royalty rates “…have not kept pace with changes in the resource base and world energy markets.” It puts the “onus” on the government to “re-balance the royalty and tax systems so that a fair share is collected.”

The Panel makes it explicit there needs to be a policy shift on royalties. It is not making an “implied policy shift” as suggested by the RBC. The change needs to reaffirm the fundamental principle that it is all ALBERTANS who own these non-renewable natural resources and that is their right pursuant to the Constitution of Canada.

The Royalty Review clarifies that the Government of Alberta is the trustees for the citizen's natural resources and they are mandated to protect the interests of the citizen’s of Alberta. The energy industries are tenants who are granted permission through the EUB regulatory approvals to do business on the public’s property and to exploit the public’s resources for the greater and common good as well as their own self interests.

The RBC comment on the need for a sharing of “risk and reward” is a tad ironic. This “sharing” benefit has not been fair for a long time – and the rewards have mostly been in industry’s favour, especially with the current high commodity prices and unbridled growth that is spurred by the current inadequate royalty regime. The new severance tax is a perfect example of the Review Panel recommending a risk-reward sharing model. This new tax has recommendation an oil commodity floor price of $40 before it kicks in and then maxes out at $120 per barrel oil. That is a true risk and reward sharing regime than anything that exists at present.

As for reward sharing, according to the Auditor General's recent report, we had an Alberta government that, for years, did not even bother to correctly calculate or collect the royalties due under the current regime. Albertans end up taking all the risk, the energy industry reaps the rewards and it is all government's fault under that scenario. Not good stewardship. Not good trusteeship. Not good enough!

The relationship between the energy industry and the government from now on will be open, public, transparent and accountable. Citizens will see to that in the next election. Any politician, regardless of party affiliation, who wants to continue to govern this province, had better start living up to their trusteeship and stewardship responsibilities relating to resources, environment and societal needs.

The past model of these decisions being made behind closed door and the inappropriate cosiness of the energy industry with some of their passive and compliant political friends is over. How can that true “partnership” between the industry and the government be anything but healthy and better serve the common good – especially in the long term?

An Armchair Look At Premier Stelmach's Coming Week As He Announces the Royalty Review Decision.

So here is what next week looks like on the Alberta energy policy and royalty review scene. I have no inside information but experience and common sense makes this set and sequence of events seem logical.

Tuesday the Cabinet meets and the final decisions are made about the official response to the “Our Fair Share” Royalty Review Report. I’ll bet there will a quick taping to edit in of some additional commentary by the Premier for his scheduled televised speech on the government’s position.

On Wednesday in the Premier's televised chat do not expect the official royalty review announcement. Mainstream media are salivating that this will be when it happens and some still think he will make an election call that night. Astonishing!

The issues on the royalties are too complicated and critical a decision for a pretaped TV presentation. Besides there are lots of other issues that need to be covered in the TV event too. I expect he will say something significant to Albertans about the royalty review and that is he will say that his government has come to a decision and stay tuned for the announcement.

On Thursday morning there will be media lock up and detailed briefing on the “Our Fair Share” Review and the government’s response. There will be a late morning or early afternoon new conference with a full statement and rationale for the decisions and that is when it will be announced. There will be lots of announcement details and updates with web links for Albertans to get direct unfiltered and unmediated access to the decision. There will be backgrounders that gives the thinking and analysis behind the decision. The Premier will have to be ready to give reasons for the decision and to sell it.

Friday will be action and reaction day with a media feeding frenzy looking for controversy and conflict. Stupid things will be said, and of course reported on. Thoughtful commentary will be limited and delayed because it takes time to study and reflect on the implications of the decision.

Saturday morning the Premier will spend an hour at the Progressive Conservative Party Policy Conference in Calgary. He will be walking his party membership through the panel process, the government review process and the principles that were included in the “balance” he is looking for and he will answer questions from the floor. That will not be an easy time.

There will be lots of talk about the need for balance in the announcement. Balance is not going to be about a compromise between the “Our Fair Share” recommendations and the fear mongering from industry as most media are currently seeing and over simplifying the issues and trying to define the "conflict." It will be about designing, defining and deploying a balance that is much more complicated than that.

It will be about balancing the pace of growth and the impact on the environment and the ecology of Alberta. It will be about balancing the needs of high growth and slow growth communities as well as big cities and other communities. It will be balancing competing labour needs and shortage between various sectors of the economy and how to meet the social infrastructure deficits that uncontrolled and rampant energy sector growth has caused.

It will be about the need for short term and long term balance. It will be about balancing continental energy supply demands with the limited capacity of the province to respond in an even faster pace than now. It will be about inter generational fairness and how to preserve these once in a life time non-renewable resource revenues in the current and future context.

For Premier Stelmach, next week will just be another day at the beach – but he will be able with the tsunami on the horizon. He just won't know for a while how big it is or how fast it is moving..but hi will know it is coming.

Wish him well and pray that he, along with all the rest of us rank and file Albertans, will have the courage and conviction to do the right thing - and not to blink. There will be lots of heat coming out of the government royalty review decision next week. Let’s hope there is some enlightenment too.

Is Desperation Setting In as Some Try to Discredit the Hunter Royalty Review?

A comment on another post on the Blog about CAPP's claim in an Edmonton Journal Letter to the Editor that the Royalty Review Review Panel is no longer in full agreement on their recommendations is worth a post in itself. the anonymous commenter thinks because a consultant's advice on striking a balance between royalties or tax increases was not accepted by the Panel that the credibility of the whole report is suspect.

The commenter challenges me as to if I have even read the van Meurs Edmonton Journal piece. I have read the van Meurs op-ed and have it in front of me as I write this post.

Mr. van Meurs is not, and never was, a panel member or an author of the report. He was a consultant retained by the Review Panel to give advice. He wanted to see a higher severance tax and lower royalties as the approach to take to give Albertans their "Fair Share."

The expert panellists, who were actually tasked with the review job and appointed by the Premier decided a lower tax instead of a higher royalty was the best way to go.

So what? They disagreed but the process worked and a unanimous set of recommendations came out of the review panel.

Thanks to van Meurs' authenticity and integrity, Albertans got to see some of the differences and the range of options considered in the review. That is reassuring to me as to the quality of the deliberations.

This review process is a very different approach to openness and transparency in government than the cosy industry arrangements done behind closed doors in 2004.

Back then there was an internal review and a recommendation for royalty increases but they were refused by the Minister. Why? Because he felt there was enough cash flow into government already -not if is was fair to Albertans and no consideration of the resource ownership issues and the breach of the public trust such an attitude displays.

Or even consider earlier this year when the Energy Minister said, in the Legislature, that he had done an updated internal royalty review. Now we see that the AG finds out it that was not the case at all. Shame!

Remember also the intellectual dishonesty of some in the energy industry that used van Meurs' report on Alberta royalties from 10 years ago. They quoted old data at the public hearings on the Royalty Review to justify the status quo.

Yes. that is right. They had the gall to stand up in public and based on such outdated 10 year old information to say that there was nothing that needed to update royalties in Alberta. As if 1997 reflected 2007 realities and current public policy purposes.

The industry today says the panel used incorrect and non-current information in arriving at its recommendations. Too bad the Review Panel couldn't have put some industry players under oath at the public hearings to see if they would still so blatantly misrepresent the facts.

This attitude by some industry players - not all - is simply trying to play Albertans for suckers. It has been a successful industry strategy under the old Klein regime but it is not going to work anymore.