Thanks to Graham Thomson’s Blog in the Edmonton Journal Albertans have access to the letter of apology from Dr. Dwarkin written to some fellow “Our Fair Share” Panel members. This is because of some of the content and tone of a review she apparently “co-authored” and released by her employer Ross Smith Energy Group (RSEG) out of Calgary.
The Royalty Review panelists are a group of quality people of great character with a great deal of individual and collective experience and expertise. The final report they released proves they have done an exemplary job in a critical and complex area. Since they released the document, they been ridiculed, insulted, called names and vilified as part of an overall well planned intimidation and misinformation strategy.
In the face of all that, some of them are continuing, on their own time and at their own expense, to speak up, clarify and very ably debunk the misinformation and fear mongering campaign that is being put forth by some powerful forces in the Alberta energy sector.
There is a lot at stake here and, as important as that is, it is not just the money and how it is to be allocated and controlled. There are lots of very powerful special interests and self-interests at play and from people who are very used to having their way with our government and it seems to have been happening mostly behind closed doors. The “Our Fair Share” Royalty
Review Report made those points very precisely and they fixed the blame for it too. Then they went to work on recommending how to change it.
The royalty review panelists are personally bearing the brunt of some pretty serious pressures from those powerful sources and forces. The content and context of this letter by Dr.Dwarkin shows how the powerful sources and forces play the influence game, even at the personal level. It has a clear message to all Albertans that there is a serious problem with the balance of power in our provincial democracy. The Royalty Review said it and the Auditor General said it too.
Premier Stelmach set up this process and he is to be congratulated for doing so. It now falls on him to show the proper respect for government’s role as trustee of Albertans natural resources and to reaffirm industry’s place as the tenant on that public property not a tyrant trying to intimidate our citizens.
The best way to do that is to accept the recommendations of the Royalty Review Panel. Then Premier Stelmach, you need to clean up the culture of contempt for responsibility that is owed to the citizen’s of Alberta that has been found in some corners of your government.
Dr. Dwarkin’s letter shows just another example of how this power imbalance is practiced and applied on some people. Here is what Dr. Dwarkin said in her letter of apology yesterday to some of her fellow panelists.
Hello Evan, Andre, and Sam:
I very much regret how things transpired yesterday and understand completely your disappointment/surprise. I am sincerely sorry for not getting the RSEG report to you in advance, and providing you with the context for it in advance.
As I said in my note yesterday after the fact, I planned to send it to the panel when I got back from Edmonton (the final version was being finalized while I was in Edm.), together with the context in which it was done and more information about how things are done at RSEG . Unfortunately, things didn't happen this way and I am very, very sorry for this.
I also am really distressed and sorry about the way the report is being portrayed by the media as some sort of repudiation of the panel's report. This is absolutely untrue. RSEG endorses the panel's report, the thought process that went into it, the principles used to develop the recommendations.
RSEG is suggesting a refinement to one of the (dozens of) recommendations. My contribution to the work product was to share my personal view on this particular aspect.
Please know that there are some observations/characterizations in the RSEG report that I strongly disagreed with - for example, the one about 'short cuts’, that Texas isn't a good comparable for Alberta, the reference to lacking the requisite 'expertise'.
The report's other authors don't have all of the information about how the analysis was done because it isn't in the public domain, and they weren't convinced by my insistence that it wasn't an issue of 'industry expertise' or incorrect methodology.
I was horrified when I got back to my office late on Wednesday afternoon and saw that the final report had gone out with this stuff in it. If it's of any comfort to you - and I understand it probably isn't - please know that I wrestled several other unfair criticisms out of the report before that.
The language in RSEG's report is provocative in some places. If you were familiar with RSEG reports, this wouldn't surprise you. I did request it be toned down before this report was sent out but was over ruled. What everyone - especially the media - needs to appreciate is that one of the remarkable features of the panel report is that it reflects a BALANCE of views on a very complicated topic.
No one particular viewpoint dominates the recommendations. This is why the govt constructed a panel whose members came from a variety of backgrounds - it wanted to understand the BALANCE of views. The other remarkable thing about the panel report - that each of us emphasized during the meeting yesterday - is that it sets out a set of principles, concepts and framework to guide the government's decision.
The report has moved the debate to a fundamentally different place. As I said yesterday, this is a sea change.
In my dealings with the media, I am focusing on these points and that the RSEG report is a suggested refinement to a very solid proposed structure.
If any of the comments here would be of use to you in your own dealings with the media or others, please make use of them.
Judith Dwarkin
Chief Economist
Ross Smith Energy Group Ltd.
Saturday, October 20, 2007
Friday, October 19, 2007
Stelmach' s Royalty Response Coming by the End of October
My Blog post yesterday and my armchair speculation about what will happen next week is proving to be true. Premier Stelmach confirmed today in Calgary that the television presentation on Wednesday “… deliver only basic principles of the government’s response to the controversial royalty report – with specific details to come at a later date.
The “Our Fair Share” Royalty Review is mostly controversial in Calgary from the replies I get to this Blog.
The “Our Fair Share” Royalty Review is mostly controversial in Calgary from the replies I get to this Blog.
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.
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.”
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 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 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.
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?
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?
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