Some Thoughts From a Lougheed Cabinet Minister on Royalties

Yesterday I received an email from a friend and a former Lougheed Cabinet Minister. His observations on the royalty issues of 2007 compared to the same stuff in 1972, when Lougheed raised them are interesting. The observations and comparison are as follows:

“I submit four comments re: royalties -- First, the extent of change
recommended is barely half of what was done under Lougheed in the '70s -- so it should have been an easy and immediate decision for the Stelmach gov't. I think the recommendations are timid, so no deviation no doubt which way…is acceptable to me.

Second, if the Premier felt time was needed why the hell not have a "Committee of the Whole" public hearing in the Legislature -- exactly what was done in December 1972 (I was there). Then Big Oil could have its say, but to the public at the same time as the gov't, not behind closed doors; others had their say too, and many did.

Three, I don't think the energy industry problems are so much additional cost (which no one would like) but the uncertainty (which anyone making an investment hates).

Finally, Ed's big problem is that he failed to call a general election instead of those bye elections last summer. The Premier's moral authority is hobbled by still being the Klein gov't, though with someone else warming the chair.”

My friend sure has added more grist for the new and positive political mill that Alberta is quickly turning into. I like the idea of a “Committee of the Whole” but it is too late now...but who knows , we are going into a legislative session in early November, it could still happen!

If the “Our Fair Share” recommendations are “barely half of what Lougheed did, then it is arguable the “compromise” is already in the Royalty Review Report…that is my belief. I think Stelmach will enhance the Royalty Review recommendations to provide some ecological incentives as outline in the "Our Fair Share" in the "Afterward" comments.

I think Stelmach will redefine are reframe "the balance" beyond the industry seeking status quo and the Royalty Review recommendations to include social, environmental as well as economic concerns and a balance between short and long term approaches.

Certainty is certainly more critical than additional costs given that Alberta is still going to be in the most competitive half when it comes to royalty costs internationally. The fast we provide a long term stable governance structure that is not available in many other oil producing places and you don’t need a private army to protect you assets or you people seems to be lost in the cost comparisons.

As for the election call, I disagree. Ed doesn’t need and election now and he did not need to call one instead of the by-elections either.

One thing for sure is the response to the Royalty Review will be definitive for Premier Stelmach. The Stelmach government response is going to determine, in the public mind, if he is merely “warming the chair” for the continuation of the Ralph Klein government or is he his own man. My money is on the latter.

Bill Hunter Speaks Out On the Dr. Dwarkin Incident and the Alberta Royalty Review Report.

I got an interesting email on Saturday night from Bill Hunter, the Chair of the Premier’s Royalty Review Panel. He has been a friend and a client for many years and we have had a number of chats since the “Our Fair Share” Royalty Review Report came out. That said he sent me what I think is an important email and we had a chat about it Sunday night.

There has been an unfortunate set of circumstances around the controversy caused by Dr. Dwarkin, one of the review panelists. It arises from her subsequent co-authoring of a “Royalty Review Report” entitled “Looking for Rent in All the Wrong Places” done by her employer the Ross Smith Energy Group. That document detailed some criticism over specifics in some conventional gas aspects of the “Our Fair Share” document. Some differences of opinion were stated as well as some points of agreement with the “Our Fair Share” findings and recommendations were also noted.

But some of the observations, language and representations in the review seemed intent on casting aspersions as to the capabilities of the expert panelists. Ironically that would include Dr. Dwarkin, herself an expert panel member. The Ross Smith Energy Group allege that “short cuts” were taken, the modeling methodology used by the Panel was not proper, the panel lacked “requisite industry expertise” and they did not have enough time to do the job.

This approach could be interpreted as another attempt to undermine the credibility and capability of the panelists as well as cast doubts on the reliability of final Royalty Review Report. Ross Smith Energy Group is not the first to use or be seen to be using, these tactics. They are, however, the first to do so with the aid and apparent abet of one of the expert panel members, who just happens to be in their employ as well.

It leaves one wondering, what was the motivation behind the Dr. Dwarkin’s co-authorship of her employer’s document? She also seems to be trying to disavow its content and context in subsequent media and other comments. This is all the more strange when you consider that she was the panelists who led the Royalty Review’s work on the conventional oil and natural gas aspects review, analysis processes findings and recommendations.

With all the examples of intimidation and coercive tactics that we have been seeing from some energy industry players, questions naturally arise over the circumstances and the context surrounding what Dr. Dwarkin did. Why did she do it at all under the circumstances? You have to questions the timing as well. I wonder why it was done just before the meeting of the Panel with the Premier.

The facts seem pretty clear and complete surrounding the context and content of the Dr. Dwarkin and the Ross Smith Energy Group "review" incident. I will leave it for others to interpret and pass their own judgment as to the consequences, motives and implications of those facts and the parties involved. Citizens will no doubt draw their own conclusions. I have no further comment on those questions and issues other than what appears in my previous postings in this Blog.

So in light of all of that, here is the email Bill Hunter sent me on Saturday night. For the record, he has never asked for an advanced look see on anything I have written on this Blog including the Royalty Review Report. He has never asked for me to write anything about the Royalty Review Report either. That said he read this Blog and gave me permission to publish this email.

I suggest Albertans also consider Bill Hunter’s words in any judgment and conclusions they choose to reach about this incident. Albertans need and are entitled to have confidence in the appropriateness and thoroughness of the royalty review process. They must be able to respect the capabilities of the expert people involved. There has to be authority, authenticity and reliability in the analysis and methodology used in reaching the “Our Fair Share” Royalty Review findings and recommendations. I believe there is no reason for Albertans to have any doubts whatsoever about any of these points notwithstanding the Dr. Dwarkin incident.

So here are Bill Hunter’s opinions and observations on those matters.

"My friend

The Our Fair Share report is a culmination of learnings, analysis, debates, arguments (for and against), thoughts and personal believes … in the future of Alberta through some stringent Terms of Reference, asked of Albertans.

Six extraordinary (extraordinary because they gave up their lives for 7 months to volunteer to participate in a Panel to ascertain whether Albertans get their fair share of revenues from “their” non-renewable energy resources) Albertans, many of which are North America’s top minds when it comes to; Royalties, Taxes and Fees, Business, Economics, Sustainability, Production and being Albertan … elected to design and deliver a report that came from a position of what they believe is compromise and balance.

Each Panel member brought unique and solid strengths to the mix of intelligence and compassion for the topics being discussed. Judith Dwarkin is an example of that strength; her careers and exposure to/and in the Energy world were critical to the balance we found in our deliberations, I am indebted to her contribution and appreciate her ability to represent the industry’s positions.

Today, Oct. 20th, 2007 … I feel that there are still 6 Panel members who stand behind their report and its intent to be a starting point for the launch of a new regime that embraces “continuous improvement” and will ensure Our Fair Share for the Owners, the People of Alberta!

Proud to be an Alberta Royalty Review Panel Member and it’s Chair,

Bill Hunter"

This Time an Eastern Business School Prof Warns Albertans over Royalty Rate Increases

Here is a Calgary Herald Editorial page piece written by a Queen’s University business professor that says Albertans should not be to “grabby” over royalty rates. It makes you wonder if he even read the “Our Fair Share” Royalty Review. Grabby it is not. It even recommends a final royalty rate below the benchmark 66% in all cases and provided incentives for new technology adoption and setoffs for upgrader investments, to name a few non-grabby features.

He seems not to know of the Alberta government largess that was given to the oil sands sector in 1997 with the introductions of 1% royalty until project payout and then 25% on NET PROFIT royalties…when oil was under $20, not the $88 it is today. Albertans have been sharing the risks of these projects for a decade but they are not participating appropriately in the royalty rewards under that old regime.

The rapid growth in the energy sector is driving the inflation, making housing unaffordable for middle class people and the competition for staff and materials is stifling the rest of the Alberta economy, and destroying the capacity of social service providers to do their jobs.

He also says: “To compound matters, such companies extract stuff that belongs "to the people," so claiming the people ought to get their fair share strikes a populist chord that governments find hard to ignore. It's a wonder the province waited as long as it did to do the review. The energy industry is perceived to be where government can extract wealth, and be rewarded politically for do so. The temptation to increase the take from a booming energy sector is almost impossible to ignore.”

Damn straight, but this is not about an overreaching “grabby” Alberta public and a hard done by energy industry. The Alberta industry has enjoyed record profits over the past 5 years, and currently record share prices. They have the benefits of dealing with an Alberta government that is democratic and sometimes responsible. They have stable long term leases in place, with a skilled well educated workforce. In Alberta they can develop their projects without needing a private army to protect workers and assets as are required in many other part of the oil world.

This is not about being grabby. It is about citizens of Alberta today and for future generations, getting a fair return of economic rents for this non-renewable resource with a one-time revenue stream. The “Our Fair Share” recommendations would even put Alberta in the lower half of the “take scale” relative to the international royalty marketplace in the world today. Grabby is not what the "Our Fair Share" Royalty Review recommendations are all about.

This royalty issue is more about good stewardship and trusteeship of government and the Auditor General has recently shown just how pathetic a job our government has been at honouring that responsibility. They have not even monitored, calculated or collected the correct royalty amounts under the current regime.

I agree the industry needs to be rethought. The industry players individually need to reconsider what they need to do to justify its continuing social licence to operate in Alberta. We need to look to investments and market from beyond North American sources. We need to find ways to make this sector sustainable in the sense it must be green and profitable the same time. It is not an option it is a requirement for the Alberta energy sector going forward. That is the big “re-think” that has to happen within the Alberta energy sector right now.

The citizens of Alberta are way head of the government and some of the industry, in this thinking. They will elect a new government this spring that will align with and act on those ends. Premier Stelmach knows this as does every other political party leader except of course for all the old die-hard Reform types and their Libertarians friends. They want to eliminate any government role entirely out of the energy sector revenue equation.

Here is a Calgary Guy who Gets It.

Here is a new Blogger out of Calgary that is worth a read and perhaps a following...and he is not anonymous. He is thoughtful, articulate, adds value and puts context on issues and even with all that heavy and heady stuff - he is a damn good read. I recommend you visit and even follow Drew Anderson.

Here is Dr. Dwarkin's Apology Letter to Fellow Royalty Review Panel Members

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.