I Read Dunn and Valentine and I Still Don't Know If Albertans Are Getting Their Fair Share of Royalties

I have read “Building Confidence” the Peter Valentine document on “Improving Accountability and Transparency in Alberta’s Royalty System” that was released today. Apparently the former Auditor General was asked by the Premier to consider “oversight of the royalty system, a review and assessment of the government’s business processes and controls; and a performance measurement and reporting.” Mr. Valentine has made 13 recommendations that the Minister of Energy was quick to note today the all Valentine’s recommendations will be accepted by the government.

The genesis for this “Building Confidence” undertaking was in response to a report last fall by Fred Dunn, the current Auditor General, who criticized the government on how it reviewed and decided to adjust royalties. Dunn made 5 recommendations and it looks like Valentine has caught all of them in his report. Valentine has also made recommendations that make the Minister of Energy more accountable to Cabinet and therefore Albertans and not just the one-man-show “decider” of all things royalty related as in the past.

Valentine hired KPMG to help him out in his review. They were charged with reviewing the “source and nature of assurance the Department has over the accuracy and completeness of industry and/or other external data. They also were tasked to review the processes in the Department to collect external data and information used to assess the performance of Alberta’s non-renewable recourse revenue policy and collection of royalties. What KPMG was not asked to do was “review of calculations, data input, reporting and verification processes and controls that take place outside the Department, for instance in oil and gas companies and the Energy Resources Conservation Board.”

It is more interesting as to what was out of scope in both reports. Dunn did an analysis on conventional oil and gas and oil sands for a 5 year period starting in 2000. He also did not examine the system the Department used to calculate and collect the royalty and bonus revenues. He did not assess if Alberta Energy “…has adequate controls on the completeness and accuracy of data that form the foundation for royalty calculation.”

Dunn notes that in coming to a calculation for royalty revenues the government uses averages and scenarios covering a range of pool sizes and well characteristics from publically available sources. Industry on the other hand models well data outputs based on “confidential information such as the company’s financial parameters.” The upshot is government models royalty returns on “averages” to estimate economic rents but industry models the specific well or project to determine profitability and rate of return.

The two reports by Auditor Generals present and past are excellent documents but they both beg and profoundly fail to answer the foundational question…are Albertans getting all the royalties they are entitled to under the law? If we don’t know if the input data is accurate and if the model being used is adequate how can we tell? If industry uses one model and government uses another how can we cross check for accuracy in calculations?

Valentine says the Department settles for a vague answer to this foundational question. He says the Department “estimates that it will effectively collect 100% of the available return to Albertans by collecting 20%-25% of the industry’s net operating revenues.” Well my understanding is we have not been at this rate of return for royalties and recommendations by the Department to the former Minister(s) to return to that range of royalty revenues were rejected unilaterally by him/them.

Both Dunn and Valentine noted the royalty system in place no longer served the public interest in the days of high and fluctuating commodity prices. That is where Dunn identified the $1 billion of opportunity losses from uncollected potential revenues. Valentine says there is no substance to support claims we were missing collecting money but the admission of the various systemic flaws makes it difficult to square that conclusion with so many unknowns still unknown.

It looks like industry knows its own numbers on production and costs. Industry’s actual production numbers of our non-renewable resources belonging to Albertans should be made public and used for royalty calculations on a gross basis. Costs of doing business are individual corporate competitive issue and that data rightly belong to the industry players and not the public.

This dichotomy of data and cdifference in alculations between the industry private and the Alberta public interests provides us with a problem in determining if we are getting Our Fair Share. What needs to change is the royalty regime based on net revenues and move to a gross production and commodity price based calculation for royalties. That way we don’t care about the company’s costs of doing business and our government doesn’t need to make wild-assed guesses and averaging calculations to deem a production total.

Mr. Premier, you have two excellent reports on royalties now but neither of them adequately answers the single most important and fundamental question on the minds of Albertan…are we getting our fair share. Until that is answered authoritatively and authentically with information and evidence to back it up the job is not done and the foundational question is not answered.

Financial "Masters of the Universe" Are They Committing Crimes Against Humanity?

I have been mulling this Blog post for a week now trying to find the balance between containing my anger and express my angst due to the economic circumstances created by the abuses perpetrated by certain financial institutions - mostly in the United States.

The developed world economy is about to go into a vicious downward cycle of recession that has been caused by the greed, selfishness and hubris of the “Masters of the Universe” types in the financial services sector, particularly in the USA and triggered by the sub-prime mortgage fiasco and meltdown.

It is not just the greed and short term selfishness of the mortgage/lending business that was written for too many folks who had no hope in hell of handling the initial debt – never mind the rate bumps built into the deals. There is the culpability due to the wanton negligence and possible fraudulent willful blindness of so-called “independent” debt rating agencies who ranked these junk loans a solid and who were paid by the very perpetrators of the scams in the first place.

The investment banking and commercial banking division and separation after the Depression was done for a reason. But it has been inconvenient and avoided in generating the enormous fees and bonuses inherent in the short run short term thinking of these greedy bastards who were in for the fast buck and screw the consequences to the rest of us.

The high priests of the free market who sell us the concept that open markets are the best arbiters of fairness, openness and determinate of value are undoubtedly charlatans and likely crooks in many instances.

The government’s use federal reserve systems have been bailing them out in the Billions of taxpayers money – as the write-offs pile up within big-name financial institutions that are (were) some of the most respected and revered in our world view.

Now we will see the pendulum swing away from free markets into regulated financial institutions where realities will be tough government regulation that run them like utilities. OK by me but there is another “catch.” With the gutting of governments buy the likes of Thatcher, Reagan, and the Bushes…and Harper, Klein and Harris if you want to come closer to home…and you should.

I wonder, do any of these governments still have the technical talent and expertise plus the political wisdom and energy in place to exercise the resilience and robustness of political will needed to do the job? I don't relish this alternative any more than I do the meltdown caused by the sub-prime financial fisco caused by idiots who are noted for their supreme self-absorption and selfishness instead of the common good.

The UK is under as much pressure as the US in htis regrd and, as a result, Prime Minister Brown is a spent political force...stick a fork in him...he is done! Bush is out of his depth and done like dinner too – and his Canadian "mini-me," buddy Steve Harper is not strong enough politically, policy or character-wise to cut it in the face of the pending disaster...and Canada has have no one in the wings politically to take over either.

The Democratic presidential race is internally destructive and both candidates are actually avoiding dealing with the real economic policy issues in the campaign and will continue to do so until after the election in November. McCain is just another Bush with an Eisenhower perspective who is fimly embedded in the 1950's and '60's who readily admits to not knowing much about economics anyway.

This means there are many months to go before anyone in America can really wrestle with this politically and with practical policy alternatives...even if they had someone win the election who is capable enough to do the economic job. The Americans are already in a recession and it is only a dirty little secret to the authorities because everyone else in the world already knows this truth. The "authorities" have to stay in denial to stave off the inevitable admission of reality because this is an election year and they dare not be seen as telling the truth under such circumstances.

The financial sector Masters of the Universe who are involved in running the private sector financial markets, who have also enabled, aided and abetted this travesty, and soon to be tragedy, deserve to have their “balls” busted. Why? Because of their iresponsible disregard for the common good while they manipulate the rules to gather accumulations of astonishing personal wealth through greed and possible corruption. Will it happen? Not likely.

It will only happen if we have an effective, forthright, strong and activist government leadership once again. We need political leadership who will undertake to regulate and “unfix” the “fix” that has been “in” on the public. The common wisdom about the preference for the so-called “free markets” and the "professional" managers, who have been allowed to abuse their privileges and avoid responsibility and accountability is no longer a myth - it is a lie!

In wars we have a concept of crimes against humanity and we try and even execute the guilty. These greedy bastards in these financial crimes are damn lucky the concept does not transfer to the damage that they have done against the economy and the human condition for purposes their own prosperity, power and personal purposes.

Now we will have the likely alternative possibilities of inept or fascist strong-man government who would take over and perpetrate more variations-on-a-theme abuses on the public. Unless citizens smarten up and re-engage in politics in a purposeful, informed and meaningful way we will continue to suffer abuse from private sector or public sector idiots who both abuse the system...and us!

Notes From London

Hello and sorry for so few posts as of late. I am on vacation in London and I have had “better things to do.”

There are some interesting parallel observations on what is happening in England and the US around the economy, leadership and Iraq. The anxiety over a recession is palpable here. Housing prices are plummeting, caught in the American sub-prime mortgage fiasco fall out and inflation is taking hold.

The future of the military involvement in Iraq is under debate but not an open question in reality…the Brits are in for the long haul and may be coming more engaged in Afghanistan too. There is some sense of shock and dismay over allegations of Iraqi prisoner abuse that are in the hands of the British military. While the Americans mollify their consciences by saying if they do something to a prisoner like water boarding, it can’t be torture…because, as Dubya says…”America does not torture prisoners. “

The Prime Minister is suffering from declining respect and confidence too. The media makes more of his getting “lost” (the Queen’s “observation” on an open microphone) at a recent state dinner; mistakenly thinking he was to be in a receiving line versus when he was to be seated at the head table.

All this unease and nervousness about where the world of the Brits is going is caught in the mortifying mess in the opening of Heathrow’s new Terminal 5. A magnificent botch up of monumental proportions that further undermines the confidence of a nation that brought us the Industrial Revolution. The chatter on the street and in the cafes is all about how embarrassing the Terminal 5 fiasco is for the reputation of England in the world.

Seems to me the angst over Terminal 5 as a national humiliation is simple transference. The sense |I get is that London at least is prepared to focus on some relatively meaningless management mistakes like Terminal 5 so they don’t have to face the stark reality of the really big and looming monsters under the national bed.

Off for a tour of Spencer House…and China's Terracotta Army display at the British Museum - BFN

Hillary Picks Hubris and Hyperbole Over Honesty and Honour

When the phone in the White House rings at 3:00 am I don't want the President of the United States of America and the Commander in Chief of the most powerful military on the planet not remembering what was talked about...intentionally or otherwise.

I don't what hyperbole to pass for honesty. And I sure don't want another liar in the White House who will continue to abuse the office by also making up facts as a means to justify a political end.

This is not an honest mistake. It is a fundamental character flaw.

Bill Richardson Tells Us Why He Endorses Obama

Bill Richardson breaks the mould of old-style politics and speaks his mind and stakes out a new territory of inclusive leadership. He brings a depth of experience in foreign policy and the United Nations.

Cynics will say this is Richardson's bid for VP - I am for that.