Here is a very insightful article on line and from the DOB magazine on the impact of the oil industry growth at any cost mentality. Nice to see this perspective being published in an industry publication. Maybe more in the energy sector will come to realize that what they are enjoying is not good for everyone. This article is a testimony to that reality…and written from a Calgary consciousness.
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October, 2007
Alberta Royalty Review
Fairness And Envy: Human Factors That Fuel The Royalty Debate
By Mike Byfield
Six months ago, the topic of higher petroleum royalties rarely cropped up in coffee shop chatter or the mass media. Now most Albertans are aware of the subject, and a large majority appear to favour drawing more energy dollars into the public treasury. "I'd like to see more funding for education and environmental protection," says Bertram Rampersaud, a Calgary masseur and father of four. "I'm not too concerned about hurting the oil and gas business, it's very rich. The people who drive those Porsches and Ferraris will still be parking them in their driveways after the province collects more money."
A handful of randomly chosen individuals - interviewed in Calgary's 17th Avenue Hard Disk Caf� and the Chinook Mall - conceded without exception that they knew little about Alberta's royalties system. Their attention focused mainly on high salaries and bonuses, cited repeatedly as irrefutable evidence of the petroleum industry's wealth. "I'm no expert in this field but I think the oil companies will make money whether or not royalties are raised," says Don Ward, who markets medical equipment to hospitals and clinics.
Several interviewees prefer to reveal only their first names. Among them is Donna, an energy service company bookkeeper who comments, "My husband and I have known a number of managers in the oil and gas industry, some of them as neighbours. Every one of them has made a fortune. Even when they got laid off in the busts, they got paid a bundle each time and none was ever out of work for more than a couple of months. Please don't tell me that those companies can't afford to contribute more to the community."
The prospect of an economic slowdown doesn't much perturb Stan, a construction estimator. He believes the oil and gas boom has intensified Calgary's cost of living, traffic jams and crime rate. "Service has gotten much worse. The buses are so late that it's a joke. Overall, our quality of life has deteriorated drastically in the past few years, especially for anyone who isn't pulling in big money," says the semi-retired builder. He also notes that Alberta's economy remains manufacturing-poor and overdependent on the energy sector.
Joanne, a middle-aged executive secretary with an oilfield manufacturer, says her employers have made personal fortunes since oil prices began surging three years ago. Although the firm moved into the red recently, she suggests that higher royalty payments from producers might help spread wealth more evenly. "I'm all for rewarding hard work, really I am. But there should be more balance. A single mom raising a couple of kids is working just as hard as anyone."
Bernice is a veteran administrator with a municipality outside Calgary. "Local governments have been struggling so hard for a long time to keep pace with the growth," she says. "The petroleum industry has new equipment and they spend very freely. If the province shares its extra royalty revenue with local governments, the result would be better for everyone."
David sells safety gear, mostly to oil and gas clients. "My sales are still okay but less than last year for sure. I think the companies are regrouping now. They're still building a lot of rigs, it looks to me like some big projects are being prepared," says the thirtyish Calgarian. He does not favour higher royalties, though. "Governments get too much money as it is. They're wasteful and higher royalties would just encourage more waste."
In fact, skepticism is common concerning the likely benefits of higher provincial oil and gas revenues. "The companies will lay off people to protect their profits so I doubt that the there'll be any overall benefit to ordinary Albertans," cautions Don Ward. Rampersaud agrees, "It would be wonderful if my children would get a better education but very little of that money is likely to get through to families that feel fortunate to go out for pizza once a week," the masseur comments.
Despite that cynicism about who benefits from public sector spending, polling by Leger Marketing over the past month indicates that 88% of Albertans favour higher royalties. Premier Ed Stelmach's personal popularity has risen to 45% on the strength of this issue, up from 39% in June. Two thirds indicated support for a 20% increase in oil and gas royalties and other recommendations from the recently released report of an Alberta royalty review panel. The industry's response - that higher royalties could trigger an economic downturn - does not appear to have generated much public alarm.
Brent Applegate, technical director for a roofing materials manufacturer, acknowledges that higher royalties could prompt a pullback in new capital investment. "Housing prices in Calgary are already off by 10% over the past few months and we've never seen so much new product for sale," says the former president of the Canadian Association of Home and Property Inspectors. "Prices could go quite a bit lower if the energy sector retreats in terms of new investment." On the other hand, Applegate suggests that lower house prices would improve affordability and he personally leans toward a modest raise in royalties. "The oil isn't going to go anywhere, it will likely be worth more later in any case and the producers will come back."
Norman Ward (who's not related to Don, above) wrote an oil and gas royalty review for the Western Stock Growers' Association (WSGA) earlier this year. The rancher recognizes that Alberta's economy could take a steep nosedive if the provincial government drives out too much new investment. "I haven't forgotten the 1980s, when the population of Brooks fell from 8,000 to 4,000," the rancher remarks. "Because energy and agriculture are entwined in so many ways, higher royalties could have both good and bad effects on our industry."
Specifically, the WSGA wants petroleum producers to pay market value (as opposed to agricultural value) for surface rights. "If the province takes a lot more money, agricultural operators are not likely to get more," predicts Ward, who sits on the association's board of governors. On the other hand, he notes that oil and agriculture compete directly for labour, machinery parts and some other services. "If the oilsands and drilling back off, the guy who's been making $40 an hour in the patch will work on a ranch for $15," the southern Alberta rancher says. "On balance, I'd estimate that what's bad [financially] for oil and gas probably benefits our industry."
Municipal politicians are campaigning for their upcoming election on October 15. Morris Flewwelling, running for his second term as mayor of Red Deer, says citizens of his city have distinctly mixed feelings about higher royalties. "Everyone sees big money being made in oil and gas. We've seen young businessmen who've accumulated millions in Red Deer, and no one wants the government to leave public money on the table," he points out.
On the other hand, the mayor acknowledges that oil and gas underpins much of Red Deer's economy. "No one wants the government to cripple the oil and gas industry. My own sense is that the balance is tipped slightly toward the energy sector, although I have no clue where the right point actually lies," Flewwelling says. "People are still confident that Stelmach will figure that out for them and make the right call."
Wayne Ayling, hitting the hustings for a third term as mayor of Grande Prairie, says voters seem pleased that Stelmach has conducted an unfettered, open review of royalties rather than cut an inside deal with the industry. On the other hand, it's clear to him that the main players on both sides "need to go into a room and make a consensual change. No one wants a war." Ayling does not feel that the popular temper has reached a boiling point which might impede a rational economic decision on the part of politicians. "As I go door knocking around the city, the royalties issue has not come up," the mayor reports.
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Tuesday, October 09, 2007
TSX Presidents Tries To Reassure Alberta's Energy Sector on Royalties
Copied below is an interesting bit of advice that the conventional oil and gas sector in Alberta was being given by the President of the TSX today.
Notice in these comments there is no mention of social license to operate, corporate social responsibility, environmental responsiveness, reclamation responsibility, concerns over fragmentation of the land and destruction of habitat. There are no comments about the need for conservation, new technology adoption, enhanced community relations and civic engagement or anything at all about integrated land management and the overall sustainability of the industry in the normal marketplace thrust and parry of the marketplace in these comments.
If this industry wants "stable, transparent and predictable policy and regulatory frameworks," and they should, they have a lot more issues to consider beyond just “listing, financing and trading.”
Albertans are reading the “Our Fair Share” Royalty Review Report and the Auditor General’s recent report and they are going to be demanding a much higher standard – from both the conventional energy sector and the government of Alberta.
TSX Venture Exchange President Speech To Small Explorers And Producers Association Of Canada (SEPAC)
09/10/07
In remarks today to the Small Explorers and Producers Association of Canada (SEPAC), TSX Venture Exchange President Kevan Cowan said TSX Group’s exchanges have made a positive contribution to the energy sector in listing, financing and trading. He offered these comments on the recent recommendations from the Royalty Review Panel. ”A stable, transparent and predictable policy and regulatory framework is key to the success of any industry sector. As you all know, providing a stable, predictable and clear business environment is key to the success of
Alberta's oil and gas sector and an important objective for the province's overall economy. We are confident that the Alberta Government will carefully review the Royalty Review Panel's recommendations and continue to enhance the investment climate for this province's key industrial sector.”
He also explained to the SEPAC members that TSX Venture Exchange is well-positioned to represent the interests of junior companies. “We have the advantage of being part of a larger group – an international leader in financial markets. At the same time, we are focused on the needs of small companies and we understand the oil and gas sector. I look forward to working with your association on public policy issues of concern to the industry, and to assisting those of you who are seeking ways to raise capital.”
Notice in these comments there is no mention of social license to operate, corporate social responsibility, environmental responsiveness, reclamation responsibility, concerns over fragmentation of the land and destruction of habitat. There are no comments about the need for conservation, new technology adoption, enhanced community relations and civic engagement or anything at all about integrated land management and the overall sustainability of the industry in the normal marketplace thrust and parry of the marketplace in these comments.
If this industry wants "stable, transparent and predictable policy and regulatory frameworks," and they should, they have a lot more issues to consider beyond just “listing, financing and trading.”
Albertans are reading the “Our Fair Share” Royalty Review Report and the Auditor General’s recent report and they are going to be demanding a much higher standard – from both the conventional energy sector and the government of Alberta.
TSX Venture Exchange President Speech To Small Explorers And Producers Association Of Canada (SEPAC)
09/10/07
In remarks today to the Small Explorers and Producers Association of Canada (SEPAC), TSX Venture Exchange President Kevan Cowan said TSX Group’s exchanges have made a positive contribution to the energy sector in listing, financing and trading. He offered these comments on the recent recommendations from the Royalty Review Panel. ”A stable, transparent and predictable policy and regulatory framework is key to the success of any industry sector. As you all know, providing a stable, predictable and clear business environment is key to the success of
Alberta's oil and gas sector and an important objective for the province's overall economy. We are confident that the Alberta Government will carefully review the Royalty Review Panel's recommendations and continue to enhance the investment climate for this province's key industrial sector.”
TSX Group is a leader in the oil & gas sector - more oil & gas companies are listed on Toronto Stock Exchange and TSX Venture Exchange than any other exchange in the world. At the end of June 30, 2007, there were 434 oil & gas companies with a total market capitalization of $544.9 billion listed on Toronto Stock Exchange and TSX Venture Exchange.
He also explained to the SEPAC members that TSX Venture Exchange is well-positioned to represent the interests of junior companies. “We have the advantage of being part of a larger group – an international leader in financial markets. At the same time, we are focused on the needs of small companies and we understand the oil and gas sector. I look forward to working with your association on public policy issues of concern to the industry, and to assisting those of you who are seeking ways to raise capital.”
Edmonton Chamber of Commerce Takes a Position on the Alberta Royalty Review Report.
Edmonton Chamber of Commerce has taken a public position on resource royalties, and I like it. They step up to the plate and into the fray.
It takes the conservative position by asking the government of Alberta to “verify” the Review Panel’s findings on the potential economic impacts of their recommendations. Since the data used was all supplied by the government and the personnel and consultant data was all from government sources or those previously used by the government, verification should not be a problem.
Next the Edmonton Chamber confirms and agrees with the “Our Fair Share” Royalty Review goal of a simplified and very specific royalty framework. The energy industry in Alberta is changing and has many aspects from conventional oil and gas, to oil sands to coal bed methane. One royalty regime will not fit all but that does not mean the systems cannot be simplified.
They next ask for a staged and measured approach to rate changes and to provide more certainty to say the new rates will have a commitment for a certain period of time. That is a safety valve for some aspects of the industry to adapt, like the conventional gas sector for instance. The stated commitment of time for the rates before another review is a bit unrealistic but one can understand the motivation. On one side certainty for no change in rates for say 10 years will help industry with certainty. On the other hand we are in a market-based commodity reality where prices can drop as much and as often as the rise. In the 80’s under Premier Getty we actually say lots or rate cuts and holidays due to low commodity prices. So it may be a better model to have a formula that ties reviews to prices in case they drop but keep the severance tax in case they rise.
The last request of the Edmonton Chamber is the simple yet eloquent kicker! “Respond to any lapses in stewardship of the resources.” That is the elephant in the room for government and it goes to the heart of the Auditor General’s Report. This is not business telling government how to do its “business.” But it is saying they better attend to the business of government – especially the stewardship aspects – much better. LOVE IT!
The brilliance of the Edmonton Chamber’s position is that they also focus on what to do with the extra revenues the royalty increases will generate. They say cut taxes by 10% on the personal and 1% on corporate taxes. They are a Chamber of Commerce so this recommendation is to be expected. However, the Edmonton Chamber also says to use the additional money to “improve infrastructure” with a focus on high growth regions in the “northern extraction and processing regions.” That means the Wood Buffalo/Fort McMurray region that has been ignored for 10 years. It also means the Edmonton region, without serious co-ordinated regional planning around the various growth demands the new upgraders will cause, this city will turn into a new Fort McMurray - only this time the problems will be affecting ten times the population. It could be devastating.
Finally they push for some protection of the environment, again an idea contained in the Bill Hunter authored “Afterword” in the back of the “Our Fair Share” Royalty Review Report.
I have the odd quibble but overall I have to congratulate the good work and good ideas from the Edmonton Chamber of Commerce.
It takes the conservative position by asking the government of Alberta to “verify” the Review Panel’s findings on the potential economic impacts of their recommendations. Since the data used was all supplied by the government and the personnel and consultant data was all from government sources or those previously used by the government, verification should not be a problem.
Next the Edmonton Chamber confirms and agrees with the “Our Fair Share” Royalty Review goal of a simplified and very specific royalty framework. The energy industry in Alberta is changing and has many aspects from conventional oil and gas, to oil sands to coal bed methane. One royalty regime will not fit all but that does not mean the systems cannot be simplified.
They next ask for a staged and measured approach to rate changes and to provide more certainty to say the new rates will have a commitment for a certain period of time. That is a safety valve for some aspects of the industry to adapt, like the conventional gas sector for instance. The stated commitment of time for the rates before another review is a bit unrealistic but one can understand the motivation. On one side certainty for no change in rates for say 10 years will help industry with certainty. On the other hand we are in a market-based commodity reality where prices can drop as much and as often as the rise. In the 80’s under Premier Getty we actually say lots or rate cuts and holidays due to low commodity prices. So it may be a better model to have a formula that ties reviews to prices in case they drop but keep the severance tax in case they rise.
The last request of the Edmonton Chamber is the simple yet eloquent kicker! “Respond to any lapses in stewardship of the resources.” That is the elephant in the room for government and it goes to the heart of the Auditor General’s Report. This is not business telling government how to do its “business.” But it is saying they better attend to the business of government – especially the stewardship aspects – much better. LOVE IT!
The brilliance of the Edmonton Chamber’s position is that they also focus on what to do with the extra revenues the royalty increases will generate. They say cut taxes by 10% on the personal and 1% on corporate taxes. They are a Chamber of Commerce so this recommendation is to be expected. However, the Edmonton Chamber also says to use the additional money to “improve infrastructure” with a focus on high growth regions in the “northern extraction and processing regions.” That means the Wood Buffalo/Fort McMurray region that has been ignored for 10 years. It also means the Edmonton region, without serious co-ordinated regional planning around the various growth demands the new upgraders will cause, this city will turn into a new Fort McMurray - only this time the problems will be affecting ten times the population. It could be devastating.
Finally they push for some protection of the environment, again an idea contained in the Bill Hunter authored “Afterword” in the back of the “Our Fair Share” Royalty Review Report.
I have the odd quibble but overall I have to congratulate the good work and good ideas from the Edmonton Chamber of Commerce.
Monday, October 08, 2007
When It Comes to Alberta's Energy Resources, Whose "Golden Goose" Is it Anyway?
The old Klein government ruled by Steve West values was so suspicious of academics and expert advice one could almost say they were anti-intellectual.
Times have changed and this insightful editorial piece in the Edmonton Journal and the Calgary Herald by from U of C economics professors is living proof that times are a changin'.
Lets hope the Stelmach version of progressive and conservative policy and politics has a more informed and enlightened approach.
Times have changed and this insightful editorial piece in the Edmonton Journal and the Calgary Herald by from U of C economics professors is living proof that times are a changin'.
Lets hope the Stelmach version of progressive and conservative policy and politics has a more informed and enlightened approach.
Toronto Investment Banker Say Alberta's Auditor General's Comments on Royalties is Outside His Mandate
I see in the Edmonton Journal editorial pages today another institutional broker has taken a public position on the Alberta energy royalties. This time at least the article is not calling Albertans stupid but instead they have targeted Fred Dunn, the Alberta Auditor General.
The writer is reported to be a Calgary broker for Westwind Partners Inc., a Toronto based investment bank, which according to their website, just sold out to an American firm.
The article is accusing Dunn of commenting “well beyond his mandate” and saying he is “irresponsibly poured gasoline on the funeral pyre of Alberta’s free-market boom.” Pretty romantic prose for a broker.
For clarity Section 29 of the Auditor General Act says: "The Auditor General may, at the request of a department, Provincial agency or Crown‑controlled organization or any other organization or body of which the Auditor General is the auditor, provide advice relating to the organization, systems and proposed course of action of the department, (emphasis added)Provincial agency or Crown‑controlled or other organization or body."
Dunn is accused of over-reaching his authority by commenting and assessing the quality of our political leadership. A plain reading of the AG Report on the Department of Energy royalty system audit shows Dunn is clearly within the scope of the Auditor General Act. As for leadership assessment, Dunn merely outlines the role of the Minister of Energy at page 91 when he says:
“The Minister of Energy is legislatively responsible for designing, operating, monitoring and adjusting royalty regimes. While the Minister takes advice for a variety of stakeholders and needs authorization (Cabinet approval) to make regime changes, he has the final responsibility for the stewardship of Alberta’s oil, gas and oil sands resources. The Department of Energy supports him by analyzing royalty issues and regimes and implementing royalty policy.”
Dunn goes further to explain and confirm he is operating and commenting within his mandate in his report also at page 91. Noting that the Department’s advice to the Minister “beginning at least three years ago” that the Alberta royalty share had “fallen below stated government revenue targets” and that an additional $1B per year in royalty payments could be charged “without stifling industry profitability.” This is just stating a fact.
In the paragraph on page 92 of the Auditor General’s Report, entitled “Why have changes not been made?” Dunn is again careful to point out “the Minister of Energy has final responsibility and is accountable for these decisions.” (on royalty regimes). Dunn then appropriately notes “Our audit mandate does not extend to auditing or judging policy decisions such as changes to the royalty regime. However, we do report on systems where sound analysis of Albertans’ most valuable physical asset does not appear to have le to timely action.”
Dunn then goes on to make five recommendations directly related to “…strengthening the Department’s royalty review system and enhance accountability for the resources stewardship.”
So J.P. Veitch I disagree that Dunn is assessing political leadership in his audit. He is making systemic recommendations for more accountability, transparency, and better stewardship of Alberta’s “most valuable physical asset” and that is within his legislated mandate.
Citizens of Alberta will assess Dunn’s report and its findings. We are already looking at our government’s actions as our Trustees of our natural resources. Just read the letters to the editors of Alberta’s newspapers and the comments on the Blogosphere for proof of that happening. Citizens’ will assess and judge the quality of our political leadership and resource stewardship and decide what to do in the next election. Albertans are fully engaged and not amused by the actions of the industry and very unhappy about the exercise of our government’s role and responsibility as well.
One final point on the Westwind Partners Inc. piece needs comment. That is the allegation that the Royalty Review Panel is “engaged in visiting editorial boards across the province, spending taxpayers’ money in a public relations exercise designed to promote its view of the world…” I have spoken with the Chair of the Royalty Review Panel, Mr. Bill Hunter and can assure J.P. Veitch that the panellists are commenting and clarifying the issues in their “Our Fair Share” report on their own time at no charge to the taxpayers of Alberta.
On the other hand I fully expect the energy industry’s current full-court-press public relations campaign and lobbying costs will be designated by them as project costs. As a result the lobbying and PR money being spent by the industry to scare Albertans will be used to reduce their project net profits and thereby reduce Albertan’s royalty share as a result.
Remember Albertan’s royalties are calculated on NET PROFITS only. In short, Albertan’s should not be surprised if their non-renewable resource tenants are charging all of their current lobbying costs to the citizens of Alberta.
Ironic wouldn’t you say?
The writer is reported to be a Calgary broker for Westwind Partners Inc., a Toronto based investment bank, which according to their website, just sold out to an American firm.
The article is accusing Dunn of commenting “well beyond his mandate” and saying he is “irresponsibly poured gasoline on the funeral pyre of Alberta’s free-market boom.” Pretty romantic prose for a broker.
For clarity Section 29 of the Auditor General Act says: "The Auditor General may, at the request of a department, Provincial agency or Crown‑controlled organization or any other organization or body of which the Auditor General is the auditor, provide advice relating to the organization, systems and proposed course of action of the department, (emphasis added)Provincial agency or Crown‑controlled or other organization or body."
Dunn is accused of over-reaching his authority by commenting and assessing the quality of our political leadership. A plain reading of the AG Report on the Department of Energy royalty system audit shows Dunn is clearly within the scope of the Auditor General Act. As for leadership assessment, Dunn merely outlines the role of the Minister of Energy at page 91 when he says:
“The Minister of Energy is legislatively responsible for designing, operating, monitoring and adjusting royalty regimes. While the Minister takes advice for a variety of stakeholders and needs authorization (Cabinet approval) to make regime changes, he has the final responsibility for the stewardship of Alberta’s oil, gas and oil sands resources. The Department of Energy supports him by analyzing royalty issues and regimes and implementing royalty policy.”
Dunn goes further to explain and confirm he is operating and commenting within his mandate in his report also at page 91. Noting that the Department’s advice to the Minister “beginning at least three years ago” that the Alberta royalty share had “fallen below stated government revenue targets” and that an additional $1B per year in royalty payments could be charged “without stifling industry profitability.” This is just stating a fact.
In the paragraph on page 92 of the Auditor General’s Report, entitled “Why have changes not been made?” Dunn is again careful to point out “the Minister of Energy has final responsibility and is accountable for these decisions.” (on royalty regimes). Dunn then appropriately notes “Our audit mandate does not extend to auditing or judging policy decisions such as changes to the royalty regime. However, we do report on systems where sound analysis of Albertans’ most valuable physical asset does not appear to have le to timely action.”
Dunn then goes on to make five recommendations directly related to “…strengthening the Department’s royalty review system and enhance accountability for the resources stewardship.”
So J.P. Veitch I disagree that Dunn is assessing political leadership in his audit. He is making systemic recommendations for more accountability, transparency, and better stewardship of Alberta’s “most valuable physical asset” and that is within his legislated mandate.
Citizens of Alberta will assess Dunn’s report and its findings. We are already looking at our government’s actions as our Trustees of our natural resources. Just read the letters to the editors of Alberta’s newspapers and the comments on the Blogosphere for proof of that happening. Citizens’ will assess and judge the quality of our political leadership and resource stewardship and decide what to do in the next election. Albertans are fully engaged and not amused by the actions of the industry and very unhappy about the exercise of our government’s role and responsibility as well.
One final point on the Westwind Partners Inc. piece needs comment. That is the allegation that the Royalty Review Panel is “engaged in visiting editorial boards across the province, spending taxpayers’ money in a public relations exercise designed to promote its view of the world…” I have spoken with the Chair of the Royalty Review Panel, Mr. Bill Hunter and can assure J.P. Veitch that the panellists are commenting and clarifying the issues in their “Our Fair Share” report on their own time at no charge to the taxpayers of Alberta.
On the other hand I fully expect the energy industry’s current full-court-press public relations campaign and lobbying costs will be designated by them as project costs. As a result the lobbying and PR money being spent by the industry to scare Albertans will be used to reduce their project net profits and thereby reduce Albertan’s royalty share as a result.
Remember Albertan’s royalties are calculated on NET PROFITS only. In short, Albertan’s should not be surprised if their non-renewable resource tenants are charging all of their current lobbying costs to the citizens of Alberta.
Ironic wouldn’t you say?
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