Stelmach Plans a Live Webcast Thursday Afternoon on His Government's Response to the Royalty Review Report

Looks like my armchair quarterbacking post last week on what would transpire this week on the "Our Fair Share" Royalty Review process was pretty accurate. I said the Stelmach government would do their final government policy decision making today, as I predicted. In the TV presentation tomorrow the Premier will only deal with “principles” around the royalty changes, as I predicted.

On Thursday there will be the big event. That will have live streaming video coming out of Calgary (the belly of the beast?) of the Premier and the Energy Minister outlining the government’s response to the “Our Fair Share” Royalty Review Report.

That live web cast is scheduled for 3 pm with phone calls able to come into the event from all over North America. For 2 hours prior there will be a media lock up (just like in a Budget) so they can go over the documents and get briefings on the response details. I called that too but not the live streaming video – that is cool.

Friday will be media frenzy feeding reaction time and on Saturday the Premier faces his party in a Policy Conference to explain the whats, wherefores and the whys (wise?) of the response.

I see five possible outcomes on Thursday’s event and I will blog on them and some possible political implications for each on Wednesday morning.

I have no idea what the Premier is going to say except there will be higher royalties since "the status quo is not an option." What else is included is being closely held - as it should be. In Ralph's day something like this would have had trial balloons floating for weeks before. They like to set the expectation levels "properly" (meaning low) and then actual announcement was pretty pro forma.

Stelmach is a very different politician. He is not manipulating the media message, nor is he preprogamming the expectation levels. His challenge will be to bring clarity out of the complexity. His personal challenge is to communicate the plan effectively. He sees all the nuances and implications of a policy issue and he is comfortable exploring all of them - in public, usually orally and rambling...kind of like this blog - on occasion.

This is going to be interesting. I smell open and transparent and accountable democracy in the air...and it is about time.

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.

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.

Cambridge Strategies' Most Recent Column for LaPresse

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

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

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

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

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

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

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

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

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

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

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

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

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

No Royalty Review Panellist Has Broken Ranks on the Recommendations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CAPP Incorrectly Claims "Many of the Authors Appear to No Longer Support"...the Royalty Review

Honourable people can disagree…and it happens all the time. Pierre is a knowledgeable and an accomplished spokesperson for the energy sector in Alberta. I know Pierre Alvarez the President of the Canadian Association of Petroleum Producers to be an honourable man. However, today I have to disagree with him, based on his letter to the Editor in the Edmonton Journal today.

The CAPP response is a classic example of “framing an issue” to fit a preconceived position and to be selective in presenting the facts. Mr. Alvarez takes two points and seeks to make them out to be major issues that ought to result in a conclusion that the “Our Fair Share” Royalty Review process and report is fatally flawed.

Firstly he suggests there are “revelations” from earlier comments of review panellists to be distancing themselves for the reports recommendations as they relate to elimination of deep gas and enhanced royalty programs. In fact the Panellist’s comments were that the Royalty Review was not intending to eliminate the deep well gas incentives and confirming that they ought to continue.

On page 68 of the Royalty Review this incentive is described as a lower royalty rate for deeper wells that do not achieve productions rates sufficient to compensate for the additional drilling costs. The Review notes the program is scheduled to end August 31, 2012.

On the same page the Review deals with the EUB flare management framework designed in 1996 to “reduce gas flaring volume reduction targets from 1996 base levels by 50% for 2002. This program provides a royalty waver “to natural gas that is produced from oil wells where it is uneconomic to conserve.” I for one, have to wonder if that is an appropriate policy to continue in light of the current environmental concerns and context in Alberta.

Otherwise the Review notes there are a bunch on incremental programs in the conventional gas area that are “patches on patches” designed to address specific problems and situations. The royalty regime is said to “not appropriately reflect the unique costs of certain developments or to facilitate special policy direction determined by government.”

The goal is to make the royalty regime simpler and CAPP’s Technical Review section 2.1.2 agrees with that recommendation.

The letter also deals with comparisons with Norway and Alberta and I will save that for another post.

Finally Pierre makes a huge leap in the final paragraph of his letter to conclude that “It was only three weeks ago that Albertans were asked top accept a report that many of its authors appear to no longer support.” Boy that is a stretch of the facts and a misrepresentation of the reality. The Panel has clarified one issue on its continuing support for deep well subsidies and made some minor revisions to correct some graphs in the report. That does not suggest that “many of its authors no longer support” the review recommendations.

Citizens are not going to take spin as gospel and it behoves the industry to avoid it at all costs. This is especially true if the industry wants to rehabilitate the public’s confidence and convince Albertans’ that they have the right stuff to be worthy of a continuing social license to operate their businesses on the public’s property.

More False Assumptions Over Alberta's Royalty Review Report.

Interesting piece in the National Post suggesting the Canadian oil and gas stocks are not “surging” as they apparently are in the US. The blaming is being put on the “Our Fair Share” Royalty Review, in part.. It also mentions that the loonies’ rapid rise (more correctly put – the US dollars significant decline) in value being up 20% in 2007 already and breaking parity with the US may have something to do with this.

The Canadian energy sector stock prices have been at or near record price levels before and after the royalty review report. Interesting today that Suncor is trading today over $103.00 – over the record high of $100.00 it enjoyed just before the Royalty Review came out.

People are entitled to their own opinions – they are not entitled to their own facts. In fairness, things are moving pretty quickly in the world these days and everything is so interlinked it is difficult to isolate causes and effects.

That said, it is at best a stretch to blame some minor stock volatility on a review report that has not been commented on by the government yet. Just more scaremongering and political positioning as I see it.

The Chinese Are Coming! The Chinese Are Coming!

ALBERTA ENCOURAGES CHINESE INVESTMENT:
Oct. 1ALBERTA 17, 2007 (China Knowledge) – Canada's Alberta encourages China to increase its investment in the oil province with many oil sand reserves, said a senior official from Alberta on Tuesday. Iris Evans, Alberta's Minister of Employment, Immigration and Industry, revealed in a press meeting at the Canadian Embassy in Beijing, that the more Chinese investments are expected to pour in.

CHINA’S CITIC BIDS FOR BEAR STREANS STAKE: REGULATOR
BEIJING — — China's CITIC Bank Corp. Ltd. is bidding for a stake in Bear Stearns Cos. [BSC-N], a senior Chinese regulator said, in the first official confirmation of media reports that the state-run bank was a potential suitor for the smallest of Wall Street's five big independent brokerages.
Bear Stearns is among the institutions hardest hit by the U.S. subprime mortgage crisis, and Chief Executive James Cayne said earlier this month it would consider selling a stake to an investor from China or the Middle East if the deal created value.

ALBERTA IS GOING TO BE PLAYING A NEW ROLE IN THE GEOPOLITICAL REALITY AROUND ENERGY SUPPLY AND INVESTMENT: The new normal of globalization on markets and investments and the demand for energy in the developed and developing world will put Alberta's oil sands in the cross hairs of geopolitical strategic issues. We Albertans better beef up our Intergovernmental capacity.

Gary Mar going to be Alberta's guy in Washington is a good step in the right direction. There is lots more to be done and some changes need to be made - including changing the Minister - for us to be ready for this new normal.

More Good Marketplace News in Alberta's Energy Sector "...regardless of what happens with the royalty review."

Oops! More good news from the marketplace on oil sands investments. How could this be happening when there is so many who are warning that the Alberta sky is falling on the energy sector?

Synenco Energy (SYN/TSX) is reported to have had a 13% one day rise in share prices now at $11.37. One analyst tagging it as a player to “outperform” and has a target share price of $15 on this company. Synenco Energy holds a 60% interest in the oil sands play known as the Northern Lights Partnership and they will be the operator of the Northern Lights project. They also hold a 100% interest in another adjacent oil sand project. They are also active in developing an upgrader just outside of Edmonton. These guys are not bit players.

The really interesting info on the Northern Lights Partnership is the other 40% partner. That is the SinoCanada Petroleum Corporation, an indirect wholly owned subsidiary of Sinopec – the large China based oil company. Again we see more confidence in the Alberta energy sector from non-North American sources. Why is that?

Mr. Bouchard, an analyst with Raymond James is quoted in the Financial Post as saying “Based on our analysis, current trading levels simply don’t reflect the value of the assets – regardless of what happens with the royalty review. (emphasis added.)

Some business writers (including this National Post piece) are still of the opinion that the “Our Fair Share” Royalty Review has caused the Alberta energy sector to “have taken a hit.” I presume they are talking share prices mostly. There has been some share volatility, off record or near record highs for most companies since the release of the Royalty Review on September 18. That volatility has been in a relatively narrow range that is more likely tied to oil prices being up and down on a daily basis...and setting new record highs this week.

For some more perspective, I see in the Globe and Mail Report on Business today noted that 4 out of 5 of the TSX Index Lifters are energy companies – all of whom are engaged extensively in Alberta oil sands activity. Curious wouldn’t you say? The sky is not falling. It looks to me like it is raining money.

Marathon Oil is Buying Into Alberta - What Are They Thinking?

So Marathon Oil is clearly out of it. They are buying into the Alberta Oils Sands when the conventional “wisdom” is that the industry should run away from Alberta investment - at least according to some of the existing Alberta energy “players.”

They have been saying they can’t make a go of it with the second largest oil deposits in the world with oil at a record $86 per barrel and having to suffer with a province that imposes a stable democratic government with a strong currency, a skilled work force and located next to the largest market for fossil fuel energy use on the planet. That has to be a tough scenario in which to do business and make it work. Yes sir!

The “smart money” in the Alberta oil patch that is saying it is leaving Alberta and/or no longer investing because royalties will move from 25% of Net Profit to 33% of Net Profit. Yes that is a royalty based on Net Profits, meaning the dollars subject to royalties are not determined until after the projects have first paid all their operating costs including. They say that is 20% increase – which it is – but it really moves up 8 points and is based on net profits before taxes. Give me a break!

Marathon must be a fly-by-night operation run by a bunch of unsophisticated rubes to be going forward and investing in Alberta’s oil sands now of all times. Check out their website to see just how not true that is!

They operate in 18 countries and are engaged in exploration and production, including integrated gas, marketing and transportation and happen to be the 5th largest refiner in the United States. What are they thinking - coming into Alberta?

They should just ask Encana for advice to see how much of a mistake they are making by coming into the Alberta energy sector. Oh yes Encana has the “Our Fair Share” royalty review recommendation’s figured out all right. They are leading the mythological parade out of Alberta due to the Royalty Review which they say is destined to wrought devastation on the energy sector investment market for all Alberta for all time.

Get this. They said they were pulling out a $1B of capital activity in Alberta because of “uncertainty” caused by the royalty review. Get this too. Two weeks later EnCana said they are going to be investing a cool $1B into an oil sands play. Coincidence…I doubt it. Hypocrisy is more like it.

Investment actions speak louder than political intimidations in my book.

Marathon you better think twice about coming into the Alberta energy sector because of enterprises like Encana is allegedly doing the opposite. And whatever you do – don’t talk to Warren Buffett about investing in Alberta’s oil sands…he just may talk you into it.

Oil Sands Project Cost Double and CAPP Accuses the Royalty Review Panel of Using "Incorrect Costs!"

I have done a quick read of the CAPP Technical Review Executive Summary of the “Our Fair Share” Royalty Review Report. CAPP is a very professional and respected organization with expertise available in it and to it to do such a Technical Review of the “Our Fair Share” report. I, on the other hand, am just a layman, and have not yet read the full report. However, I do find some representations in the Executive Summary curious.

I don’t know on what basis they say “Flawed Data” and that “The Panel did not take into consideration all of the data made available to them through the review process.” How could they know that, even if it were true? How do they know what was available to the Review Panel and what was not considered? We need a bit more evidence of this allegation, and it may be provided I the body o f the Review. I will definitely be looking for it.

The Panel based their recommendations on “severely understated industry costs.” The accusation is they (the Panel) used as range of between $4 – 6 Billion for a typical oil sands project. CAPP claims, and rightfully so, that such projects are ending up costing between $10 – 11 Billion. However CAPP omits the fact that all of those costs are totally recoverable by the industry during the 1% royalty rate until full project recoupment. In fact this 1% royalty rate until all project productions costs are recovered means less rigour is put on management to review and reconsider a project when costs are doubling as would be the case in a normal business model.

At record oil prices many projects have fully recovered these excessive project cost overruns in as little as 4 years. In any event, it is Albertans who are actually paying for these extreme project cost overages by virtue of our deferred royalties. So why is industry taking issue with this a saying the Panel is making a mistake of using “incorrect costs?”

I am inclined to have such projects that will do not meet presented budget targets in the original EUB process for approval go back to the EUB to show why their original project budget was so inaccurate. It is Albertans, after all, who are paying for these additional costs because of the 1% royalty rate until all such project costs are recovered. Albertans get no say in how much a company decides to pay or overpay in the end, once the proponents have an EUB project approval. That makes little sense.

Why don’t we require such projects to do a study and hold a further hearing to satisfy the EUB on what the cumulative impacts and secondary consequences are from such cost overruns? What do they do to the availability and increased costs of trades, supplies, equipment and materials? What impact will such excessive project overruns have on the costs of other necessary projects like schools, roads and hospitals who have to compete on price with energy companies?

Perhaps a project that is so inaccurately budgeted should have to justify the additional costs and perhaps even have to adjust the timing of the project so they don’t skew the labour and construction costs for other sectors. The astonishing cost escalation of the 23rd Street Overpass in Edmonton to some $250M in less than a year is a case in point on how this behaviour affects other sectors. Property taxes will also have to go up in Edmonton to pay for this inflated overpass project costs. This is because of the increases caused by competition with energy projects for everything from labour, to supplies, equipment and materials.

So the energy projects can blithely pay whatever they wish so long as oil prices stay high and Albertans eventually pay such additional project costs by our deferred royalty regime. The taxpayer gets it in the ear again by increased taxes or borrowing costs for much needed public infrastructure or the local government end up deferring those other very necessary projects hoping prices will come down.

And in the face of this the Technical Review accuses the Panel of using “Incorrect Costs?” Ironic isn’t it!

Alberta's Oil and Gas Industry Has Some Public Perception Problems

There has been some mention in comments on this Blog that want to compare the energy industry and the forest sector in Alberta. We did a survey in 2005 of almost 3000 Albertans on behalf of the forest industry looking into what they needed to do to enhance their social licence to operate.


Forest v. Oil and Gas
Comparison of two important Alberta industries:
Percentage ranking of Excellent and Very Good Performance:
The first number is the forest industry, followed by the oil and gas sector:

Concern with long term sustainability of resources: 83.7 vs. 63.1
Demonstrates environmental planning and mtg: 80.0 vs. 63.9
Gets attention/support of government: 77.3 vs. 88.9
Supports research and applies technology: 80.5 vs. 87.3
Is accountable on how it uses forest lands: 69.7 vs. 51.2
Coordinates with other sectors, communities and users 62.0 vs. 54.9
Is aware and respects needs of forest wildlife 61.7 vs. 47.2

Part of the work we did was a comparison of Albertans impressions of the performance of the two industry sectors on some key criteria on responsible and sustainable business practices.

You can see from the table there is a statistically significant difference between the two industries in every aspect under review. The most significant perceptions about the conventional energy sector was the low ranking in awareness and respect of wildlife habitat, which was found to be one of the most significant value drivers for Albertans in the use of their forests.

The low level of the energy sector’s accountability in how it uses the forest is telling as well, especially when it is a fact that the oil and gas sector cuts down more Alberta trees each year than the entire Alberta forest industry.

On the other hand, the perceptions amongst Albertans are that the energy sector get much more attention and support form government than the forest industry. Given the differences in relative size and economic significance this is hardly a surprise. One positive perception comparison for the energy sector is its use of research and technology.

The key finding is that the forest industry is perceived as an overwhelmingly better resource steward than the energy sector. This perception is not becoming reality as some of the energy sector players have tried to scare and intimidate government and suppliers over the “Our Fair Share” Royalty Review.

A recent poll is showing 88% of Albertans think royalties in the energy sector should be higher. Our findings of 2 years ago illustrated the poor perceptions Albertans’ have of the energy sector’s resource management and stewardship responsibilities.

The new focused political pressures from the royalty review and the Auditor General, and the crystallizing impact they have had on engaging citizens, the energy sector may want to revisit its strategy about threatening to pull out investment that will only punish suppliers and local communities.

Warren Buffett Likes Alberta's Oil Sands As An Investment

UPDATE: August 19, 2008...Bill Gates and Warren Buffett visit the Alberta oil sands

Bad news for the Alberta oil sector doom and gloom propagandists - and it is coming from Warren Buffett. Buffett says he had spent time avoiding the oil sands as an investment. On Thursday in Toronto he told an international audience of 140 prominent investors from all over the globe he has changed his mind.

The Toronto Star story gives his reasons as follows:
"Buffett, who has made substantial resource investments this decade, after a history of avoiding them, is now interested in the Alberta oil sands. His rationale is that it is a known resource, says Hull, who manages money for clients of Berkshire Securities Inc., recently acquired by Manulife Financial Corp.

In contrast to speculative drilling, oil-sands projects are mining operations where the size of the reserves is known. One can calculate with relative certainty the breakeven requirements over 10 years. And production costs tend to drop as the extraction and processing technology improves. "

For those who say they are going to be pulling out of their oil sands related investment in Alberta because of the royalty review - call Buffett - he is coming into the market. As an Albertan I would welcome him.

For those of you who will be leaving us, presuming you were not scaremongering or merely pulling our legs - good bye. I presume you will be considering transferring your efforts to Venezuela's oil sands. The weather is nice there even if the political and investmate climate is not. But it is a free country - at least in Canada...so do as you wish.

Gore Wins Nobel Peace Prize

Way back in February I predicted that Al Gore would win both an Oscar and the Nobel Peace Prize this year. Congratulations Mr. Gore. I also called the selection of Ed Stelmach as the winner of the Alberta Progressive Conservative leadership and Premier of Alberta as well as Stephane Dion’s win of the federal Liberal leadership last December 2. So I am thinking of buy a deck of Tarot cards and turning professional.

In the meantime I am now predicting no fall federal or Alberta provincial elections. The only way we will get a federal election is if Harper forgets to put on a policy condom and does not practice safe-politics. There is no doubt Harper is intent on trying to screw Dion and if Mr. Harper doesn’t wear protection - an “accident” could happen.

That accident would result in an artificially induced premature election. The end result would a new born minority Dion government or a born-again minority Harper government. Another inevitable result of an election accident will be a serious possibility for some still born political careers for party leaders. That includes Mr. Harper’s leadership position. This could happen if he is perceived to have engineered an unnecessary election and as a result the nation turns on him…and I don’t mean the Quebec nation.

Steps and strategies are being planned to avoid the Conservative’s “con” of declaring everything being a “confidence vote” - starting with the Throne Speech. It would be funny and sad to see the Liberals being aggressive in the Throne Speech debate but ending up staying away from the vote so as not to bring down the Harper government and forcing an election.

It would be even funnier and even sadder if the Cons stayed away at the last minute from their own Throne Speech vote too. That would leave the Bloc and the Dippers to vote against it and thereby forcing an election. An election now is what Harper wants and by staying away from a vote on the Throne Speech – the Bloc and the Dippers alone could decide it is time for an election.

This game of vote extortion and political chicken over Harper’s push for an election is classic Harper and shows his penchant for clever politics. When partisan politics and personal power aspirations of the Cons and Mr. Harper over-ride the interests of the nation and its citizens this kind of absurdity can happen.

I am not predicting this turn of events…after all I am on a winning streak prognostication-wise and have to guard my reputation. However, I would not be surprised, only dismayed, to see Harper engineer his defeat on the Throne Speech with such tactics in order to make it look like someone else forced an election on him.

Harper has said everything his government will introduce in the next session of Parliament, starting next week, will be a confidence vote. Given Harper’s Cromwell-like lust for even more centralized political and personal power, if he doesn’t play this voting trickery with his caucus staying away from a vote next week, we can expect it sometime – anytime?

I will predict one thing, with this bullying attitude of Harper and his proclivity for power-grabbing political tactics, Canada can expect uncertainty and anxiety as the dominant over-arching reality for awhile.

Good government is almost always good politics. “Good politics” is almost inevitably bad government. This lack of good government and the excessive exercise of politics by tactics by the current Harper regime are not good for the nation and not good for the economy.

Stelmach Government Now Admits Concerns About Pace of Development

Premier Stelmach’s government has done the right thing by cancelling the lease deal with Oil Sands Underground Mining Corp (OSUM) relating to Marie Lake because it did not serve the public interests. Protecting the public interest is Job #1 of democratically elected governments.

What is equally reassuring about this action by the Stelmach government is comment by the Minister of Energy that “for the first time…he had factored in Albertans’ concerns about the rapid pace of development. YES! That is a major step forward in an effort to have our government deal in a practical way with the need for responsible and sustainable development of our non-renewable natural resources.

OSUM is now reported to be threatening to sue the Stelmach government. Fair enough if they do not get what they are entitled to under the law. That entitlement, according to the Mines and Minerals Act of Alberta, means they get reimbursement for there development, engineering and planning costs.

However, OSUM wants more. They indicate they are intending to sue for opportunity costs for no longer having access to what they claim was a potential of 50,000 barrels a day of oil from an alleged reserve potential of 252 million barrels. Good luck. The legislation empowers the Minister to cancel a lease at his discretion when he is of the opinion that any further exploration or development is not in the public interest.

I truly hope the litigation goes forward because it would clearly establish the priority role of the Crown relating to natural resource management and development. The energy industry is working for the government on behalf of citizens when it gets a license or a lease to exploit our resources. When it proceeds and plans to do its exploitation profitably the industry is working for the benefit of its shareholders, the owners of the companies. Both masters must be served but they are very different masters.

The media reported comment by a well respected Calgary based energy lawyer is helpful and telling as well. He is quoted as saying he was “surprised the government would break a contract under public pressure.” It should come as no surprise that the public common interest concerns would trump an individual enterprise concern. The public interest is almost always paramount and the only protection an individual citizen (not a corporation) has is the Charter of Rights and Freedoms.

As for the potential lawsuit by OSUM for compensation for opportunity costs, the energy lawyer is quoted as saying “If the province has caused damages, as it has in this case, there seems to be a ‘plausible claim.’” Agreed, OSUM should get their out of pocket costs back – not their opportunity costs. Alberta Energy should never have issues that lease under those circumstances in the first place.

I was fascinated by the use of the word “plausible” to describe the OSUM claim for opportunity damages on the Marie Lake lease cancellation. So I went to my Pocket Oxford Dictionary and looked up the definition of plausible. Oxford was it means to be “specious, seeming reasonable or probable; persuasive but deceptive. Pretty much says it all don’t you think?

Danny Williams' Win Has Major Messages for Stelmach

Premier Danny Williams shows the way to electoral victory and there are lessons for Premier Stelmach in Alberta. Williams campaigned on strength pride and determination…values that will resonate in today’s Alberta too.

He also took on Big Oil for a fair share and negotiated government ownership equity deals for off-shore energy projects. Alberta in the early days was much like Newfoundland and Labrador today. They had government ownership positions in various energy projects in the early days and they morphed into the highly successful Suncor, Syncrude and EnCana entities of today.

The political lessons for Alberta coming out of Williams getting 70% of the popular vote was in no small part from his taking on Big Oil in the service of the greater good of all the citizens of his province. Premier Stelmach can take heart form these results and the pending consequences of some serious political decisions he is about to make on royalties and the role, relationships and the responsibilities between his department of Energy and the energy industry.

Stelmach, when perceived as a ditherer, saw his party’s fortunes dropped quickly to 39% in recent polls. When the “Our Fair Share” Royalty Review Report came out and Premier Stelmach said he would study it and would make a decision on royalties in a month. No more Mr. Dithers and no superficial responses either. Premier Stelmach also said he would not be “intimidated” by Big Oil he jumped to 45% support. Big Oil has been trying to intimidate him ever since the "Our Fair Share" Royalty Review Report was released.

The major political lesson from yesterday's win by Williams shows that siding with the voters/citizens interests over Big Oil is the way to go. Making a carefully considered royalty decision with a long term view of getting a fair share of non-renewable royalties for current and future generations of Albertans will put Stelmach’s support in the Williams’ territory of 70%.

If Stelmach instead decides to call a snap election this fall he will forfeit all this upside potential.

DOB Magazine On-Line Article Shows Insight

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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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.”

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.

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.

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?