Originally Posted by puckhog
Hey everyone, I've been lurking around here for quite a while, but this thread pushed me to set up an account. I am surprised at how little some of the people expressing opinions in this thread have actually bothered to look into things. First of all, let me point out that not one oil and gas company has made statements that show that they are principally opposed to increasing royalties, all that has been stated is that these proposed changes are unfavorable, and not just for the big "bad" oil and gas companies, but all of Alberta.
I would suggest that everyone take the time to look into an independent study, such as the one put out by Tristone Capital on October 1. As an energy market analyst, Tristone stands to gain nothing by changing or not changing the royalties - in either case people are going to want to know how to invest their money. In their report they outline the "actual" impacts of the report, and all the shortcomings in the form of out-of-date data, and poor methodology that went into the recommendations. First of all, the cost data included in the report is taken from 2004-2005. The claim that an oilsands project takes $5-6 billion dollars of capital to establish is false, it is actually closer to $10-11 billion (I know this because my dad is the chairman of a company currently establishing such a projects, it is also independently verifiable). The F&D (finding and developing costs) are well below the actual costs experienced in the past year - the highest estimated costs are still 14% below the documented costs for 2006. In addition to this, they used an exchange rate of CAD$0.88 to CAD$0.93. All of these factors give a much more favorable outlook of the economic situation than exists.
Secondly, they use comparisons to other jurisdictions in order to justify higher royalties, without giving consideration to return on investment. A 2005 study showed that Canada provides a 12% rate of return on investment - dead last in the world, and 6% below the world average. Think about it - if you were going to invest $1 billion, would you do it in Canada where you would make a profit of $112 million, or in China where the average project would return $390 million? The only reason that Canada gets as much foreign investment as it does is because we are viewed as very stable compared to other jurisdictions, such as Argentina. However, with the new royalties, this return will be even less, and many people will send their money elsewhere. This is a huge problem, because this industry is based on foreign investment dollars - even Alberta-founded success stories such as Encana and CNRL are majority-owned by foreign investors.
Another problem is that the Royalty Review Panel concludes that this will have little impact on activity, since 82% of wells will be subject to lower royalties. This is true, however, they fail to mention that these 82% of wells only account for approximately 25% of production, the other 75% will be subjected to the higher rates.
Finally, the Panel has neglected account for the spill-over effects. in Tristone's report, an estimate of these impacts is as follows:
- Loss of corporate income taxes - loss of $213 million
- Loss of personal income taxes (due to loss of drilling and service jobs) - $216 million
- Loss of revenue from Freehold Mineral Rights Taxes - $199 million
- Loss of resource revenue - $1,118 million
- Loss of Crown Land Bonuses from land sales - $418 million
This is an overall loss of $2.085 billion dollars directly from lost jobs and corporate revenues. This will effectively offset the $1.865 billion dollar increase that the government has promised (both of these are estimates and should be treated as such).
These numbers do not include the fact that demand for all jobs will go down as a result from layoffs in both the drilling and service industries in the field, and in head offices in Calgary.
There are many other effects, including the fact that this new royalty structure is very punitive of high-risk high-reward exploration, however, I feel I've gone on long enough. Again, I would suggest that everyone take a quick look at this Tristone report, as it outlines in more detail all of these effects and more.
|