Quote:
Originally Posted by Harry Lime
I'm interested in getting caught up on the narrative, but found myself skimming very quickly through the thread due to the political 'he said, she said. There always seems to be a negative backlash by the industry any time the topic of a royalty review rolls around, and it becomes more of a barometer for the will of the government than any kind of an actual review.
I was wondering, why does any action taken as a result of the review have to be static? Why not have a dynamic algorithm that reacts to the state of the industry, the price of oil and refinement? For example, when prices are low, as they are now, the royalties are subject to decline to support the industry, but when they chase $100, as they did recently, the royalties are altered in favour of the province to reflect the value of their commodity.
If it all came down to predicable math, would that settle the minds of the skittish oil companies? Wouldn't a declaration to that effect allow the government to not seem so easily pushed?
I apologize again, if these are the questions of a five year old, I just didn't have the patience to read all of the previous discussion.
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The current structure for oil sands is already set up this way actually. Royalty rates fluctuate with the price of oil. Pre-payout they are 1%-9% of gross revenue (i.e. sales). Post-payout they are 25%-40% of net income (i.e. profit).
The oil sands structure is pretty great actually. It's a simple cash flow based system. It probably needs some tweaking though so that companies can't job the system to keep assets in pre-payout by doing things like "expansions" which are really just new projects.
What needs an overhaul is the royalty system for conventional oil and gas. I don't know it that well, but it's a complicated mess where your royalties depend on all sorts of things like quality, rates, types of wells and so on.
To be honest, I'm not scared much at all about what will be announced. I can't imagine they're going to actively kill anything. What sucks though is that it's taken this long to announce. Uncertainty keeps a non-zero amount of capital on the sidelines.