Oilpatch giant makes billion-dollar threat over Alberta royalties

[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 In their report they outline the "actual" impacts of the report, and all the shortcomings in the form of out-of-date data, and poor methodology that went into the recommendations.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.

[Flame On]

Originally Posted by Azure

And other parties have said that increasing the royalties wouldn't help any.

It wouldn't help Alberta, outside of giving the government more bragging power in regards to our surplus.

Nothing would change.

Except of course Encana pulling their money and investing it elsewhere.

I think its been pointed out a few times in this thread that the oil pulled from the oil sands is not 80 bucks a barrel. As I understand it(correct me if I'm wrong Reaper)...we get somewhere around 50.



I guess that remains to be seen.



If Alberta 'needs' anything....the money is already there to provide it.



Well if the oil really belongs to 'us'....everything should be made public. Right?

or not. The Chavez comment was made to point out how the government has a habit of ruining a good thing when they get too involved.



Of course we should get something. 15% is a good number.

I can't figure out why it should be increased.

Are we lacking funds?

Or does Ed need an ever bigger surplus?



That is exactly the point.

I could understand increasing the royalties if Alberta had an unbalanced budget each year, and health care, education, senior aid...roads, etc, etc....were severely drawn back by the lack of funds.

But alas...that is not the case, and any draw back in those fields is probably because of the lack of management, organization or something else 'outside' of money.

Which is why I said throwing even MORE money at the problems we have here in Alberta isn't going to solve anything.

What else would we need with 2 billion more....thats right, we DO NOT need it.

Let Encana generate their profits and stick that money back into the economy. The government would only waste it.

We are NOT lacking in royalty funds.

The reason I keep saying "that's a different issue" is that we're in agreement on that issue. There is enough money, it should be handled better etc etc.
But for so me reason it isn't and hasn't been. Perhaps they feel with more money they can leave the surplus and or heritage fund where it is and commit more to the public. I guess that's where we diverge.
You think "why give them more" (not an invalid point) I think "give them more and maybe they'll losen up". IMO if even one more hospital gets built from it, it'd be a good thing.

[Azure]

Originally Posted by Flame On

The reason I keep saying "that's a different issue" is that we're in agreement on that issue. There is enough money, it should be handled better etc etc.
But for so me reason it isn't and hasn't been. Perhaps they feel with more money they can leave the surplus and or heritage fund where it is and commit more to the public. I guess that's where we diverge.
You think "why give them more" (not an invalid point) I think "give them more and maybe they'll losen up". IMO if even one more hospital gets built from it, it'd be a good thing.

Fair enough.

I don't necessarily think that more money would mean better funding for all the different fields that require it.

Lack of people is a bigger issue.

[Wookie]

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.

email puckhog@tristonecapital.com

[Ford Prefect]

Originally Posted by Wookie

email puckhog@tristonecapital.com

Thanks Wookie. Context is always helpful.

[puckhog]

Originally Posted by Wookie

email puckhog@tristonecapital.com

Actually, I'm just a student who's chosen to look into this in a lot of detail. There are many other sources out there (Peters & Co., Deutsche Bank, Bank of Montreal, First Energy, Wood Mackenzie, etc.) who have released similar reports. Tristone's is merely the most in-depth that I've come across to date. I've also read the actual report, and as I outlined above, there are numerous flaws inherent in their process and data.

All that is in the media is the number $2 billion dollars of increased revenue, and everyone thinks this is no big deal to the oil companies. What I'm passing on from these independent analyses is that this number is flawed, and will impact everyone.

If you care to look into some of these reports, they can be found on the company's websites or on http://www.capp.ca

[puckhog]

Originally Posted by fotze

I don't think you will be convincing anyone on the pro-royalty side of anything by sending them to CAPP's site.

Again, these are not reports put out by CAPP, they are merely linked on the site. All of these are third-party reports put out to tell investors of the possible outcomes.

This is a terrible piece of legislation, it discourages innovation and targeting high-impact pools in favor of low-productivity, shallow pools. I will say again that not one company has spoken out against the idea of raising royalties, all that has been said is that this proposal will kill the economics of many marginal projects in Alberta and will result in the funneling of investment dollars to other jurisdictions.

If the "pro-royalty" side is too sold on the idea, let it go through and we can enjoy the consequences over the next couple of decades.

[Wookie]

Originally Posted by Ford Prefect

Thanks Wookie. Context is always helpful.

No no, I was just being silly Don't take my comment as a serious implication he works there.

[Bend it like Bourgeois]

Saw a poll in the herald that 88% of albertans don't think they are getting their 'fair share'.

I'm amazed that people can enjoy a standard of living way above the national average, skyrocketing wages and property values...and feel they are not getting what's 'fair'.

http://www.canada.com/calgaryherald/...45dec9&k=25392

[Azure]

Originally Posted by Bend it like Bourgeois

Saw a poll in the herald that 88% of albertans don't think they are getting their 'fair share'.

I'm amazed that people can enjoy a standard of living way above the national average, skyrocketing wages and property values...and feel they are not getting what's 'fair'.

http://www.canada.com/calgaryherald/...45dec9&k=25392

I'm amazed at how 88% of Albertans can be stupid enough to think pumping 2 billion more onto the surplus will suddenly give them their 'fair share.'

[puckhog]

Originally Posted by Bend it like Bourgeois

Saw a poll in the herald that 88% of albertans don't think they are getting their 'fair share'.

I'm amazed that people can enjoy a standard of living way above the national average, skyrocketing wages and property values...and feel they are not getting what's 'fair'.

http://www.canada.com/calgaryherald/...45dec9&k=25392

Thanks, Bend it like Bourgeois, I think that's just the point - people do deserve their fair share, but they fail to recognize how much the oil industry has contributed to the current situation we enjoy in Alberta. This is not to say that they are entirely wrong in thinking that they could get more - even in the releases on CAPP's website (the ones I have already mentioned) the reviewers point out that there is room to increase royalties, but it has to be done to satisfy everyone. The government has a responsibility to make sure that the citizens are getting their "fair share", but they also have a responsibility to keep Alberta as an attractive place to do business and for investors (both foreign and domestic) to put their investment dollars. These royalty recommendations, unfortunately, accomplish none of these mandates, and should therefore be modified until they do.

[looooob]

Originally Posted by Azure

I'm amazed at how 88% of Albertans can be stupid enough to think pumping 2 billion more onto the surplus will suddenly give them their 'fair share.'

well I think most Albertans haven't sat down and reflected on the issues...they were answering a poll

I don't pretend to know the answers (or have studied the issue in any detail), but I can't blame someone for looking around at the infrastructure deficit and assuming that 2 billion wouldn't help

of course that's looking at the situation in isolation (and assuming the government has the will and creatitivy to solve some of these issues if they had the money), but I'm not sure people are necessarily stupid for answering the question (as it was probably posed) the way they did

[Azure]

Originally Posted by looooob

well I think most Albertans haven't sat down and reflected on the issues...they were answering a poll

I don't pretend to know the answers (or have studied the issue in any detail), but I can't blame someone for looking around at the infrastructure deficit and assuming that 2 billion wouldn't help

of course that's looking at the situation in isolation (and assuming the government has the will and creatitivy to solve some of these issues if they had the money), but I'm not sure people are necessarily stupid for answering the question (as it was probably posed) the way they did

Fair enough.

But I think many Albertans seem to think Encana is over-flowing with money(which they are)....therefore they can give up 2 billion more like nothing.

[DFO]

Originally Posted by Azure

I'm amazed at how 88% of Albertans can be stupid enough to think pumping 2 billion more onto the surplus will suddenly give them their 'fair share.'

Its called the Heritage Fund... It was mismanaged under Ralphs tenure.

[cal_guy]

There's something more disturbing in the Auditor's Report, apparently Alberta fail to collect at least $133 Million dollars of royalties that are owed to Alberta. Not only that we are now left with only 1 auditor were monitors the oil & gas industry from a team that at one point had 7.

[NuclearFart]

Originally Posted by Azure

I'm amazed at how 88% of Albertans can be stupid enough to think pumping 2 billion more onto the surplus will suddenly give them their 'fair share.'

Yup, that 2 billion would do absolutely nothing for those fools. We really shouldnt have any royalties, and in fact we the people shouldnt pay any taxes either because those n00bz in goverment will just waste it all.

It would be ingorant to think that we the people would get a 100% conversion on the royalty money, but to make such a bold statement like we would not see ANY benefit from 2 billion? You can't blame 88% of people for choosing the option that would yield them some benefit.
________
How To Love

[Ford Prefect]

As I've said in previous posts, I'm a skeptic on this debate as I don't trust the spin generated by either side. However, as an impartial, skeptical observer, it appears to me that the media in this province are using their power to shape public opinion against the oil industry, while at the same time painting the government into a political corner where they have to make some kind of royalty grab to pacify the voters. If they don't, rightfully or wrongfully, they'll face potential disaster in the next election. The irony of all this is that the media might drive the majority of Albertans and their elected officials into doing the same thing to province's economy that the Liberals did with the NEP in the 1980s. As a third generation Albertan, I findly that darkly amusing.

[red sky]

This royalty reveiw is complete crap. First off, they use data from 2005 which does not do justice to the rising cost of doing business in the western canadian sedimentary basin... not to mention the oil sands. People have to understand that the cost has increased exponentially in the past two years. In addition, the price of Natural Gas is so low that certain companies (won't name names) have actually been losing money in the first half of this year. The oil sands projects right now are only producing at rate of return of 8% for syncrude. If this roalty review is implemented that will drop to 6%. I am pretty sure most banks will offer that same rate of return for the billions of dollars that could be taken out of the oil sands. This city runs on oil and gas, the economy has boomed and will continue to do so albeit at a slower pace. People will lose jobs, there is a greater chance that we will go into a recession. This will drive out other related industries to other provinces such as Sask. and BC. At least if your going to do a review like this you use up to date and correct data... this is all a result of gaining political power, not what's right for the province
/end of rant

[Azure]

Originally Posted by NuclearFart

Yup, that 2 billion would do absolutely nothing for those fools. We really shouldnt have any royalties, and in fact we the people shouldnt pay any taxes either because those n00bz in goverment will just waste it all.

Did I say that?

I said 2 billion 'more' wouldn't necessarily 'change' anything right now.

What, Albertans think that upping the royalties by 20% and health care, education, and the rest of the fields that need funding are suddenly going to get it?

I don't think so.

Money is already there to provide that....which obviously shows that lack of funding isn't the problem.

It would be ingorant to think that we the people would get a 100% conversion on the royalty money, but to make such a bold statement like we would not see ANY benefit from 2 billion? You can't blame 88% of people for choosing the option that would yield them some benefit.

How would it yield them some benefit?

From some of the accounts I've read....it might actually have a negative effect on the economy.

88% of the people are ignorant of the problem if they think increasing royalties by 20% is going to help.

But then again, people think money first....other consequences later.

[Cowboy89]

Originally Posted by NuclearFart

Yup, that 2 billion would do absolutely nothing for those fools. We really shouldnt have any royalties, and in fact we the people shouldnt pay any taxes either because those n00bz in goverment will just waste it all.

It would be ingorant to think that we the people would get a 100% conversion on the royalty money, but to make such a bold statement like we would not see ANY benefit from 2 billion? You can't blame 88% of people for choosing the option that would yield them some benefit.

.

You seem to ignore the concept of oil companies using that $2 Billion to reinvest back into Alberta (Which incidently most are actually borrowing more money than their earnings to invest in future projects). While the distribution may not be even you can't argue that the money doesn't get back to Albertans. Furthermore the arguement is really between which vehicle the private sector vs. the public sector is to provide that $2 Billion to Alberta. The reason why 88% of Albertans side with the government is that should they want to recieve the full benefits from the private sector it would require them to actually do something beyond merely eating, drinking, and sleeping within the borders of our Province.

So much for the idea that Albertans are entreprenuerial, hard working individuals. They'd rather be fed their pork form the government that get off their arse.