Alberta Royalty Review Revisited a year later

[Cowboy89]

http://www.reportonbusiness.com/serv.../Business/home

“There is strong evidence … to suggest that investment is leaving the province,” said FirstEnergy analyst Robert Fitzmartyn in a research note, citing a drop in Crown land sales and flat drilling rig counts since the new royalty scheme was announced.
“Alberta's policy is not competitive enough to overcome the attractiveness of other jurisdictions to maintain prior [levels] of investment,” he said. “There is no question in our minds that Alberta has positioned itself to be an uncompetitive jurisdiction.”

The reallocation of capital means Alberta is unlikely to recoup the additional $1.4-billion in revenues it has said the higher royalties will create, Mr. Fitzmartyn added.

It appears that once again the government enacted a populist policy that will ultimately shrink the economic pie despite taking a bigger 'percentage piece' but a smaller actual piece for the government. Let this be a lesson for all those a year ago thinking that this policy would result in more money for public goods. With income redistribution there is always a 'big tradeoff' that often ends up with both sides having less.

For what was said a year ago here are the relavent threads:

http://forum.calgarypuck.com/search.php?searchid=792619

[Bend it like Bourgeois]

What. You mean you can't hike taxes indescriminately?

Good thing the city of Calgary is immune to such economic forces.

You could argue the money will eventually come back to Alberta. Though you never know.

[peter12]

Haha, stupid government!

This is what happens when social justice activists influence policy-making.

[calculoso]

I'm just glad that they only hiked rates as 'little' as they did. We had the Alberta Liberals (Taft) and Alberta NDP (Mason) saying that they should have been increased even further!!

Just goes to show how little the Alberta Liberals, NDP, and all those pressing for "our fair share" understand the market.

[flamesfever]

When everyone else in the world is doing everything possible to stimulate the economy, the Alberta Government is doing the opposite.

The western canadian sedimentary basin is primarily a gas prone basin. It is imperative that the drilling activity continue to maintain reserves, or this province will start losing big time.

If the Government go ahead with this new royalty scheme, I believe they are doing a great disservice to Albertans.

[JiriHrdina]

The goal of the regime should have been to maintain a win-win scenario for business and the public. By demotivating investment in the province they'll end up with less in the provincial coffers.

It was a flawed plan from the start.

[The Ditch]

Working as a drilling engineer at the moment I can tell you that the royalties have hindered drilling here, most of our wells we drill in Canada now are in BC, Saskatchewan and Manitoba. There's no incentive to drill in Alberta.

[Cowboy89]

The biggest flaw in the review methodology is the mentality that oil prices will go up forever and therefore leaving it in the ground was somehow a more fiscally prudent measure (I understand that a 'drill baby drill' approach might have had other consequences but this policy is a fiscal one and not an environmental one, strictly fiscally speaking it doesn't make sense to make policy that speculates on the future price of commodities).

[redforever]

The oil and gas companies can take a lot of the blame here. And don't start sounding off on how I know nothing about the oil and gas industry. We own private oil and gas companies, my husband has been in oil and gas exploration all of his employed life and my daughter is a geologist as well.

The oil companies simply did not bring their perspective down to a common denominator that could be understood by anyone not employed by the oil and gas industry. They might have known what they were talking about, they might have been correct, but they simply could not explain the scenario to Dick and Jane on the street.

Sure, they took out full page ads to try and get their point across. Anyone remember those or try to read them? You lost Dick or Jane by the end of the first paragraph. And it was Dick or Jane that were convinced they were being screwed over so they were the ones the oil and gas companies had to reach.

[metal_geek]

Originally Posted by Bend it like Bourgeois

What. You mean you can't hike taxes indescriminately?

Good thing the city of Calgary is immune to such economic forces.

You could argue the money will eventually come back to Alberta. Though you never know.

You can totally make that agrument. I think that investment will come back into alberta but at a much slower pace then when it was the "BEST" market to be in. A year is not long enough a time frame for good or bad assesment.

On draft day, you hear how good that first round pick is, Great stats, right size, natural ability. You see him a year later at the rookie camp playing against kids 3 years older and he looks terrible comapred to all the others. Were you lied to? Is he not as good as he was hyped to be. Do you dump him now or wait to see how your investment pans out?

I was all for the royalty increase, not to "GET MORE", but to slow the pace, and leave a little in the ground to create employment later. Granted I didn't know the world economy was gonna collapse, I did think thier numbers were complete junk and that the "investment" was gonna move elsewhere for now. It'll be back, slowly but surely and then the move will look like genious long after anyone who was involved with it is done..

[Winsor_Pilates]

As much as these reports may be true, it would be nice to see the royalty review revisted by some other parties.
This seems alot like energy companies complaining about increased royalties, and I don't think they'd change their tune no matter what the real outcome has been.

[Eagle Eye]

Originally Posted by redforever

The oil and gas companies can take a lot of the blame here. And don't start sounding off on how I know nothing about the oil and gas industry. We own private oil and gas companies, my husband has been in oil and gas exploration all of his employed life and my daughter is a geologist as well.

The oil companies simply did not bring their perspective down to a common denominator that could be understood by anyone not employed by the oil and gas industry. They might have known what they were talking about, they might have been correct, but they simply could not explain the scenario to Dick and Jane on the street.

Sure, they took out full page ads to try and get their point across. Anyone remember those or try to read them? You lost Dick or Jane by the end of the first paragraph. And it was Dick or Jane that were convinced they were being screwed over so they were the ones the oil and gas companies had to reach.

I guess the only problem is the Oil and Gas companies will always be thought of as the 'bad guys' and no matter which way they could have got their point across the average joe would still not believe them.

[4X4]

Originally Posted by fotze

I am sure they will release a report where it will show Actual Production and the new vs. old royalty regime. It will show the new one created more royalty dollars for the province, which makes sense, but the piece I know they will not capture is that the production will be lower this year and every year in the future.

Hey, look on the bright side... Our environmental record will improve!

[Thunderball]

Fotze is correct. There is always a strong political overtone to these things... unfortunately for the Oilpatch, politics is a game they always lose.

Really, what's going to win out:

Government Spin: Oilpatch makes too much profit, more revenue = more money for us. Oh yeah, are evil.

Oilpatch Spin: Oil and Gas Exploration is very expensive and difficult. We're not evil... really.

Even the name of the report, which sounds like something straight from the Communist Manifesto, told you the affiliation of those who prepared the report. The "braintrust" we have in charge is too inept to deal with it now.

[The Ditch]

Originally Posted by 4X4

Hey, look on the bright side... Our environmental record will improve!

Drilling in Alberta has some very strict guidelines with respect to pollution, if you asked me where to start to improve Alberta's evironmental record I would probably say we need to stop burning coal for electricity and look towards better solutions. Oil sands aside, because there is quite a bit of pollution there.

[Cowboy89]

Originally Posted by metal_geek

I was all for the royalty increase, not to "GET MORE", but to slow the pace, and leave a little in the ground to create employment later. Granted I didn't know the world economy was gonna collapse, I did think thier numbers were complete junk and that the "investment" was gonna move elsewhere for now. It'll be back, slowly but surely and then the move will look like genious long after anyone who was involved with it is done..

It's completely unnecissary in an environment where commodity prices rise and fall. Just as in 1980, it's not prudent to create a system where the underlying assumption is that prices would continuously reach new heights without falling. Higher taxes on production limit the highs and ultimately create lower lows. We're about to see a lower low than would have otherwise happened without the royalty review.

No, in decade's time we won't be celebrating this move's brilliance because the amount of opportunity cost lost in the mean time. The province will lose more money as a result of this than it will gain all the while our oil and gas companies do not contribute as much to our local economy. The combined value of this lost opportunity will not be less than the present value of producing the commodity in ten years time. Assuming such is speculation on oil and gas prices and not smart to center the whole province's energy policy on said speculation.

Another thing to consider: Since Oilsands projects even running at full steam at the pace of 2006 are 40 year projects, who here is going to stand up and tell me that after 2048 world prices for Bitumen (the lowest quality of oil) is going to be so high that it will generate a higher rate of return present valued to today than had things gone ahead without the review? Heck even if society makes only moderate progress on the renewables front in the next 40 years Bitumen will be completely worthless by then.

[redforever]

Originally Posted by Eagle Eye

I guess the only problem is the Oil and Gas companies will always be thought of as the 'bad guys' and no matter which way they could have got their point across the average joe would still not believe them.

No, that is not true. The problem is the oil and gas companies have a very hard time discussing anything to do with their business in layman terms.

They come across as sounding, you have to trust us, we just can't explain it to you and then the layman perceives it as "you are too dumb to understand what I am trying to tell you"

[flamesfever]

Originally Posted by redforever

The oil and gas companies can take a lot of the blame here. And don't start sounding off on how I know nothing about the oil and gas industry. We own private oil and gas companies, my husband has been in oil and gas exploration all of his employed life and my daughter is a geologist as well.

The oil companies simply did not bring their perspective down to a common denominator that could be understood by anyone not employed by the oil and gas industry. They might have known what they were talking about, they might have been correct, but they simply could not explain the scenario to Dick and Jane on the street.

Sure, they took out full page ads to try and get their point across. Anyone remember those or try to read them? You lost Dick or Jane by the end of the first paragraph. And it was Dick or Jane that were convinced they were being screwed over so they were the ones the oil and gas companies had to reach.

I think it's next to impossible for oil companies to explain to the public, in relatively simple terms, how the royalties will affect the oil industry. Can you imagine how to explain all the items related to a farmout, or all the things that have to happen from the time you buy an oil and gas lease till the time you get your first dollar out of it 5 years later?.

In my view the whole thing is too complex for Dick and Jane. And unfortunately until they start losing their job, see their house and overall net worth start to decrease in value, etc. they will go on believing that the Government knows what's best for the people.

[redforever]

Originally Posted by flamesfever

I think it's next to impossible for oil companies to explain to the public, in relatively simple terms, how the royalties will affect the oil industry. Can you imagine how to explain all the items related to a farmout, or all the things that have to happen from the time you buy an oil and gas lease till the time you get your first dollar out of it 5 years later?.

In my view the whole thing is too complex for Dick and Jane. And unfortunately until they start losing their job, see their house and overall net worth start to decrease in value, etc. they will go on believing that the Government knows what's best for the people.

You discredit the intelligence of far too many people.

[metal_geek]

Originally Posted by Cowboy89

It's completely unnecissary in an environment where commodity prices rise and fall. Just as in 1980, it's not prudent to create a system where the underlying assumption is that prices would continuously reach new heights without falling. Higher taxes on production limit the highs and ultimately create lower lows. We're about to see a lower low than would have otherwise happened without the royalty review.

No, in decade's time we won't be celebrating this move's brilliance because the amount of opportunity cost lost in the mean time. The province will lose more money as a result of this than it will gain all the while our oil and gas companies do not contribute as much to our local economy. The combined value of this lost opportunity will not be less than the present value of producing the commodity in ten years time. Assuming such is speculation on oil and gas prices and not smart to center the whole province's energy policy on said speculation.

I was looking at it from a much more basic view, in that if the rate of production slows resources are left in the ground. It's a finite resource so as global supply diminishes, the resources become more attractive. It's not about the price of oil tomorrow, it's about money being invested in our communites 10 years from now and not tomorrow. That very thing has happend with offshore oil, has happend with Oil sands, coal, and other minerals like Nickel.

I'm not arguing that the Roalty review board was genuis or that it was all some bigger plan. I think they bungled the whole thing but that in the end, 10 -15 -20 years down the road, alberta will have a booming oil sector with a better share for the province. Alberta will still have oil, a heritage fund, oil field construction and healthy industry. The people involved will long be forgotten.

As horrible as the NEP was for the people living through it then, I beleive it delayed the boom long enough that lots of Kids from the 60's and 70's got to benifit from the most recent boom... Perhaps the children of the 90's and 00's will benifit from the slowdown caused by the roalty review.

My argument is that the end effect of the royalty review will be a severe reduction in the "boom", a moderate production pace, and investment in the future that otherwise would have happend this year. I don't think that oppertunity losses realised today won't be equally or more valuable realised in the future...