April 23 2012: Alberta Provincial Election

[crazy_eoj]

Originally Posted by MarchHare

I think what Clay is trying to say is that provincial revenue from royalties should map easily to a Laffer curve. If the government sets the rate too high, they're disincentiving production and total revenues go down. On the other hand, if the rate is too low, Albertans are leaving money on the table from our one-time non-renewable resource. Are rates currently set at the level where the citizens of Alberta receive the maximum return from our resource? I honestly don't know, but that's certainly a discussion worth having.

It's an incredibly hard calculation to do with such variance in commodity prices, product delivery issues, environmental changes, etc.

However, probably the most simple way to analyze the effective royalty rate is to look at investment dollars flooding into the province. When Stelmach raised the royalty rates, we saw investment dollars go to BC and Saskatchewan overnight. When they reduced rates investment came back just as quickly.

[Thunderball]

Its a matter of perspective I think. To me, Alberta has a spending problem, not a revenue problem. The issue isnt getting an unfair return on the resource when AB workers make substantially more money than they otherwise would merit (more tax revenue and economic stimulation in spending), as well as a royalty regime that brings in enough to create multi billion dollar surpluses in good times, despite the largesse.

The problem is, spending is sexy, saving is not. Its easy to say it would be nice to take more royalties, but the reality is, dicking around with the rates creates economic instability, and makes a lot of marginal plays (which in Alberta, is most new developments) unfeasible. Hiring a firm renowned for tweaking numbers to illustrate a shortchanged government to create "Our Fair Share," and the crapstorm that followed from implementing a part of those recommendations only solidifies that belief.

Perhaps topping up the Heritage and Sustainability Funds annually in a balanced budget should be priority to ensure that the fund always grows in the good years, and we don't squander our future for largesse of the present.

[Cowboy89]

Originally Posted by MarchHare

I think what Clay is trying to say is that provincial revenue from royalties should map easily to a Laffer curve. If the government sets the rate too high, they're disincentiving production and total revenues go down. On the other hand, if the rate is too low, Albertans are leaving money on the table from our one-time non-renewable resource. Are rates currently set at the level where the citizens of Alberta receive the maximum return from our resource? I honestly don't know, but that's certainly a discussion worth having.

Good thing we have actual results from the last royalty hike to prove that we're currently at the point where hikes actually result in lower revenue and investment. It's a less relevant discussion to this election that it was in the last one as a result of what we've learned from the recent failed policy.

[GP_Matt]

Something that hasn't been discussed yet is the recovery rate of any given well. The oil companies goal is to maximize returns from every well they drill. That means that they want to drill the cheapest well possible and get the most product out of the ground and to market.
*Gross oversimplification to follow
For any given well there is a certain amount that you can recover with a minimal amount of work but if you put in more effort in you can recover more from the same well. THis is achieved through fraking, proper spacing, drilling injection wells nearby and many other methods. In the end the first barrel to get is the cheapest while the last barrel is the most expensive. As the royalty rates go up this makes the last barrels uneconomical so those aren't produced. In a lot of cases they only have one attempt to do it right. For example if they use a cheaper fraking system they will leave some oil in the ground forever.

You seem to be looking at the system as if the choices are drill now and get the money from lower royalties or raise the royalty rate and drilling will slow down but will happen in the future as prices increase or supplies run out in other regions. The system is far more complicated than that and higher royalties could permanently lock more resources in the ground.

Also, because you brought up fair returns for oil companies I am curious what you would consider fair returns. Is 1% profit ideal, 10%, 25% or some other number.

[Senator Clay Davis]

I get that the royalty structure is a complicated process. All I'm asking is that we ensure we are not being shortchanged. I'm not religious at all but this oil is a gift from God in someways. Again as the shareholders in oil and gas production, we should want our value maximized. I'm against simply raising royalties because obviously that will drive out competition. I just want the fairest possible rate for us as shareholders.

And fair returns? I mean again as an accounting student, if I was a shareholder in Husky or Encana for insance, I want to lowest royalty rate possible, as this maximizes my value as a shareholder in those companies. As a shareholder in Alberta's future, I want our return on this maximized and as mentioned the royalty structure is complicated so I don't even know what that rate is. Maximizing value obviously involves many factors. If I'm a shareholder in those oil companies, while also being a shareholder in Alberta, it obviously presents a conflict of interest.

[Handsome B. Wonderful]

Originally Posted by Senator Clay Davis

I get that the royalty structure is a complicated process. All I'm asking is that we ensure we are not being shortchanged.

Keeping Albertans employed should be the priority. Take more money for the province and you have less jobs and lower salaries. Keep the royalties reasonable and you have more jobs and more income.

Guess which one voters see as the priority.

[SebC]

Originally Posted by MarchHare

I think what Clay is trying to say is that provincial revenue from royalties should map easily to a Laffer curve. If the government sets the rate too high, they're disincentiving production and total revenues go down. On the other hand, if the rate is too low, Albertans are leaving money on the table from our one-time non-renewable resource. Are rates currently set at the level where the citizens of Alberta receive the maximum return from our resource? I honestly don't know, but that's certainly a discussion worth having.

Keep in mind that the Laffer curve pertains to government revenue which is only one part of the net-public-benefit equation. Rates should not be set to maximize government revenue.

[First Lady]

Okay.. . this is cool. I will add it to first post too.

http://www.punkoryan.com/360election/

[Makarov]

Originally Posted by Cowboy89

It's not really an 'eye of the beholder' arguement either. It comes down to absolute dollars. The more production the greater the units the government gets a royalty on. Lower royalties make more wells economical hence more production. There's an intersection where hiking the royalty actually drops future production and thus despite taking more in percentage terms, the government actually takes in less absolute dollars. Especially true when you take into account royalty structure's effect on ancillary revenues such as land sales, and income taxes on the people who would otherwise be drilling more wells. If you need assurances it's fair look no further to the past where the government raised royalties, recieved less money and then went back on their changes. It's not fair to any party to raise royalties, choke out investment, and end up with less revenue for government programs as well.

The only thing that you are omitting however is the fact that Alberta's petroleum reserves are finite. Once they're gone, they're gone. So its a delicate balance between maximizing production and maximizing benefit to Albertans of every last drop of oil.

I don't purport to be any sort of expert on royalty structures, but it is important that we maximize benefit to Albertans (and Canadians) of this limited resource.

[Makarov]

Originally Posted by Handsome B. Wonderful

Keeping Albertans employed should be the priority. Take more money for the province and you have less jobs and lower salaries. Keep the royalties reasonable and you have more jobs and more income.

Guess which one voters see as the priority.

Well, that is likely because voters are self-interested and short-sighted. What about jobs for our children and their children?

[Senator Clay Davis]

Originally Posted by SebC

Keep in mind that the Laffer curve pertains to government revenue which is only one part of the net-public-benefit equation. Rates should not be set to maximize government revenue.

Which is of course a delicate issue. The government collects the royalties obviously, not us as citizens, so if they collect it and waste it then obviously there is no net benefit to the public. I don't think the dividend cheques are the way to go because there will likely be little actually final positive economic impact on Alberta. Sadly most of the dollars will be leaving the province through outside corporation profits unless everyone spends it on local companies (which of course I would recommend).

Putting all royalty revenue in the Heritage Fund is acceptable to me, though I would like to see at least some go to infrastructure projects because whether we need them now or 10 years from now, we need them. The difference with building now is you can project costs better, whereas in 10 years everything, labour, parts etc might rise dramatically.

[Handsome B. Wonderful]

Originally Posted by Makarov

Well, that is likely because voters are self-interested and short-sighted. What about jobs for our children and their children?

Voting for a more stable job situation now takes away jobs from our children how?

[MarchHare]

Originally Posted by Handsome B. Wonderful

Keeping Albertans employed should be the priority. Take more money for the province and you have less jobs and lower salaries. Keep the royalties reasonable and you have more jobs and more income.

Guess which one voters see as the priority.

If job creation is the only priority, then royalty rates should be set at 0% to maximize industry investment, production, and employment. Obviously no party is proposing that, though.

Clearly there needs to be a balance between setting rates to maximize resource revenue, stimulate employment, and provide long-term benefit for future generations of Albertans. Have we found the perfect golden number with today's rates? Maybe, but I'm certainly not qualified to make that assessment, and I doubt any other poster here is either.

Note that I'm not stating that the royalty percentage needs to be increased; that's a possibility, but it may need to be lowered to achieve the optimal result for all I know.

[crazy_eoj]

Originally Posted by Makarov

The only thing that you are omitting however is the fact that Alberta's petroleum reserves are finite. Once they're gone, they're gone. So its a delicate balance between maximizing production and maximizing benefit to Albertans of every last drop of oil.

I don't purport to be any sort of expert on royalty structures, but it is important that we maximize benefit to Albertans (and Canadians) of this limited resource.

It's also impossible to accurately predict the long term future value of the finite resource. If someone invents cold fusion as a power source, or some of the more advanced green power technologies become profitable, oil and gas could lose value quickly.

A bird in hand is better than two in the bush.

[MarchHare]

Originally Posted by Handsome B. Wonderful

Voting for a more stable job situation now takes away jobs from our children how?

Our energy reserves are a finite resource. If the government has policies that encourage too much extraction in the short term (which obviously benefits us immediately), there will be nothing left in our gold mine for future generations. Let's hope the Alberta economy is sufficiently diversified by then!

[Makarov]

Originally Posted by crazy_eoj

It's also impossible to accurately predict the long term future value of the finite resource. If someone invents cold fusion as a power source, or some of the more advanced green power technologies become profitable, oil and gas could lose value quickly.

A bird in hand is better than two in the bush.

Fair point. And of course one reason why it makes sense to have and fund something like the Heritage Fund. Anyway, it certainly is an interesting issue. Its too bad that there wasn't more debate about it during this campaign.

[Handsome B. Wonderful]

Originally Posted by MarchHare

Our energy reserves are a finite resource. If the government has policies that encourage too much extraction in the short term (which obviously benefits us immediately), there will be nothing left in our gold mine for future generations. Let's hope the Alberta economy is sufficiently diversified by then!

At some point, oil will no longer be a desired resource. I'd argue that it's better to maximize the benefits now instead of leaving our children with worthless reserves.

[Senator Clay Davis]

Originally Posted by crazy_eoj

It's also impossible to accurately predict the long term future value of the finite resource. If someone invents cold fusion as a power source, or some of the more advanced green power technologies become profitable, oil and gas could lose value quickly.

A bird in hand is better than two in the bush.

While this is accurate, we can rightly assume the price won't decline too drastically because it is a finite resource and with growing middle classes in China and India the price of oil likely will remain fairly high as demand will continue from those developping middle classes with a dwindiling supply.

To the other point, there is far too much influence from the oil and gas lobby (more in the US obviously) to think that oil will disappear until we reach a crisis point, which we always have to do to actually change anything. I see oil being our primary energy resource for at least the next 15 years.

[MarchHare]

crazy_eoj also raises an interesting point. It's an inevitability that sustainable, renewable energy sources will eventually become more economical than fossil fuels. Once technology reaches that level, our oil and gas reserves become essentially worthless, so it's prudent to maximize our ROI before then. The trick is knowing when renewable sources will surpass fossil fuels in efficiency, though and ensuring we've "tapped out" by then. Will it be 25 years from now? 50? Within our lifetimes? Centuries in the future? I doubt anyone can make an accurate prediction with any degree of authority.

[Makarov]

Originally Posted by MarchHare

crazy_eoj also raises an interesting point. It's an inevitability that sustainable, renewable energy sources will eventually become more economical than fossil fuels. Once technology reaches that level, our oil and gas reserves become essentially worthless, so it's prudent to maximize our ROI before then. The trick is knowing when renewable sources will surpass fossil fuels in efficiency, though and ensuring we've "tapped out" by then. Will it be 25 years from now? 50? Within our lifetimes? Centuries in the future? I doubt anyone can make an accurate prediction with any degree of authority.

Keep in mind that petroleum is useful for more than just fuel. It is also used to produce things like plastics, etc. Indeed, there are likely uses for it that we cannot even imagine yet.