Alberta Royalty Review Revisited a year later

[puckhog]

Originally Posted by redforever

You discredit the intelligence of far too many people.

So, let me try to get this straight. You first claim that the oil companies did not make their point in layman's terms, making it far to difficult for Dick and Jane to understand. Then, when someone points out that oil and gas is a technical business with many intricacies that are hard to understand, you say that he is discrediting the intelligence of too many people. You seem to not be clear as to whether or not the average individual has the capacity to comprehend this business.

[JD]

Originally Posted by fotze

Plus drilling engineers are so hell-bent on beating their sandbagged AFE's that they corkscrew drill the wells like a 15 year old with a hard-on and can't get any cement returns to surface, causing gas to leak up the outside of the well and production has to pay to fix it. Drilling eng gets a big bonus and production gets kicked in the sac for spending too much money.

Well you can always just blame the cementing company. Most of our sales reps don't know enough anymore to be able to tell you you're wrong.

[flamesfever]

Originally Posted by redforever

You discredit the intelligence of far too many people.

I don't doubt the people's intelligence. I doubt their ability to take the time and effort it would take to learn the business.

[4X4]

Originally Posted by fotze

Again, the oilsands is where that shame lies mostly. Gas well causes a few tire tracks for a few days.

Originally Posted by The Ditch

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.

Sorry, my green text button was broken.

[Shawnski]

If the Alberta economy cools a bit over this, it isn't necessarily a bad thing.

For one, the oil and gas will still be there if it isn't taken out now.

For a very big second one, at the pace we were going to extract it, our economy was overheated and what happened? Billions and billions taken out as "transfer payments".

[redforever]

Originally Posted by puckhog

So, let me try to get this straight. You first claim that the oil companies did not make their point in layman's terms, making it far to difficult for Dick and Jane to understand. Then, when someone points out that oil and gas is a technical business with many intricacies that are hard to understand, you say that he is discrediting the intelligence of too many people. You seem to not be clear as to whether or not the average individual has the capacity to comprehend this business.

No, the oil and gas companies say it is too technical to explain to the average layman, I disagree with that statement.

So all the companies do is say, "sorry, too hard and technical to explain to you",

Then they take out full page ads in local newspapers, written in technical mumbo jumbo,

And then the average consumer gets insulted and comes to the conclusion that the oil and gas companies think of themselves as high class rich hogs

This is no different than many documents that are written by lawyers. But I will give lawyers more credit than oil and gas companies. When you ask them to put it in layman terms understandable by the average joe blow on the street, they can do so.

[Slava]

Originally Posted by fotze

In doing economics for projects the past year and a half I know I know 50 times what our geologists do on the economics side and I also know that I know very little. You could get three engineers in a room on the same simple project and they would not agree how to model the economics on one well, to do so on something like the entire province would be insane. I do not believe regular people would undcerstand because I don't even think 90% of people who work in the oilpatch would understand it. It is wildly complex, just trying to figure out the royalty on one bloody section is a pain in the arse, and every section is different and there are 36 sections per township and there are thousands and thousands of townships in the province all with differing royalties depending on the different strata downhole. The royalties change depending on depth of well, production rates that change by the minute, there are overiding royalties and it all different. Been doing this for 9 years and I still don't really understand it. If the Alberta government could go back in time and try to make it more complicated they absolutely could not do it. That's why there are much more mineral land people than geologists. (which is a shame).

I do agree they do a poor job communicating though, there is always an air of arrogance that is unecccesary and unproductive.

Are you saying that since things are so complex in the industry that the slow-down and the new royalty regime might not be linked? If this was the case not many people would even know....or so it would seem.

[Cowboy89]

Originally Posted by metal_geek

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...

Bolded is complete BS.

Refer to my ammendment to that post for my outlook on the future demand for Bitumen in 20-40 years time. Ie Oil (at least in the quality and technical difficulty it will take us to extract it in Alberta) will be worthless in due time due to substitute energy products.

With respect to the NEP arguement. Had there been no NEP most likely we would be a city appraoching 1.7-2.0 Million people and the money made and earned during the 1980s would have resulted in larger, more diverse opportunities for us now. The falicy of your arguement is lost opportunity cost. IE (What could have been had governments not intervened?). Even so, currently proved oilsands at planned production rates as of 2006 would still not deplete the resource for over 200 years. Factor in new technology and exploration would result in more reserves and there is no risk of 'running out' for generations. Fossil fuels (At least at the quality of product in Alberta) will be mostly worthless by the end of the century. There's no logical reason for any forced delay from an economical perspective in this generation, next generation, or any future generation.
This isn't more responsible for today's children's economic oppotunities.

Money made today isn't simply gone a generation from now. It get's reinvested by Alberta's citizens back into other businesses and builds up in the savings and investments of individuals. If you create inefficiencies in the market today this wealth and the opportunity cost are gone forever!

[Clarkey]

Originally Posted by Cowboy89

Bolded is complete BS.

Refer to my ammendment to that post for my outlook on the future demand for Bitumen in 20-40 years time. Ie Oil (at least in the quality and technical difficulty it will take us to extract it in Alberta) will be worthless in due time due to substitute energy products.

With respect to the NEP arguement. Had there been no NEP most likely we would be a city appraoching 1.7-2.0 Million people and the money made and earned during the 1980s would have resulted in larger, more diverse opportunities for us now. The falicy of your arguement is lost opportunity cost. IE (What could have been had governments not intervened?). Even so, currently proved oilsands at planned production rates as of 2006 would still not deplete the resource for over 200 years. Factor in new technology and exploration would result in more reserves and there is no risk of 'running out' for generations. Fossil fuels (At least at the quality of product in Alberta) will be mostly worthless by the end of the century. There's no logical reason for any forced delay from an economical perspective in this generation, next generation, or any future generation.
This isn't more responsible for today's children's economic oppotunities.

Money made today isn't simply gone a generation from now. It get's reinvested by Alberta's citizens back into other businesses and builds up in the savings and investments of individuals. If you create inefficiencies in the market today this wealth and the opportunity cost are gone forever!

All of those opportunity costs may be worth it if you anticipate the future commodity prices to be high enough to compensate for these opportunity costs. But I guess that goes back to your original comment about the government speculating on commodity prices.

[Azure]

Well, I'm not going to say I told you so.

But, I told you so.

Now, is it a bad thing? Not really....our economy is still going strong. And once oil jumps back up to above $80/bbl, things will be going more smoothly though.

We will always have our oil/gas sitting there. People WILL want it...eventually.

[Daradon]

Originally Posted by Shawnski

If the Alberta economy cools a bit over this, it isn't necessarily a bad thing.

For one, the oil and gas will still be there if it isn't taken out now.

For a very big second one, at the pace we were going to extract it, our economy was overheated and what happened? Billions and billions taken out as "transfer payments".

I have to agree. Oil prices will rebound. If not next year, then sometime down the road, and probably in the not to distant future. The oil will still be there and it could possibly be worth more.

The way we were drilling was like it was going out of style. Wouldn't it be smart to save some for a rainy day?

Worst case scenario the increase in royalties can always be rolled back.

I don't see this being a big problem at all.

[Mr.Coffee]

Originally Posted by fotze

In doing economics for projects the past year and a half I know I know 50 times what our geologists do on the economics side and I also know that I know very little. You could get three engineers in a room on the same simple project and they would not agree how to model the economics on one well, to do so on something like the entire province would be insane.

I do not believe regular people would undcerstand because I don't even think 90% of people who work in the oilpatch would understand it. It is wildly complex, just trying to figure out the royalty on one bloody section is a pain in the arse, and every section is different and there are 36 sections per township and there are thousands and thousands of townships in the province all with differing royalties depending on the different strata downhole. The royalties change depending on depth of well, production rates that change by the minute, there are overiding royalties and it all different. Been doing this for 9 years and I still don't really understand it. If the Alberta government could go back in time and try to make it more complicated they absolutely could not do it. That's why there are much more mineral land people than geologists. (which is a shame).

I do agree they do a poor job communicating though, there is always an air of arrogance that is unecccesary and unproductive.

Hey! What's with all the landman hate? Just kidding, your right. At the end of the day, geo-scientists are the ones that find it. Mineral departments are the necessary evil biproduct of an intricate Canadian oil and gas sector... developed over the last 100 years.

Also, you are absolutely dead on with your discussion on economics and how complex they truly become- area to area, zone to zone, depths, royalties will be linked to prices, what commodity are you after? Explaining it would not only bore the regular Joe in about 2 seconds, but even if you made it simple, it would come off as vague and beating around the bush. There truly is no-win for the industry in that little debate, because they either tell it how it is, and nobody understands it (people go to school for 4 years with degrees directed at these types of calculations), or they "aren't specific enough" on how it's going to affect them and their economics on a project per project basis. Furthermore, companies didn't really know how it'd hit them, and I believe they still don't truly know because forecasting prices and costs is like forecasting the Flames' effort shift to shift.

I'm a landman at a fairly aggressive exploration company. Anyone want to hear about real examples of drilling suspension? We are scaling back this winter's drilling to less than 10% of what we had planned to drill. Many of our partners in the area are doing similar scalebacks. I had a fairly legit deal ready to roll about a month ago that got cancelled overnight (literally) because we could not commit to new drills. The cost to drill, complete, and equip a well in our area is just under $2MM. That's enormous! Nobody has seen the effects yet, because downtown sees them first on paper. We should re-open this thread in May/June, after all the layoffs, after all the pandemonium. Things are going to get ugly I think... mostly for small companies, but also a little bit for big companies heavily invested in Alberta. But the cost to drill is insane in Alberta.

There is good news though... with a heavy reduction in drilling programs, costs should come back to an acceptable level. Also, the new royalty framework is calling for Shallow Rights Reversion, which should increase drilling in shallow pools, landsale revenues for the province and- add jobs for land guys because there will be even more administrative burden. B.C. already has this. Unfortunately SRR doesn't affect Alberta for at least 5 years because it's only on new leases.

One last note... in west Africa, the royalties one government has in some of their contracts with major producers is 10%. Alberta can be upwards of 50% under the new regime. A 100 bbl/day well in Alberta's decent these days... a new drill in offshore Africa can produce >25,000 bbls/day. But what about political stability right? Alberta could ask itself the same thing says Syncrude & Suncor...

[Daradon]

Originally Posted by fotze

That's the problem though, the price will have to go significantly higher than is reasonable to predict in order to make it like putting money in the bank. Smart thing would be for the government to do something with the money. Get the cash and put the money in the bank for a rainy day, a lot bigger dollar difference than letting the oil sit there making 0% interest. $3 billion dollars in your pocket today then in the bank at 10% interest is worth much more than 3.5 Billion dollars in your pocket 7 years from now.

for example ....$3 billion (30 MMBBLS at $100/bbl) today is the equivalent to having $5.85 billion in 7 years at a 10% discount. To have the exact same value at the end of 7 years you would need that oil to be priced at $194/bbl. If it is expected to beat $194 in 7 years then it was the right decision, but that's pretty risky.

Well that's all true, but when does the government ever invest earnings wisely? When they make a bunch, they spend too much.

Also I don't believe $200 a barrel oil in 7 years is out of reach. It was near $140 this summer. The biggest thing affecting the price right now is the economic slowdown. If we get some stability after 2 or 3 years I'm sure prices will shoot right back up again.

I do understand the argument though. As my first post mentioned, I don't think it's a big problem, but I could see how it's a small one or maybe not the best result in the myriad of options.

I'm just of the opinion it's probably 6 of 12 one way, a half dozen the other. I think the complaining is coming from the patch obviously, but in the scheme of things I doubt it's going to make a huge difference to the province or the taxpayers.

[Daradon]

Well I'm not going to bet on anything, but I think it's safe to say the world will need lots of oil for at least another 50 years.

And as I mentioned in the first post, if it really becomes a problem, the increases can be rolled back or other incentives can be provided. It's not like things are written in stone or can't be changed.

[Azure]

I doubt we go above $150/bbl prior to 2015.

Or until supply becomes a REAL problem.

[flamesfever]

Originally Posted by Daradon

Well I'm not going to bet on anything, but I think it's safe to say the world will need lots of oil for at least another 50 years.

And as I mentioned in the first post, if it really becomes a problem, the increases can be rolled back or other incentives can be provided. It's not like things are written in stone or can't be changed.

Change is something investors don't like. They like and need a stable investment environment, especially when you consider the long time frame for investing in the industry. The government have already witnessed what their change in royalties will do to the industry, and with all the myriad of other things threatening the industry these days, I think going ahead with the new royalty program defies common sense.

In my experience, the biggest risk facing the industry has always been the stroke of a politician's pen. If the changes they make are done too often or done to the extreme in the case of this new royalty scheme, IMO the major investors have long memories, and will not come back in a hurry.

[Mr.Coffee]

Originally Posted by flamesfever

Change is something investors don't like. They like and need a stable investment environment, especially when you consider the long time frame for investing in the industry. The government have already witnessed what their change in royalties will do to the industry, and with all the myriad of other things threatening the industry these days, I think going ahead with the new royalty program defies common sense.

In my experience, the biggest risk facing the industry has always been the stroke of a politician's pen. If the changes they make are done too often or done to the extreme in the case of this new royalty scheme, IMO the major investors have long memories, and will not come back in a hurry.

It's true what you say about stability. Stelmach had an axe to grind against the industry even before he came into office. All anyone talks about are the gross profits oil and gas companies make, and you know what? It's true, they do make ridiculous profits. And they should pay a lot of it to Albertans. But as an Albertan I sure hope the government uses good judgement and care with the money.

Also, usually rate of return is correlated to risk. Oil and gas companies undergo some pretty big risks in exploration... even 3d seismic can be inaccurate. Hundreds of companies have gone bankrupt in Alberta searching for oil and gas. Banks and insurance companies make some pretty hefty profits... do they pay 1/2 of everything they make to the province too? Is their level of risk equivalent? Seems to me (and I honestly could be wrong here because I don't understand enough about it) that a mortgage offered up by a bank is protected. That's why in Canada you won't see foreclosures like in the U.S. Guess my point is that the O&G industry has been painted by a pretty dark brush by a society that is pretty thirsty for its product, and that there are other businesses out there who make some of the same figures but are left untouched because of societal perception.

[Bend it like Bourgeois]

Originally Posted by Shawnski

If the Alberta economy cools a bit over this, it isn't necessarily a bad thing.

For one, the oil and gas will still be there if it isn't taken out now.

For a very big second one, at the pace we were going to extract it, our economy was overheated and what happened? Billions and billions taken out as "transfer payments".

i'm worried cools a little bit could be a huge understatement in Calgary.

We've got 10 years of growth with no roots that could pack up and leave as quickly as it came. Not that the royalty review would be the only contributor, but the timing could not be worse.