Oilpatch giant makes billion-dollar threat over Alberta royalties

[mykalberta]

The only thing I fear is more Royaly money for Alberta means less transfer payments in the form of corporate income tax taken to go fund the welfare provinces and their cheap electricity.

I am sure Ontario and QC who are always whining about money will be just all peachy with Alberta getting and extra 2 bills a year just by changing some tax brackets.

MYK - Rudy is the only hope to defeat evil in 08!

[Flame On]

Won't the increased royalties, make up for any investment losses by companies? Maybe not to the dime, but for the most part it should make up for it? So call their bluff.
Besides, if invenstment slows down, I think that's all the better, it's not going anywhere. Might as well make the province more viable long term.
IM non expert O

[burn_this_city]

Too many greedy people clawing for what they havent earned. Most oil sands projects have a commerically viable breakeven point. The project I'm on right now sits around $45 a barrel.. You add another 20% to that and your in the $50-55 range.. Just because oil trades at $80 a barrel right now, doesnt mean it will in 2-3 years. Historically the price spikes upward for a few years then right back down to the $20-$25 range. If prices tank they will shutter these projects faster than ever before. Prices have sky rocketed on everything related to construction and theres no relief in sight. Everyone whines about the profits at Encana, $6.48 billion last year. No one ever looks at the $2.5-3 billion dollars in exploration investment next year, and the $1-2 billion dollar office building they are constructing downtown. Geeze I coulda swore they were just building a big pile of money to sleep on and park their ferraris under.. Oh and money in private business' hands is always better spent that in public hands.. Don't kid yourselves about the trickle down effect..

DONT BITE THE HAND THAT FEEDS YOU

[ken0042]

Originally Posted by Flame On

Won't the increased royalties, make up for any investment losses by companies? Maybe not to the dime, but for the most part it should make up for it? So call their bluff.

Originally Posted by burn_this_city

DONT BITE THE HAND THAT FEEDS YOU

I have to agree with Flame On- if the province gets X Billion today from Y projects, and then next year they get X Billion from half the same projects, then won't we be just as far ahead? And for not biting the hand; it's not like the oil and gas under our feet will suddenly become useless. In fact, wouldn't being able to hang onto some of it for longer help Alberta maintain its levels for a longer period of time?

[Ford Prefect]

Originally Posted by ken0042

I have to agree with Flame On- if the province gets X Billion today from Y projects, and then next year they get X Billion from half the same projects, then won't we be just as far ahead? And for not biting the hand; it's not like the oil and gas under our feet will suddenly become useless. In fact, wouldn't being able to hang onto some of it for longer help Alberta maintain its levels for a longer period of time?

Plus, with less oil and gas development, we'll be lowering our greenhouse gas emissions too, right? Maybe then the rest of the country might get off our backs about it.

On the downside, there will a job losses, and the accompanying potential for a negative impact on the economy. Although, with the number of job openings in other lines of work due to the exodus of workers to the oil patch, I doubt this impact will be very serious.

[simmer2]

Originally Posted by DuffMan

and in case you were wondering what kind of cash the CEO makes....



http://www.edmontonsun.com/News/Colu...0/4537829.html

That's a completely one-sided article. I love how we can talk freely about what a hockey player earns, claiming he "deserves $6mm" or he "deserves no more than $3.5mm".

Personally, and I may be in the minority, CEO's then technically also "deserve their $10mm" per year. The CEO is in charge of 6200 employees as of July 2006. He determines the direction of that company and along with that 6200 family's livelihoods. Is $10mm alot of money? Sure it is. But when we start talking about the kind of people that earn that amount of money, they all generally "deserve" it.

[Eagle Eye]

Originally Posted by burn_this_city

Too many greedy people clawing for what they havent earned. Most oil sands projects have a commerically viable breakeven point. The project I'm on right now sits around $45 a barrel.. You add another 20% to that and your in the $50-55 range.. Just because oil trades at $80 a barrel right now, doesnt mean it will in 2-3 years. Historically the price spikes upward for a few years then right back down to the $20-$25 range. If prices tank they will shutter these projects faster than ever before. Prices have sky rocketed on everything related to construction and theres no relief in sight. Everyone whines about the profits at Encana, $6.48 billion last year. No one ever looks at the $2.5-3 billion dollars in exploration investment next year, and the $1-2 billion dollar office building they are constructing downtown. Geeze I coulda swore they were just building a big pile of money to sleep on and park their ferraris under.. Oh and money in private business' hands is always better spent that in public hands.. Don't kid yourselves about the trickle down effect..

DONT BITE THE HAND THAT FEEDS YOU

To add to this the increase of the Canadian dollar has erroded much of the profits that $80 oil would normally bring.

[Flame On]

Anyway, in speaking about this it was pointed out to me that Stelmach (sp?) has to instigate the review panels' decisions now. Otherwise he looks like he was A, cowed by interested parties and B, is an Oil/Gas company stooge.
They've in a sense challenged him.

[Flames in 07]

Originally Posted by jolinar of malkshor

I would call his bluff. Once natural gas prices increase again, they will be back out drilling.

Who says they will? with LNG becomming more accessable into North America I doubt you'll see prices much over $5 in the long run.

[Bring_Back_Shantz]

I'm not trying to be a dick, but it seems like there are a lot of people who are incredibly misinformed about what this royalty change will mean, and what this statement by EnCana means.

I'll preface this by saying that I'm in the industry, so I've got a vested interest in not seeing the royalties change, but that proably means I'm also in a better position to understand what this change is all about, as knowing what the canges are directly affects (and is a part of my job). Not be be rude, but unless you've read (AND UNDERSTAND) how the royalties are chaning, and how the economics of oil and gas produciton work I doubt you're in a very good postion to critique it and explain why it's toally fair, and Oil companies are just greedy.

First up, all of the asertations that EnCana can't just take their $1.0 billion and spend it elsewhere is a bit of nonsense. EnCana has properties in Colorado, Wyoming, Saks, BC, Texas, all of which are NOT changing their royalty regimes. projects that up untill now were not as economic as ones in Alberta are now getting priority (apparenlty to the tune of $1 billion).
Think of how many jobs that $1 billion supports, yes those of you not in oil and gas can say that the oil and gas sector has had a nice boom, and now it's time for a slowdown, but less people making oil money, means less people buing cars, less people going to restaraunts, less people buying just about everyting, it's a simle trickle down effect, and you can't think that taking that much economic activity out of the province will not have a very profound and easily felt consequence.

Secondly, not too long ago a lot of incentives were added to increase activity in what was previously marginal opportunities, and some of this is now being removed. One examle is the deep gas royalty holidy, which greatly improves the economics of a deep gas well, because the royalies are reduced early in the life of the well when the NPR is affected the most. In the area I work in removing this means that the economics on a well that was previously somewhere near 25% rate of return has dropped to less than 13%. With cuts in profitabilty like this it is no wonder EnCana is saying that they will move their capital elsewhere.

Do the royalties need to change? Probalby. But there is most certainly a better way to do it than what has been proposed. I'm not going to go over my full objections to this change, as they are too many to go into here, but beleive me when I say that comments like "The oil and gas companies are just being greedy" sho exactly how ignorant some of the people on here are about what these changes really mean.

This statement by EnCana is not a threat, it is a statement of reality brought on by basic economics.

No one in the Calgary office will lose their job over this $1 billion, because you can be guaranteed that EnCana will still spend it and will need people to plan it, but that $1 billion in capital will be spent elsewhere and the whole province will feel it. And remember, that that is just one company, others will do the same.

[Flame On]

Originally Posted by Bring_Back_Shantz

I'm not trying to be a dick, but it seems like there are a lot of people who are incredibly misinformed about what this royalty change will mean, and what this statement by EnCana means.

I'll preface this by saying that I'm in the industry, so I've got a vested interest in not seeing the royalties change, but that proably means I'm also in a better position to understand what this change is all about, as knowing what the canges are directly affects (and is a part of my job). Not be be rude, but unless you've read (AND UNDERSTAND) how the royalties are chaning, and how the economics of oil and gas produciton work I doubt you're in a very good postion to critique it and explain why it's toally fair, and Oil companies are just greedy.

First up, all of the asertations that EnCana can't just take their $1.0 billion and spend it elsewhere is a bit of nonsense. EnCana has properties in Colorado, Wyoming, Saks, BC, Texas, all of which are NOT changing their royalty regimes. projects that up untill now were not as economic as ones in Alberta are now getting priority (apparenlty to the tune of $1 billion).
Think of how many jobs that $1 billion supports, yes those of you not in oil and gas can say that the oil and gas sector has had a nice boom, and now it's time for a slowdown, but less people making oil money, means less people buing cars, less people going to restaraunts, less people buying just about everyting, it's a simle trickle down effect, and you can't think that taking that much economic activity out of the province will not have a very profound and easily felt consequence.

Secondly, not too long ago a lot of incentives were added to increase activity in what was previously marginal opportunities, and some of this is now being removed. One examle is the deep gas royalty holidy, which greatly improves the economics of a deep gas well, because the royalies are reduced early in the life of the well when the NPR is affected the most. In the area I work in removing this means that the economics on a well that was previously somewhere near 25% rate of return has dropped to less than 13%. With cuts in profitabilty like this it is no wonder EnCana is saying that they will move their capital elsewhere.

Do the royalties need to change? Probalby. But there is most certainly a better way to do it than what has been proposed. I'm not going to go over my full objections to this change, as they are too many to go into here, but beleive me when I say that comments like "The oil and gas companies are just being greedy" sho exactly how ignorant some of the people on here are about what these changes really mean.

This statement by EnCana is not a threat, it is a statement of reality brought on by basic economics.

No one in the Calgary office will lose their job over this $1 billion, because you can be guaranteed that EnCana will still spend it and will need people to plan it, but that $1 billion in capital will be spent elsewhere and the whole province will feel it. And remember, that that is just one company, others will do the same.

Probably sounds as assinine to you as hearing Encana make statements along the lines of "Alberta has done well out of it".
Yes but an independent review board is suggesting it's not doing as well out of it as it should be. Period.

[Bring_Back_Shantz]

Originally Posted by ken0042

I have to agree with Flame On- if the province gets X Billion today from Y projects, and then next year they get X Billion from half the same projects, then won't we be just as far ahead? And for not biting the hand; it's not like the oil and gas under our feet will suddenly become useless. In fact, wouldn't being able to hang onto some of it for longer help Alberta maintain its levels for a longer period of time?

What about the loss of taxes that the missiong $1 billion in capital generates?

It's not just the absolute value of the royalties that you have to consider.
As busy as this province is removing $1 billion worth of investment (and that's just by ONE company), will have as much of an impact as the province taking an extra $2 billion in royalties.

Economic impact is not always as simple A + B - C = nothing changes.

[The Yen Man]

Maybe I'm way out to lunch here, but I thought Stellmach was reviewing on whether or not he wants to up the percentage. So if gas prices fall, the percentage taken falls too does it not? So in a way, it's not like gas companies will go bankrupt if it goes down. Well, unless it dips down to the point where its not economically viable for those companies to extract anymore gas. But can't the government build in a provision in there somewhere or something in case that happens that they'll take less royalties? I'm sure there are ways around it.

[Bring_Back_Shantz]

Originally Posted by Flame On

Probably sounds as assinine to you as hearing Encana make statements along the lines of "Alberta has done well out of it".
Yes but an independent review board is suggesting it's doing as well out of it as it should be. Period.

I'm gonna assume you meant "Isn't".

And that's fine, if the board thinks that the province should be taking more, but for ANYONE to think that these changes won't have a massive economic impact is naive, and completely uninformed.

All they see is the panel saying that Alberta should be taking an extra $2 billion worth of royalties.
I'll ask you this? Do you know why the board made these recomendations?
Do you know what the structure change will be?
Do you really think you're informed enough about this to be debating it if you answered no to EITHER of those questions?

What these recomendations do is remove the competetive advantage that Alberta has enjoyed, and is the reason for the boom, which for the vast majority of Albertans has meant prosperity (hell ask the guy who's making $12 an hour selling doughnuts). These changes erode Alberta's ability to attract investment, and in a substantial way (as evidenced by EnCana's statement).

Too many people are looking at this and seeing that extra $2 billion, and ignoring the other numbers that are just as relevant, namely like the one EnCana has thrown down.

Don't kid yourselves, EnCana will spend that money and will still make a pretty good profit from it, but the money won't be spent here and the benefit will be felt elsewhere, NOT IN ALBERTA.

If my company moves their capital dollars out of Alberta will that affect how much I make? Nope, not one bit. Us "Big Oil Fatcats" will keep living large, but I can guarantee that the guys working for the service companies, will be the ones that feel it.

So if anyone wants to justify it by making remarks about how much the CEO makes, or how all the office folk (presumably the target of the oil biz bashing) are making too much, and driving up house prices, etc, you should understand that it won't for the most part affect highest paid folks at the largest companies, it's gonna be everyone in towns, like Edson, Medicine Hat, Cold Lake, Grand Prairie, etc that will feel it the most.

[Cowboy89]

Originally Posted by fotze

Prior to the changes the break-even point was ~$7/GJ for many companies. This would just move that number up somewhat.

If these rates get implemented not only will it help cause small gas companies to go bankrupt, but it will be harder for new companies to get investment dollars for their enterprises when the prices come around anytime in the next ten years or so. The investment community will put an additional 'risk-premium' on Alberta as they are not sure how stable our politics are.

In my personal opinion, whenever you here phrases like 'Fair share' being bandied about in any serious political discussion vote for the opposite viewpoint in the next election. It indicates a shift in the government's or the general publics focus from growing the economic pie to trying to artificially distribute it. It artificially stunts current growth and deepens the bust that would naturally follow as well.

While many argue the virtue about 'slowing down so we can catch-up' they fail to understand that we've already slowed down naturally on both the oil sands and the gas front. Costs are high for both sectors but the oil price hasn't risen as much as costs and gas prices have actually gone the other way. Many people in this province have been duped into thinking that somehow as a whole Alberta is worse off due to 'growing pains.' This is absolutely absurd. Every possible economic metric available indicates that on all accounts Albertans are collectively much better off than any period before. The opportunities available now are unprecidented.

Yes there will be stories of individual people in specific jobs that didn't see 'as much of an increase' as others, or who have a more difficult time affording things because costs are up, but that's why the province already collects a heavy chunk of royalty revenues. If you're not seeing evidence of this in the services you recieve then why not take the government to task for what they're doing with the money they already do get(Considering that they're spending more than twice the amount most other provinces are spending per head I would imagine a lot is being squandered). Failing that, no ones stopping anyone from seeking work that pays more (Which is in abundance).

[Thunderball]

Originally Posted by Cowboy89

If these rates get implemented not only will it help cause small gas companies to go bankrupt, but it will be harder for new companies to get investment dollars for their enterprises when the prices come around anytime in the next ten years or so. The investment community will put an additional 'risk-premium' on Alberta as they are not sure how stable our politics are.

In my personal opinion, whenever you here phrases like 'Fair share' being bandied about in any serious political discussion vote for the opposite viewpoint in the next election. It indicates a shift in the government's or the general publics focus from growing the economic pie to trying to artificially distribute it. It artificially stunts current growth and deepens the bust that would naturally follow as well.

While many argue the virtue about 'slowing down so we can catch-up' they fail to understand that we've already slowed down naturally on both the oil sands and the gas front. Costs are high for both sectors but the oil price hasn't risen as much as costs and gas prices have actually gone the other way. Many people in this province have been duped into thinking that somehow as a whole Alberta is worse off due to 'growing pains.' This is absolutely absurd. Every possible economic metric available indicates that on all accounts Albertans are collectively much better off than any period before. The opportunities available now are unprecidented.

Yes there will be stories of individual people in specific jobs that didn't see 'as much of an increase' as others, or who have a more difficult time affording things because costs are up, but that's why the province already collects a heavy chunk of royalty revenues. If you're not seeing evidence of this in the services you recieve then why not take the government to task for what they're doing with the money they already do get(Considering that they're spending more than twice the amount most other provinces are spending per head I would imagine a lot is being squandered). Failing that, no ones stopping anyone from seeking work that pays more (Which is in abundance).

Squandered insofar as they are paying 2007 dollars + labor premium for projects 10-15 years overdue.

I agree with you. People have no idea how adverse the effects could be by screwing with royalty rates. While EnCana might "send a message" by allocating $1 billion elsewhere, small and even midsize producers don't have the luxury of doing the same. This means job loss... not just "Bill and Marty from Accounting," but thousands of jobs. Say "Exploration Company A" can only produce 50% of their drilling program... that's 50% less need for in house staff. That's where it ends, right? Wrong. That's 50% less need for drilling rigs, service companies, surveyors... all the way down the line. That 50% will also be buying a lot less, so there's the hit to the service sector. Getting the "fair share" ends up damaging the two largest sectors of the Alberta economy.

As Cowboy89 points out... if Alberta is deemed politically unstable, the big companies will simply take their ball and go somewhere else until things change and Alberta is deemed a business friendly locale again. The oil and gas isn't going anywhere. They will take who they need with them to wherever they transfer operations to and fire the rest. They'll come back later when its lucrative again.

But there's a labor shortage... this is a good thing then, right? Yes and no. What a lot of people outside the oilpatch don't realize is that job cuts are already going on. Another mild winter along the eastern seaboard, and natural gas operators will be drilling substantially less... at current royalty rates. Let alone increased rates. Less drilling programs = less royalty tax. If this is not handled exactly right, this will actually cost billions rather than recoup them. While the economy needs to be cooled a little, tampering with natural market conditions could lead to a much rougher landing.

[Flame On]

Originally Posted by Thunderball

Squandered insofar as they are paying 2007 dollars + labor premium for projects 10-15 years overdue.

I agree with you. People have no idea how adverse the effects could be by screwing with royalty rates. While EnCana might "send a message" by allocating $1 billion elsewhere, small and even midsize producers don't have the luxury of doing the same. This means job loss... not just "Bill and Marty from Accounting," but thousands of jobs. Say "Exploration Company A" can only produce 50% of their drilling program... that's 50% less need for in house staff. That's where it ends, right? Wrong. That's 50% less need for drilling rigs, service companies, surveyors... all the way down the line. That 50% will also be buying a lot less, so there's the hit to the service sector. Getting the "fair share" ends up damaging the two largest sectors of the Alberta economy.

As Cowboy89 points out... if Alberta is deemed politically unstable, the big companies will simply take their ball and go somewhere else until things change and Alberta is deemed a business friendly locale again. The oil and gas isn't going anywhere. They will take who they need with them to wherever they transfer operations to and fire the rest. They'll come back later when its lucrative again.

But there's a labor shortage... this is a good thing then, right? Yes and no. What a lot of people outside the oilpatch don't realize is that job cuts are already going on. Another mild winter along the eastern seaboard, and natural gas operators will be drilling substantially less... at current royalty rates. Let alone increased rates. Less drilling programs = less royalty tax. If this is not handled exactly right, this will actually cost billions rather than recoup them. While the economy needs to be cooled a little, tampering with natural market conditions could lead to a much rougher landing.

Politically unstable?! Don't make me laugh. Am I the only one that's finding the mellowdrama coming from industry types to be laughable? Where were they in their concern when their industry lead to the countries highest inflation, or the increasing numbers of homeless people. The cherry picking of "moral fibre" is laughable.

[Thunderball]

Originally Posted by Flame On

Politically unstable?! Don't make me laugh. Am I the only one that's finding the mellowdrama coming from industry types to be laughable? Where were they in their concern when their industry lead to the countries highest inflation, or the increasing numbers of homeless people. The cherry picking of "moral fibre" is laughable.

Politically unstable as in the political whims of the province are not stable, and that they would be going from being pro-business laissez-faire (with already massive regulation) to an even more hands-on, punitive political jurisdiction. No one is talking juntas and coups here... but politicians playing economist means an unstable business environment. Period.

As for the rest of your argument... talk about a straw man argument. Yes, its all the evil oilpatch's fault for the increasing numbers of homeless... seeing as they are providing thousands of jobs for people who run the gamut of education from nothing to PhD for better than average pay? Homelessness is a societal malady, not an industrial one.

The primary reason this boom has devastated Alberta is due to political incompetence and a severe lack of foresight. Ralph Klein cut the hell out of the budget with the mentality that oil would never again breach $20/bbl. Something anyone who has even walked by a Hubbard curve would say is temporary, because supply is finite and prices will naturally increase... and they did over 5 fold from mid 1990s lows. Therefore, rather than building schools, hospitals, roads, LRT and encouraging TOD when the local economy was weak (and laborers NEEDED work) and putting less emphasis on debt reduction until the economics improved (then sitting back and paying off the debt)... they eliminated the debt (by slashing healthcare and education to the bone despite persistent population growth), and are now competing with private enterprise to catch up at a severe premium... so new developments, oil and gas projects (which are paying for all these overbudget improvements) and private construction are all progressing at a snail's pace. Condo towers and new communities are being delayed because there aren't enough crews. "Cause they're all in Fort MacMurray??" Sure, but what about the ring road, new CBE building, Rockyview expansion, Lougheed expansion, Children's Hospital, Glenmore Trail, etc.

Government projects decades overdue sucking up a ton of labor... and they are paying handsomely for it.

The result? Housing shortages and inflation.

[cal_guy]

Originally Posted by Thunderball

Politically unstable as in the political whims of the province are not stable, and that they would be going from being pro-business laissez-faire (with already massive regulation) to an even more hands-on, punitive political jurisdiction. No one is talking juntas and coups here... but politicians playing economist means an unstable business environment. Period.

As for the rest of your argument... talk about a straw man argument. Yes, its all the evil oilpatch's fault for the increasing numbers of homeless... seeing as they are providing thousands of jobs for people who run the gamut of education from nothing to PhD for better than average pay? Homelessness is a societal malady, not an industrial one.

The primary reason this boom has devastated Alberta is due to political incompetence and a severe lack of foresight. Ralph Klein cut the hell out of the budget with the mentality that oil would never again breach $20/bbl. Something anyone who has even walked by a Hubbard curve would say is temporary, because supply is finite and prices will naturally increase... and they did over 5 fold from mid 1990s lows. Therefore, rather than building schools, hospitals, roads, LRT and encouraging TOD when the local economy was weak (and laborers NEEDED work) and putting less emphasis on debt reduction until the economics improved (then sitting back and paying off the debt)... they eliminated the debt (by slashing healthcare and education to the bone despite persistent population growth), and are now competing with private enterprise to catch up at a severe premium... so new developments, oil and gas projects (which are paying for all these overbudget improvements) and private construction are all progressing at a snail's pace. Condo towers and new communities are being delayed because there aren't enough crews. "Cause they're all in Fort MacMurray??" Sure, but what about the ring road, new CBE building, Rockyview expansion, Lougheed expansion, Children's Hospital, Glenmore Trail, etc.

Government projects decades overdue sucking up a ton of labor... and they are paying handsomely for it.

The result? Housing shortages and inflation.

First the authors of the report include 3 economist so your point of the politicians playing economist are clearly false. Second governments across the world have been able to increase the government take significantly in the past four years yet the government's take(including the federal income taxes) have remained the same turning Alberta from one of the least competetive royalties and tax regime to one of the most generous from a period of ten years.

Let's imagine the subsurface oil & gas resources weren't own by Alberta, but by private owners (such as in the US). Would you argue that if these owners push for the best price for their resources would you argue that they were jepordizing Alberta. Or would you think that by pushing for the best price(and the oil & gas companies only agreeing when they believe they make a profit) they would in effect pushing the market to the market equlibrium?

[Vedder]

Originally Posted by cal_guy

First the authors of the report include 3 economist so your point of the politicians playing economist are clearly false. Second governments across the world have been able to increase the government take significantly in the past four years yet the government's take(including the federal income taxes) have remained the same turning Alberta from one of the least competetive royalties and tax regime to one of the most generous from a period of ten years.

Let's imagine the subsurface oil & gas resources weren't own by Alberta, but by private owners (such as in the US). Would you argue that if these owners push for the best price for their resources would you argue that they were jepordizing Alberta. Or would you think that by pushing for the best price(and the oil & gas companies only agreeing when they believe they make a profit) they would in effect pushing the market to the market equlibrium?

they'd only be able to get what the industry could justify in their economics, that's the beauty of a market economy and private ownership. The fact of the matter is that the natural gas business is already on its back due to low prices and a royalty increase could be the finishing punch for a lot of companies who are primarily natural gas and don't feel the benefit of the high oil price to offset the huge decreases in gas revenue.

As a sidenote, I'm quite surprised by the lack of gratitude towards the industry shown by some of the people on here. It's ironic when you consider that it's due in large part to those greedy oil and gas types that we still have a NHL team in this city. But I don't know, maybe once the industry tanks, all those overpaid CEO's will sell their Ferrari's so they can afford to keep the luxury boxes that provide the Flames with millions in revenue every year.