Official (Alberta) Oil Discussion Thread

[woob]

Originally Posted by Bend it like Bourgeois

People like Topp and Notely knew *nothing* about the industry economics before this. I'll give them credit for listening and hearing.

I'll also give them credit for resisting the urge to take all the upside potential which would have been as fatal as trying to get blood from the stone at current prices.

Still more hints at value added projects, which sounds to me like boondoggle refineries.
And the theory of rewarding lower cost producers sounds good but the devil will be in the details.

Solid grades. They brought in smart people. Clearly listened. Whether it was our good fortune that politics met a crap market or they were genuinely pragmatic about this all along the result is the same.

Now that the uncertainty is removed I think a lot of deep pockets will go shopping.

Good points.

While I hope you're right on the "shopping" front, as we can use an influx of capital back into the province to bring back some lost jobs, I ultimately think this royalty review will have little impact in that manner.

[Bend it like Bourgeois]

For those looking for key points and commentary check out Trevor Tombe on Twitter.

https://twitter.com/trevortombe/stat...38534006288384

[Handsome B. Wonderful]

Originally Posted by Resurrection

There's a lot more to royalties than just price of oil. what if the cost of pulling oil out of the ground suddenly changes for AB? what if the technology makes it much, much cheaper?

How about if the government decides to slash taxes for business? or greatly increase them?

I don't think you're considering the full picture.

If a new technology came along that made things much, much cheaper, it wouldn't do a thing for all the existing extraction in the province. Those facilities are already built and in operation.

The only way costs could suddenly drop is if wages began to be drastically reduced. At that point, things would already be dire in the province

I don't think you understand the full picture. Your naive ideologies have no place here.

[Frequitude]

Originally Posted by Resurrection

NDP campaigned on a fair royalty review

NDP won and had a mandate.

NDP conducted a fairly quick and obviously fair royalty review

NDP has decided that things are fine at this time and in this climate.

Outrage. It's so predictable and such typical politic team sports bullcrap I can hardly be surprised.

No, they campaigned on rebalancing the royalty system because Albertans weren't getting their fair share.

From the NDP Platform

The PCs have also refused to implement realistic oil royalties that the people who own the resources — all of us — deserve. The reason for this refusal is clear: Jim Prentice and the PCs are too close, much too close, to a small minority of Albertans who bene t from the status quo under the PCs, while the people of Alberta as a whole are deprived of much of the benefit of our own resources.

100% of incremental royalty revenue, above the sums earned by Alberta under the current regime, will be invested into Alberta’s Heritage Fund – an important first step to achieving the original vision for this fund.

The PCs failed to earn Albertans’ full and fair value for their oil and gas by maintaining one of the world’s lowest oil royalty rate structures, even when prices were very high.

[MrMastodonFarm]

I see some have successfully set themselves up to be outraged no matter what today.

[peter12]

Originally Posted by MrMastodonFarm

I see some have successfully set themselves up to be outraged no matter what today.

Are you alright, man?

[Frequitude]

Originally Posted by Resurrection

and royalties would need to be adjusted so that Albertans share in this wealth, which comes from our soil and our land.

Albertans would share in this wealth because under the existing and the "new" (or should I now say "existing") framework royalties are based on a percentage of profit. If technology increases profits, both Albertans and corporations share in this increased profit.

[nik-]

Originally Posted by MrMastodonFarm

I see some have successfully set themselves up to be outraged no matter what today.

I'm not outraged, but I am pretty annoyed. These rates weren't secret and Notley has been around for a while so she's aware of them. It seems like a pretty big waste of time and money.

[firebug]

I keep getting confused by the comments that there are no changes... did people see a different conference than I.

Existing wells, no changes.

New wells, changes. See bend it's post above.

[nik-]

Originally Posted by firebug

I keep getting confused by the comments that there are no changes... did people see a different conference than I.

Existing wells, no changes.

New wells, changes. See bend it's post above.

That graph isn't where the difference is. Where there's likely going to be the difference is auditing around where the payout period starts.

[Bend it like Bourgeois]

Originally Posted by woob

Good points.

While I hope you're right on the "shopping" front, as we can use an influx of capital back into the province to bring back some lost jobs, I ultimately think this royalty review will have little impact in that manner.

Yeah fair, I meant shopping as in consolidation.

Nothing new in the short term but I think now the strong can take out the weak and at least set the stage for actual capital investment.

[Frequitude]

Originally Posted by MrMastodonFarm

I see some have successfully set themselves up to be outraged no matter what today.

Nah, I had set myself up to expect a simplified framework with a small but not overly industry-damaging increase in rates to go along with their campaign pledge to increase them. And I would have been fine with that. Not in favour, but accepting. They campaigned on it and got voted in so any displeasure with a token higher rate disappeared many months ago.

This is the LAST thing I was expecting.

[peter12]

No, I think MMF was talking about himself.

[chemgear]

Originally Posted by Bend it like Bourgeois

Yeah fair, I meant shopping as in consolidation.

Which will likely mean more layoffs in the short term certainly.

[CaptainYooh]

From what I'm hearing there is a big sigh of relief coming from the energy industry this morning. Below, is a point summary I received from a friend who is very close to this review process:

Royalty Review Release


Ø Government is accepting the recommendations of the panel in full
Ø Goal is to create a simpler, more transparent and efficient system. Emphasis on OPTIMIZING returns. Not maximizing.
Ø Panel found that, overall, Alberta’s royalties are comparable with other jurisdictions. And with respect to oil sands: “The oil sands royalty framework implemented in 2009 provides Albertans an appropriate share of value”
Ø So their recommendations became about MODERNIZING the framework and making it more transparent to increase public trust, not about raising or changing rates.
Ø It says it will reward innovation and improved costs. Big focus on costs, and harmonizing methods. They will be basing the royalties on an annually established average of Drilling and Completion Costs. If you can be more efficient or use technologies to beat the average, you get to keep more of the revenues.
Ø All changes to the framework for crude oil, liquids and natural gas will apply to new wells in 2017. Existing royalties should remain in effect for 10 years on the wells drilled before 2017.
Ø More transparency and disclosure on royalty calculations and allowable costs will be implemented (worked on throughout 2016 – calibration period of 60 days). Will publish an annual Capital Cost Index for oil and gas March 31 every year. Will also publish the revenue, expense, and royalty information for each oil sands project.
Ø Government will develop a strategy to capitalize on adding value to its vast natural gas reserves. It will also look at opportunities to accelerate partial upgrading of bitumen. Government will assemble a working/advisory group to establish this strategy.
Ø Government will report annually on the performance of the Royalty Framework based on a set of established metrics such as returns to the people of Alberta (accessible website, report made public and presented to the Legislature. Metrics to include: industry costs, investment levels, job creation, and environmental performance.

Details:
Recommendation 1: Establish Guiding Principles:

1. · Optimize Returns to Albertans: Framework encourages the application of new processes and technologies to improve the efficiency of developing Alberta’s energy resources. Lower costs increases returns
   
2. · Attracts investment and promotes job creation: supports predictable business climate in Alberta.
   
3. · Supports downstream and value-added industries: (such as upgrading, refining, petrochemical processing and fertilizer manufacturing.
   
4. · Encourages environmental responsibility

Recommendation 2: Modernize Alberta’s royalty framework for crude oil, liquids, and natural gas:

1. · All changes for new wells only, beginning in 2017
   
2. · Design a royalty structure for crude oil, liquids, and natural gas that emulates a “revenue minus costs” approach, providing both the Province and investors with a clear line of sight on recouping certain upfront capital costs on average, and ultimately, see them re-invested in Alberta
   
3. · Harmonize the royalty structures across crude oil, liquids, and natural gas to remove distortions in the current framework.
   
4. · Eliminate the multitude of expiring drilling programs and replace them with a permanent formula to easily calculate Drilling and Completion Cost Allowances for each well, based on vertical depth and horizontal length.
   
5. · Apply a flat royalty rate of 5% until cumulative revenues from a well equal the well’s Drilling and Completion Cost Allowance, followed by higher post-payout royalty rates that increase with price.
   
6. · Implement strategic programs (also by March 31): Enhanced hydrocarbon recovery, and high risk experimental wells.

Recommendation 3: Enhance royalty process for the oil sands

1. · Retain the current structure and royalty rates for the oil sands
   
2. · Increase the transparency of allowable costs

Recommendation 4: Seize opportunities to enhance value-added processing

1. · Develop a value-added natural gas strategy for Alberta
   
2. · Examine opportunities to accelerate the development and commercialization of partial upgrading and alternative value-creation technologies for bitumen
   
3. · Enlist the advice of experts (Premier later said she’s going to assemble a working group to help them develop a long-term value-add/diversification strategy).
   
4. · Provide financial support to accelerate the commercialization of partial upgrading technologies

For a person not directly involved in O&G industry, it actually looks OK to me. I would appreciate someone more into this field explaining a couple of points on a layperson's level:

Point 2 of Recommendation 2: Does it mean that it could still get worse? What needs to be "designed"?

Point 4 of Recommendation 2: Essentially, same question as above.

Point 5 of Recommendation 2: How does it compare to present rate?

General question: which processes are going to become more expensive/difficult to comply/less attractive/less competitive from an investment perspective as a result of this?

[Gundo]

Good lord, that could have just been announced with a bloody tweet.

[puckedoff]

Originally Posted by Gundo

Good lord, that could have just been announced with a bloody tweet.

Yeah but then we wouldn't have heard the soothing elevator music

[CaptainCrunch]

The NDP, can relax and regroup now and work towards the next firestorm which is the budget in I think March.

With no change in the RR, I would expect that this budget will feature fairly heavy cuts in the governments day to day operating budget and spending.

[Bring_Back_Shantz]

Everyone who is saying nothing has changed is missing a few very important key points.
Specifically that royalties are now tied to well costs, and the effect this will have on producers based on their costs vs industry averages.

Also, I'm trying to find out if a couple key incentives are still applicable, but I haven't seen anything specifically about them. Whether or not these are still applicable and how they compare to the new cost based model could have some interesting consequences, and may mean that this overall is a net benefit for some and not others.

EDIT: I just found out that the incentives I was talking about are being extended and being built into a new framework.
Also of SIGNIFICANT NOTE is that after the cost based hurdles have been met, new royalty rates will apply to wells which will be commodity price based (as they currently are, with a rate based component as well), however those rates have not yet been determined. So there is still room for change.

Another point that I'm a little concerned about is how they keep stating that they will not be increasing their take overall, but after hearing all the talk about how the carbon tax is "Revenue Neutral", I'm a bit wary of how the NDP is willing to frame economics using terms that mean the exact opposite of what they are using them for.

Either way, I'm no NDP cheerleader, quite the opposite, and I think overall this is a relatively neutral outcome, but like I said, anyone saying "Nothing has changed" is showing that they either have no idea how royalties worked prior to this review, or they haven't read the review.

[CorsiHockeyLeague]