Alberta Royalties Report Released

COMMENT: Alberta's royalty review report is in and it's saying what we've been saying for a long time: royalties are too low, in the oil sands especially, and it's time to stop the giveaway.

19-Sep-2007 Update: Have you read the National Post's "Golden Goose" article? Whine, whine, whine. Told you so."

Royalty Review Framework

The independent panel asked to review Alberta's royalty and tax regime delivered its final report and recommendations to the Government of Alberta on September 18, 2007.

Alberta Royalty Review

News release (September 18, 2007)

Royalty Review Panel Final Report

* Sensitivity Analysis Appendix
* Data Appendix

Royalty Review Panel final report released to public
News Release, Province of Alberta, 18-Sep-2007

Alberta royalties report made public today
David Ebner, Globe and Mail, 18-Sep-2007

Royalties hit would kill 'golden goose'
Claudia Cattaneo and Jon Harding, National Post, 19-Sep-2007

Energy stocks plunge after call to raise royalties
David Ebner and Norval Scott, Globe and Mail, 19-Sep-2007

News Release
Province of Alberta
September 18, 2007

EDMONTON - The Government of Alberta has publicly released the final report of an expert panel asked to examine the province’s energy royalty and tax regime, following through on a commitment to make the royalty review process open and transparent.

Entitled Our Fair Share, the 104-page report provides recommendations about how the government can modify the existing provincial royalty structure.

“Albertans made it clear that examining the province’s royalty regime was a priority to ensure they are receiving their fair share from energy resource development,” said Premier Ed Stelmach. “Albertans, as owners of the resource, now have the opportunity to examine the details of this report as government thoroughly reviews the recommendations.”

The government will provide a formal response to the report by mid-October.

The royalty review process began in February with the appointment of a six-member panel by Dr. Lyle Oberg, Minister of Finance. Chaired by Bill Hunter, former president of Al-Pac with more than 30 years experience in the natural resource sector, the panel included experts in resource taxation and the royalty system. Members of the panel included Evan Chrapko, Judith Dwarkin, Kenneth McKenzie, Andre Plourde and Sam Spanglet.

As part of the review, the panel hosted a series of five public meetings across the province and accepted over 300 submissions from Alberta residents, municipal leaders, and stakeholders in the oil and gas industry.

“Thanks to the panel’s hard work over the past eight months, government has a thorough report and valuable information to consider when making a final decision,” said Oberg. “Our goal is to ensure the royalty framework strikes the right balance, providing Albertans with a fair return while maintaining an internationally competitive system that allows the provincial economy to continue to prosper.”

The complete report and recommendations are available on the Government of Alberta website at www.finance.gov.ab.ca.

This News release (September 18, 2007)

Alberta's government is today publishing a report it commissioned earlier this year on royalties, taxes and other levies paid by oil and natural gas producers. The report is authored by a public panel that toured the province, seeking out views of citizens and industry. The key issue is whether the province is getting its fair share from the oil sands. A final decision on what to do with the report will come in several weeks, the government has said, and the publication has been described as most important economic report in a generation for the province

Alberta should hike oil sands royalties

Edmonton — Albertans are not receiving “their fair share” from the province's energy industry and the government must significantly hike royalties in the oil sands, according to a much-anticipated report released Tuesday afternoon.

“Albertans do not receive their fair share from energy development and they have not, in fact, been receiving their fair share for some time,” said Bill Hunter, chair of the six-person expert panel that wrote the surprisingly blunt report that investigated whether the debt-free province was receiving adequate oil and natural gas revenues.

The panel found that the government's royalty tax take “ranks very low” against competing jurisdictions, especially in the oil sands arena. It recommended that royalties and taxes be raised by around $2-billion a year, a 20 per cent increase.

In recent weeks, various warnings have been issued from oil patch executives against the provincial government tinkering with the royalty restructure, which hasn't been updated since the mid-1990's.

The Progressive Conservative government is expected to provide a formal response to the 104-page report by mid-October. In 2006-07, Alberta collected $10-billion in energy royalties.

“Albertans made it clear that examining the province's royalty regime was a priority to ensure they are receiving their fair share from energy resource development,” said Premier Ed Stelmach. “Albertans, as owners of the resource, now have the opportunity to examine the details of this report as government thoroughly reviews the recommendations.”

The royalty review process started in February when Mr. Stelmach's government appointed the panel, which included experts in resource taxation and the royalty system. The panel held five public meetings across the province and received 300 submissions.

The panel concluded that it's fair to hike royalties for oil sands projects because the area is a “production powerhouse.” It is also recommending businesses operating in the oil sands pay a new tax.

It rejected essential industry arguments that higher costs, which have plagued all oil sands projects, are a reason to keep royalties the same.

Mr. Hunter has urged the government against grand-fathering in any hikes “on the grounds of fair treatment for all participants.”

The panel has asked the government not to increase more than half of convention oil and gas royalties on the grounds that this sector of the industry is on the decline.

Mr. Hunter said that during the review process, the panel found the province's royalty regime was complex and “almost impossible to follow.” The panel also discovered that government bureaucrats couldn't answer many questions because “useful information is not adequately collected in the first place.”

The panel is recommending in the “strongest possible terms” an accountability package that forces both industry and government to regularly publish data about the energy industry.

Mr. Hunter estimated that the Alberta government has been missing out on more than $1-billion annually from royalties they were entitled to.

The report is being released at a time when the Progressive Conservatives and its new leader, Mr. Stelmach, are struggling in the public opinion polls.

Political observers are closely watching how the 36-year-old government handles this delicate file.

Faron Ellis, political scientist at Lethbridge College, said it's unlikely that Mr. Stelmach will do anything dramatic because it's not his political style. “He does his homework. He's not Ralph Klein…The ‘Steady Eddie' approach demonstrates that he has no intention of being Ralph Klein.”

Prof. Ellis also said he hasn't seen a huge public appetite in Alberta to dramatically reform the royalty regime to get a lot more money from the oil patch.

Alberta Liberal Leader Kevin Taft disagrees.

“There's a genuine interest at street level amongst citizens about this issue,” he said in an interview. “There's a mood out there as the owners of the resource that they aren't getting a fair share.” The Liberals want the government to collect up to 25 per cent of total value in royalties.

He said this is a “big issue” for Alberta and a major moment for the Stelmach government, which has “struggled to be decisive on virtually everything it has faced.

“It's very, very important for the government to handle this one effectively,” Mr. Taft said. “It's much more important to them than us in a way. You've seen their [polling] numbers.”

A quick look at Alberta's current energy royalty system:

History: Concept of royalties dates back centuries. They are a way for the owner of a resource to exact a payment from the person developing that resource. What the specific rate should be is the tricky part.

Government Revenues: Energy sector paid Alberta government about $10-billion in royalties in fiscal 2005-06, not including lease sales. Industry says royalty-related revenues account for 40 per cent of total provincial revenues.

Lease sales: Companies bid against competitors for right to explore and develop oil and gas on parcels of land. These fees, paid whether energy reserves are found or not, generated a further $2.4-billion in provincial revenues last year.

Provincial royalty goal: Fluctuated over the years, but currently sits between 20-25 per cent of total energy industry revenues. Critics charge current take is below 20 per cent and far less than other producing jurisdictions, including Texas and Norway.

Conventional oil and gas: Production-based royalty paid on a sliding scale based on price and productivity per well. Formula enables government to get a higher take if well is more prolific than expected or if price rises significantly. Industry says producers are left to shoulder any unexpected higher costs.

Oilsands: Companies pay just 1 per cent of gross revenues until all project construction costs are recouped, then the rate climbs to 25 per cent of revenues, minus costs. Industry says that when federal and provincial income taxes added, the share of revenues between government and industry is close to 50-50.

Other provinces: In Saskatchewan, oil and gas royalties and taxes are forecast to top more than $1.2-billion, or about 17 per cent of total provincial revenues. Like Alberta, royalties are collected on a sliding scale based on the age of the wells, quality of oil, etc. In Newfoundland, royalty rates differ on the three producing offshore oil projects. The province also recently announced small equity stakes in the latest offshore project, Hebron, as well as the White Rose expansion.

Royalties hit would kill 'golden goose'

CALGARY • Debate raged inside and outside Alberta yesterday over how to divide fairly the spoils from the province's envied oilsands deposits following a government-appointed panel's recommendation that would see oil companies slapped with another $2-billion annually in taxes and royalties.

"Do they really wish to kill this golden goose with one fell swing of the tax axe?" said economist Dennis Gartman, editor of the Gartman Letter, an influential investment newsletter based in Virginia, who was "shedding tears" about Alberta going "socialist" and wondering whether the provincial government has "gone mad."

"We want out of all things Canadian, and we want so immediately. We can return at a later date, when these proposals are turned down by the legislature involved. Until then, discretion is the far, far better part of valour. Goodbye Canada; it was fun while it lasted."

Even former Alberta premier Ralph Klein emerged from retirement to voice a strong opinion against radical changes, saying he fears for the industry that directly or indirectly employs one in three people in the province.

"There is one thing for sure, we have had a fair and clear and comprehensive royalty regime where the rules are the same for everyone," said Mr. Klein, who helped raise the oilsands' profile globally to attract investment and was one of the architects of the current oilsands royalty regime.

"It was a regime created by industry and government. Those kinds of rules don't change on a whim. Companies are nervous."

But reflecting the other camp in what has become a heated debate in Canada's most business-friendly province, Calgarian John Zalischuk said he doubts oil companies will abandon ship.

"People living in the real world know that this is not going to happen," he said in an e-mail.
"If there is any energy company that does not like the new rules, they can leave and they will be replaced by someone else. They can always go back to Venezuela, Russia, Kazakhstan or Africa and try to negotiate a better deal," Mr. Zalischuk said.

Meanwhile, a major lobbying effort has begun to influence Premier Ed Stelmach, a novice who is seen as being naïve for having triggered so much acrimony and is expected to pay a political price regardless of which way he leans.

The six-member panel, headed by retired forestry executive Bill Hunter, said in its 104-page report released Tuesday that Albertans aren't getting a fair share of the province's oil wealth and urged a 20% increase to the billions the debt-free government already collects.

The recommendations, while still under consideration by the province, sank oilsands stocks across the board, even as oil prices touched a new record high of US$82.51 per barrel.

J.P. Veitch, an institutional broker at Westwind Partners, Inc. in Calgary, said he has been inundated with calls from clients in Canada and the U.S. "livid with this report and the subsequent uncertainty."

A litany of Canadian investment banks also pulled no punches in their assessment of the proposals in the Our Fair Share report.

FirstEnergy Capital Corp. warned the proposed measures, in a report entitled "Albertastan? Misguided Intentions and the Fair Share Option," would be "negative if adopted, and will slow down the development of oilsands."

BMO Capital Markets called its report: "Assassinating the Goose?" and predicted a negative impact on oil and gas share values. Peters & Co. said "the changes proposed by the panel are incredibly harsh."

Tim Hearn, CEO of Imperial Oil Ltd., Canada's largest oil company, said the panel failed to take into account the cumulative impact of policy changes in the past year that have added costs. Meanwhile, industry costs are soaring and the high Canadian dollar has cut the value of a Canadian oil barrel by a third.

"It's very important that whatever we come up with we end up with a vibrant and competitive industry, not end up doing something that we will all collectively regret," he said in Toronto.

Glen Schmidt, CEO of oilsands startup Laricina Energy Ltd., warned the panel "seems only to have identified the maximum possible tax grab to push the sector to the edge."

The Alberta government said it would have a formal response next month, stirring concerns that the province's oil-dependent economy will be on edge until the dust settles.

The report's key recommendations are that the total government take - taxes and royalties - from oilsands projects increase to 64%, from the current 47% and that the new rules apply to projects across the board, including industry pioneers Suncor Energy Inc. and Syncrude Canada Ltd. that have Crown agreements that lapse in 2015. The report acknowledges that scrapping such agreements could give those developers grounds for lawsuits.

The panel believes Alberta should jump on the global trend of demanding a greater share from its oil wealth and argues that many of the world's producing countries that did so got away with it without seeing an exodus of investment, with Venezuela being the only exception.

"Newfoundland's recent 5% and 10% buy-in deals are a very current Canadian example," the report said.

It also recommends a 5% increase in government charges for conventional oil and gas projects, with higher producing wells bearing the brunt of the increase, while low producers would get a break.

"Adopting this report, the Alberta government slams the door on any growth of conventional gas," said George Gosbee, chairman of Tristone Capital Inc. "I guarantee you would never see the production high of 17 billion cubic feet a day that we reached in 2000 ever again in our lifetime."

CALGARY — Investors hammered oil sands stocks Wednesday, fearing the sector could be hurt if Alberta raises royalties following a landmark report that at once infuriated and befuddled the oil patch.

The report issued Wednesday by an expert review panel concluded that the provincial government should raise royalties and taxes on oil sands production significantly, adding that Alberta would remain competitive even with higher rates. The government has said it will decide what to do about the panel's recommendations by mid-October, leaving most oil producers unable to respond definitively.

The report, which also advocated higher rates on some conventional oil and natural gas wells, proposed that no projects be grandfathered, meaning every energy company operating in Alberta could be affected.

Investors reacted to the royalties report swiftly, driving the Toronto Stock Exchange energy index down 2.7 per cent, compared with 0.5-per-cent slide for the general market. There was a flurry of negative reports from brokerages and an opinion issued by Dennis Gartman, the popular stock newsletter writer, was circulated widely among traders and hedge funds.

“We may be premature and we may be responding too swiftly … we want out of all things Canadian and we want so immediately,” Mr. Gartman wrote in a midday assessment. “We are shocked, aghast, disturbed, disappointed … and we could go on.”

Oil sands stocks were particularly hard hit, with Suncor Energy Inc. down 4.5 per cent and Canadian Natural Resources Ltd. 5.9 per cent lower. Junior oil sands firms such as Synenco Energy Inc. fell further, down 15 per cent.

Conventional producers that could face higher royalties also were hurt, with names such as Highpine Oil & Gas Ltd. down 6.2 per cent.

The report, if implemented, could cut the average net asset value of large oil sands players by about 4 per cent, according to UBS Securities Canada Inc. Alberta's royalty report called for Alberta's total share of oil sands profits, including taxes and the like, to rise to 64 per cent from a current 47 per cent.

Tim Hearn, chief executive officer of top oil sands producer Imperial Oil Ltd., said any additional royalties would harm companies already facing sky-high labour and construction costs for their projects.

“I'm not in a position today to say whether we've reached a tipping point or not because I can't tell you,” Mr. Hearn said. “But there's enough things working against us that if all this stays in place as is, there will be an effect in the industry, clearly.”

A former oil executive who was on the review panel lashed back at energy executives, saying they should concentrate on better managing their own businesses and contain cost increases rather than “whining” about higher royalties.

“I don't have any sympathies,” said Sam Spanglet, who ran Shell Canada Ltd.'s oil sands operation before retiring several years ago.

“[Alberta is] still going to be very competitive. I feel very confident.”

Some Calgarians were angry, with one broker e-mailing his clients with the subject line: “Caracas on the Bow River,” comparing Alberta with Venezuela and its socialist President Hugo Chavez, who expropriated oil assets this year.

“If [the report is] enacted, investment decisions will be impacted … [the report] reads a bit like a Chavez-style manifesto,” Steve Larke, a Peters & Co. Ltd. broker, said in the e-mail.

Premier Ed Stelmach wasn't shaken by the market's response.

“It wasn't any more than what many had predicted,” he told reporters in Calgary.

Some oil sands companies said they could deal with the proposals.

Marathon Oil Corp. of Houston, which is buying Western Oil Sands Inc. for $5.8-billion, said the proposed increases would not deter its takeover, though it did say the pace of future investment might be affected.

“We were of course aware of the actions being taken on royalties,” said Marathon spokesman Paul Weeditz. “It was one of the points we factored into our analysis of acquiring Western, and we are moving forward on the acquisition.”

With the government's course of action unknown, many executives in Calgary were hesitant to speak on the record.

A senior executive for a company developing a major oil sands project, speaking on the condition of anonymity, said the proposed new rates “aren't going to help us, that's for sure.”

But he admitted that the changes likely wouldn't prevent his firm's development from being built, saying that the project should still prove profitable even with higher royalties, and that it was “very unlikely” that his firm would shelve its oil sands plans, given the lack of similar opportunities elsewhere in the world.

The Canadian Association of Petroleum Producers said it is still trying to figure out what the report exactly means and considers the document a step in a discussion process rather than the final answer.