More whining about Alberta's royalty report

See Alberta Royalties Report Released for the first package of coverage and commentary about Alberta's Royalty Review, released this week.

No, Ed, don't give in so quickly!

Parts of royalty report called 'Draconian'
David Ebner, Globe and Mail, 20-Sep_2007

We'll listen to oilpatch, Stelmach says
Tony Seskus, Calgary Herald, 20-Sep-2007

More room to manoeuvre
Editorial, Calgary Herald, 20-Sep-2007

Good direction on environment
Editorial, Edmonton Journal, 20-Sep-2007

Scare tactics too predictable
Graham Thomson, The Edmonton Journal, 25-Sep-2007

BANFF, Alta. — — Alberta could raise oil and natural gas royalties but this week's recommendations for major increases are “Draconian,” according to Murray Edwards, vice-chairman of Canadian Natural Resources Ltd. [CNQ-T], the country's No. 2 producer in the oil patch.

“To get into the particular details, it's probably premature, but I think there was a recognition [among industry leaders] that there maybe could be some increases on royalties as you move to higher [commodity] price environments. But to go the magnitude of the increases [in this week's Alberta royalty report] just goes far beyond the economic capability of the basin,” Mr. Edwards told reporters in Banff on Thursday at an annual business conference.

On Tuesday, a landmark report produced by an independent expert panel concluded that Alberta has been missing out on billions of dollars of energy money, issuing broad recommendations led by a call to hike Alberta's take in the oil sands to 64 per cent from 47 per cent, including royalties, taxes and other levies.

The six-person panel said Alberta would still be attractive for investments even with such an increase. It said Alberta could have collected $11.4-billion in 2006, 20 per cent more than the $9.5-billion actually taken in during a year when oil companies all booked record profits.

Mr. Edwards, and others in the energy business, are criticizing economic figures in the royalty report, suggesting that assumptions on development and production costs, as well as industry profits, are wrong.

Alberta Premier Ed Stelmach has promised a final answer from government by mid-October and Thursday said he is ready for an open discussion, inviting industry to meet with the finance and energy ministers.

“This is an opportunity for industry to look at the numbers and say, ‘You know what? We don't agree with this portion of the report,'” Mr. Stelmach told reporters in Banff. “And that's why in the next few weeks we'll see that discussion.”

Mr. Edwards—who owns $830-million of Canadian Natural stock—said the report didn't strike the right balance between government take and industry profits, suggesting that its recommendations could hurt Alberta's economy.

“The fear is that some of the proposals in the report are so Draconian and so drastic it may end resulting in less economic activity and less revenue overall for Albertans over the long term,” Mr. Edwards said.

Canadian Natural is close to completing the first $7.6-billion phase of its Horizon oil sands project, which would be the fourth mine north of Fort McMurray and produce 110,000 barrels of synthetic oil a day when its starts operation next year.

The company has outlined expansion plans worth more than $20-billion beyond phase one of Horizon. Mr. Edwards said every plan would now need to be reviewed The price of oil closed at a record $83.32 (U.S.) a barrel Thursday, up $1.39.

BANFF - Premier Ed Stelmach hinted today there might be room to move on the controversial recommendations in a major royalty report, saying industry will have a chance to meet with key ministers to discuss concerns.

The new study found Albertans are not getting their "fair share" from oil and gas development in the province, recommending changes to the royalty and tax system that would boost the government's take by $2 billion annually.

After addressing a blue-chip business crowd in Banff, Stelmach suggested that while the six-member panel did their calculations for the study, the government will also take time to crunch the numbers.

"The calculations were done by the panel and they took a position. It's now our report - it's also in the hands of the public - and it will be based now on good, solid evidence," Stelmach told reporters.

"If there's an issue there (with the report), I'm sure industry will be sitting down with our finance minister and our minister of energy, and then the two ministers will bring that forward to caucus."

Stelmach rejected the suggestion that industry might be getting special access to discuss the report. He said this week that he wouldn't be intimidated by anyone - including the oilpatch - in deciding how to respond to the report's recommendations.

"All Albertans can submit their comments to government," Stelmach said.

"This is a major report that was made immediately public. So, there's no private component to this."
The government is expected to respond in mid-October to the study.

Stelmach ordered the review in response to public concerns that Albertans were not getting enough in royalties and taxes from energy development.

tseskus@theherald.canwest.com

© Calgary Herald 2007

Premier Ed Stelmach's government cannot ignore the royalty review it asked for, but neither should it adopt it paragraph by paragraph, as review-panel chairman Bill Hunter demanded last week, saying it should not be "cherry-picked."

The report is a radical document, here and there recommending arbitrary measures over market solutions, that old contracts not be grandfathered, and treating consultation with industry as a barely necessary inconvenience.

Yet, strangely that all works to Stelmach's advantage.

For, change is in the offing, and the energy industry, especially that part of it working in the oil sands, knows it. The 1997 agreement that coaxed today's extraction complexes into existence, has more than done its job. It makes sense to rewrite the rules so that future projects yield a higher return to the taxpayers.

The problem for any Alberta government would be the howls emanating from the industry.

Enter Hunter, with "Our Fair Share." By presenting such an extreme solution, it gives Stelmach room to come back with less onerous terms, that would still extend the province's total take -- even if not by the $2 billion that Hunter says would have come its way, had his principles been applied to 2006 production at 2006 prices.

Where Stelmach can easily give is in dropping such recommendations of the Hunter panel, as that old contracts not be grandfathered.

Alberta's energy industry has been built on trust, and the expectation that a deal made with government, would stay made. Yet, this report effectively proposes the province unilaterally terminate contracts entered into in good faith between former governments and investors, and arbitrarily establish new ones.

It was a surprising, even offensive, recommendation. One wonders how rich last year's $2.1 billion bonus bids would have been, had the Hunter review's proposals governed the market.

Nor is it conducive to investment that consultation with industry be for appearances sake only. Speaking of a new regimen to establish a market price for bitumen, for example, the report first dismisses market forces as "unlikely to resolve this issue in the best interests of Albertans," then continues, "Consultation for this purpose, as a point of clarification, would not entail or imply negotiation nor is it intended to introduce any sense of veto power or consent requirement on the part of the oilsands industry."

Stelmach should be able to give that away with little fuss, as well. Then, he may start to pick cherries.

While high oil prices do not translate directly into surplus profits -- exporters lose on the Canadian dollar's galloping value much of what they make on oil's galloping price denominated in US dollars -- industry has this ace: An insatiable market, just across the border, in a tense world, with the ability to pay. A government that acknowledges its higher costs, and defers to Alberta's tradition of honest dealing, can reach a satisfactory arrangement with industry.

Above all, Stelmach is as entitled as the Hunter panel -- as leader of an elected government, more so, perhaps -- to decide what is, in fact, fair.

It is an unfortunate hole in the Our Fair Share report, that nowhere does it define "fair."

What is fair? An agreed rate of return on investment, or revenue? A 50-50 split between Alberta and the producer? Two thirds-one third, as Hunter suggests for oilsands and natural gas? To the extent the report answers the question, it infers that Alberta should be in the middle of a pack that includes countries with vastly differing geologies and recovery costs, and not a few political systems.

To that point, it is hardly an argument for Alberta being shortchanged, that it squeezes less from producers than Angola, or Venezuela. Fair, then, becomes what Hunter thinks is fair.

And, that's fair enough, as long as everybody knows there's no objective standard in use here, and that Hunter appears at home with arbitrary dictums.

He presents his report as a whole prescription for Alberta's royalty future, but it would be better treated as the opening bid in a process to recalibrate the province's royalty structure.

Stelmach and his cabinet must examine it carefully. Then, they must decide what they think is fair to both Albertans and the industry, and act accordingly. But make no mistake, there is no question industry will pay more: The question is: What is really fair?

© The Calgary Herald 2007

As the royalty review panel discovered, a fair share of royalties isn't the only issue on the minds of Albertans. So is the environment.

Though it wasn't their mandate to deal with the green file, the panel members decided they couldn't ignore a growing concern they heard at public hearings.

"Now, at the end of this task and looking back," writes chairman Bill Hunter, "I am struck by how much of our discussions revolved around exploring appropriate ways to respond to the many concerns voiced for the environment resulting from the pace of development ...

"We on the panel became convinced that the environment is a critical component in the planning of our future."

This is a refreshing and candid message.

Premier Ed Stelmach should take a close look at the panel's suggestion of a conservation tax as a way to move forward. This special Crown Land Conservation Tax would be paid by all sectors -- oil and gas, forestry, mining and agriculture -- that have leave a footprint on Crown land, the panel suggests.

The energy industry would pay a 10-cent-per-barrel levy, the forest industry 25 cents per cubic metre of timber logged, agriculture a $10-per-acre fee for Crown land, and mining a 10-cent levy per tonne.

At the suggested levels, the tax would raise $75 million. The money could be used to set up a multi-stakeholder body to "analyze, assess and plan strategies to protect the environment for future generations."

Such a tax is common in other countries with oil and gas development, the report notes, and it would ensure that of the billions of dollars made, "a portion would be set aside; directed to a cause many Albertans think is vital for obtaining our continued consent for resource development."

The panel members recommend against using the royalty regime as a mechanism for paying for environmental protection, and they're right.

The share of economic rent paid to the owners should not be reduced by a company's environmental footprint.

Alberta took a step down the road to a tax on pollution this year in province's plan to reduce greenhouse gas emissions.

Companies that cannot meet the government-mandated target -- a 12-per-cent reduction in emissions intensity -- will be required to pay a carbon tax of $15 a tonne.

That is expected to raise $175 million in the next two years. Those funds will be put back into new technology that reduces carbon emissions.

The panel didn't spend much time looking at how the conservation tax might be spent.

What's desperately needed, environmentalists will tell you, is not cash for another multi-stakeholder committee (we've go plenty of those), but rather cash to carry out wildlife and forest protection plans.

In 2004, for instance, a multi-stakeholder committee came up with a plan to protect the dwindling population of Woodland caribou.

So far, there's been no money on the table to carry it out, says Glen Semenchuk of the Federation of Alberta Naturalists.

"After we come up with a plan, the government has to go back to industry for the funding to implement," says Semenchuk.

"If you just added a bit to the price we could pay for these things," he said.

It's no secret that land reclamation in the oilsands is years behind. The environment department has yet to issue a single certificate for reclamation.

Is that because the department has no financial leverage?

The panel has done Stelmach's government a favour in opening this door, providing "a talking point for how the world of money and of the environment might come together in Alberta's future," as Hunter puts it.

Stelmach should take advantage of the opportunity to have that long-overdue conversation.

© The Edmonton Journal 2007

After carrying it around like a security blanket for the past week, I have finally put down my well-worn copy of the royalty review panel's report.

Well, it actually put itself down, falling apart at the seams like a $5 suit. I apparently wore the poor thing out rereading the bits about government incompetence and the need to raise energy royalties.

So, to give it, and me, a break, I picked up some newspaper articles instead.

One had the headline: Oil industry says Alberta may kill the golden goose.

Another said, Higher oil tax called 'unjustified.'

A third article explained how energy companies predict "the government proposal would cripple the oil industry and hobble the provincial economy."

Old news, you say? You saw all that reaction last week?

Well, yes, it is old news -- but not from last week. These are all stories from 1972, retrieved from the archives of the legislature library.

Step into my time machine and we'll take a journey back 35 years to an era when American Pie was the name of an epic song, not a teen movie, and Watergate was the name of a hotel, not a political scandal. Richard Nixon was still godfather of the United States and Marlon Brando was godfather of the movie theatres.

In Alberta, the rookie Conservative government of Premier Peter Lougheed had deliberately picked a fight with the energy industry over royalties and taxation, saying Albertans as owners of the resources deserved a higher rate of return that would provide about $70 million more a year in revenue to the provincial treasury.

The oil companies reacted with outrage. The Canadian Petroleum Association said the government's plan was not "practical and equitable." According to the association's brief to the government, Lougheed's proposed tax was "a serious breach of faith with the industry."

The Calgary Albertan reported on May 24, 1972, Husky Oil had delivered its own presentation against Lougheed's taxation proposal, saying, "the net effect of the plan will be to reduce exploration in the province and to discourage the development of reserves once they are found."

The Independent Petroleum Association of Canada issued a dire warning that 50,000 jobs would be lost and one colourful oil executive, John Rudolph, threatened to pack up his drilling rigs and move back to the United States rather than pay the new royalties.

In a retrospective interview last year, Lougheed said he told irate oil executives at the time: "What you don't understand is you don't own the resources."

Lougheed's comment was echoed in last week's review panel report that said: "Albertans own the resource."

Any student of history would not be surprised by the energy companies' heated response to the panel's report, just as Lougheed wasn't surprised back in 1972. He had done his homework and understood the kind of fight he had started 35 years ago. Oil companies will initially resist higher royalties, then learn to live with them.

Lougheed knew, for example, when the previous Social Credit government introduced a new royalty regime in 1962, the oil companies had fought back, warning of a slump in investor confidence.

Same thing in 1951, when the Socred government introduced a royalty regime energy companies said would shake investor confidence, reduce exploration and cause unemployment.

The reaction is as foreseeable as the changing seasons. Introduce new royalties and watch the energy companies erupt. Old Faithful isn't this predictable.

It's not their fault, I suppose. Their first responsibility is to their shareholders, not to the people who own the resources -- which would be us Albertans.

Now, let's return to September 2007. We're still waiting for Premier Ed Stelmach to decide whether he'll adopt the review panel's recommendations and increase royalties. He'll give his answer the middle of next month -- but an increasing number of government sources say Stelmach will likely adopt the bulk of the report's recommendations.

So far, the only political voice raised against the report comes from the fledgling Wildrose Party which issued a news release with a less-than-subtle headline that could have been written by an energy company executive: Leave oil royalties alone!

The Wildrose Party has subsequently discovered an internal split over the royalty issue, however, and is inviting the public to a debate tonight at the Old Timers Cabin in Edmonton.

Party founder Link Byfield will argue against new royalties.

As I write this, nobody had been named to argue in favour of higher royalties, not that it should be a problem.

There are plenty of Albertans who want royalties increased.

As an editorial in The Journal said: "In the matter of royalties, as with anything else, the first duty of the government and the legislature is to do the best for the people of Alberta."

The editorial was written in 1972 -- but could have just as easily been written today.

gthomson@thejournal.canwest.com

© The Edmonton Journal 2007