Royalty Review

[LynnF]

I'll tell ya what....I wasn't paying too much attention to this a couple of weeks ago, but after listening to our CFO, analysts and our sales force who tell us that our clients are sitting on their hands waiting to see what happens next week, I'm getting a little uncomfortable. The phrase "you will be able to shoot a cannon through downtown" does not make me feel very good about this whole thing right now.

 

Who is feeling optimistic the Premiere is going to do the right thing here?

[EdB]

I don't think that this arshole realizes how far down hill this runs and how many peaple will be out of a job.

 

Encana said they will stop drilling witch means i'm out of a job. Most companies i heard will go to Sask or just fold up.

 

Hope he wasn't planning on a second term cause i he did he's fooked. Greedy b@stard. Some of these oil companies are allready paying millions of dollars to the gov and he wants more. At least houses will be cheap to buy soon.

[Badger]

...

[BillyGopher]

I hope that the gov does the right thing and follows Norway into getting true value in an industry that needs our resources. Good old USA and other foreign lands (see China) will come banging down the door very soon and the short term pain by doing the right thing will mean long term prosperity and stability vs the give away of today.

 

Just casting a line into a pool to see what rises, please don't come too hard back at that statement, looking for thoughts to that.

[OneMoreLastCast]

If it goes thru as some think it might, I will most likely be forced to work oversees.

 

I work on Contracts in the Fort McMurray area and just the review alone, without anything else, has already scared a lot of money from the area. The fact that the threat, whether it goes thru or not, is there has caused investors to take their money elsewhere because if they don't do it now, then might one day is the frame of thought it seems.

 

People don't realize that the money put into getting the Oil out of the ground comes from investors and they will very easily invest their money in something else.

The Premiere of Saskatchewan is limbering up for if it happens, because he will be doing back flips.

 

My 5 year old could figure out that changing something to get $2 Billion will cost upwards of $25 Billion is not good business, so hopefully our brutally underqualified Premiere and His Board can do the simple math as well.

 

So, as for the question....Yes, I am optimistic because it would take the World's least intelligent human being to do what they are threatening.

 

If they get their 20% Royalties, Fort McMurray will be a Ghost town. Calgary and Edmonton will take a big hit as well. Anyone that knows me will agree that I am a very positive person with just about anything and everything, but anyone that sees any positive coming out of this doesn't have all of the information.

 

I've heard the jobs lost will be around 30000, and that is just in the Oil Patch which doesn't necessarily include the Fort McMurray area.

 

The only upside is that I would be able to pick up a really nice house for cheap and move back to Calgary.

[fisher26]

The only upside is that I would be able to pick up a really nice house for cheap and move back to Calgary.

 

I also agree that Calgary’s economy needs to slow down. Holy cow at this rate we'll be two million in 20 years, not to mention the disgusting sprawl that has sprung up in the last few years, those cookie cutter houses are taking over the county side.

 

Albertans have been ripped off from oil royalties since the beginning. It would be nice to take some of that royalty money and put it into a decent education program, healthcare and affordable inner city housing. I doubt that a Royalty increase will mean everything collapse, maybe just those oil executives in their hummers will have a little less cash to frivol away.

 

After all oil companies are making record profits and it's not like this province has record services, schools and hospitals.

[Glenbow]

I can only hope that our illustrious Premier leaves well enough alone. I pulled my RRSP's today that are in the oil & gas sector as a precaution. I can re-invest if things go well, but if they don't I won't be down another 25% like after our Class-A Doofus Prime Minister screwed me out of 25% of my retirement savings with the Income Trust broken promise.

[reevesr1]

Just so we are clear on who is at risk here, it isn't the oil executives with their hummers. They, for the most part are set for life. It's the rank and file who will suffer, and the stark reality is the further you are down the scale, the more the suffering will be. Those of us who have come from other places can always go back, though in my case I sincerely hope that doesn't happen. But I have lots of friends who are born and raised here who are scared. Answer me this:

 

If Joe who is a high school educated roughneck, with a couple of kids looses his job because the oil industry "slows down" who is going to hire him and the 10's of thousands of others like him? The good news is McDonalds and Wendys can go back to paying minimum wage because they will have lots of applicants. Joe gets to try to sell his truck (with no one to buy it) his house (same problem), and will go bankrupt. Thats what will happen if the "slow down" becomes an "all stop."

 

The thought that Canadians will now step in and pick up the slack is a bit far fetched as well. There are many reasons, but I'll only go in to the biggest one:

To drill and produce a well takes lots of capital investment. If you are a Major oil company, that capital comes from within. If you are a Canadian startup, you gotta raise the money. Trust me when I say that if the royalty increase does cause the majors and big Canadian companies to stop drilling, there will be almost no money available anywhere for anyone to drill anywhere else. (edit: I mean in Alberta. Not Sask or BC)

 

There is a bit of a recoil for many in the province because of the big profits of oil and gas companies in the last several years, mostly caused by a rapid increase in the price of the resource. However, if memory serves, there is a mechanism already in place to ensure the province and federal government get their fair share of these profits. It has a name which is evading me, wait I know. Its called Taxes. It's like royalties, but on the back end. Another word of caution here, taxes and royalties already do fund hospitals, schools, roads, etc. Raise royalties to a level that makes it too painful for companies to stay, and can someone tell me where the money is going to come from for infrastructure? The good news is you won't need as much because there will be less people. And those cookie cutter houses will all have for sale signs on them.

 

Look, I have no idea what the final outcome of this will be. I do however know what a bust is like, and make no mistake, that is what the province is playing with right now. This province has lots of resources, and they will be consumed eventually. The high operating cost that already exists in Canada ensures that they will be consumed slowly, which is good. Change the business environment and you run the risk of maintaining the same old boom bust cycle.

 

Be careful what you wish for.

[Taco]

Bullshit boys...look to the Lougheed yrs, this ain't the first time there's been such a hue and cry from Calgary's highrises. The universe is not ending and the Conservatives know damn well that if they don't implement the vast majority of the report they are most likely done as a political force in Alberta. Anyone heard of Social Credit??

 

Just look to it being phased in over a number of yrs.

[Glenbow]

If it ain't broke, don't fix it.

[reevesr1]

Bullshit boys...look to the Lougheed yrs, this ain't the first time there's been such a hue and cry from Calgary's highrises. The universe is not ending and the Conservatives know damn well that if they don't implement the vast majority of the report they are most likely done as a political force in Alberta. Anyone heard of Social Credit??

 

Just look to it being phased in over a number of yrs.

 

Not going to disagree with you Taco (ok, maybe a little). I will say that for the many of the companies in Canada the profit margin ain't all that great to begin with, and is much higher in many parts of the world. Raise royalties, and the landscape will change. The question is into what.

 

And you just hit, in a nutshell, what is wrong with political parties in general (and those of us who elect them). The decision will be political, not based on business, need, analysis, whatever. Just self preservation. Ain't politics grand.

 

Finally, how many busts since the Lougheed years? Just because the industry came out the other side doesn't mean it was the correct way to get here.

[Crowsnest]

Bullshit boys...look to the Lougheed yrs, this ain't the first time there's been such a hue and cry from Calgary's highrises. The universe is not ending and the Conservatives know damn well that if they don't implement the vast majority of the report they are most likely done as a political force in Alberta. Anyone heard of Social Credit??

 

Just look to it being phased in over a number of yrs.

 

 

Amen Taco,

 

You are wise beyond your years. Taco for Premier.

[trailhead]

Yes it will be interesting to see how this all plays out. It was also interesting that the chairman for the commitee that authored the study was a forestry executive. I don't think that the oil & gas business will go bust, if the review goes through as written. But it will definitely contract, as for Calgary going bust that won't happen because the companies that operate in the neighboring provinces and states are all based there. The big hit will be in Ft McMurray and in Edmonton, that's where all the hottest action has been and where the biggest bubble to burst is located. Finally the one thing that still keeps not being addressed is the landsale dollars that the oil & gas industry pays twice a month into the provincial coffers, about 5 billion last year. If the business goes south even only moderately, that will contract too.

[skiff]

Hi all,

 

Having 'lurked' on this and predecessor boards for quite a while now I finally feel like I have something to add to this board. I work in a Junior oil & gas company who's production is dominately natural gas (85%) and who dominately drills in the western part of the province (read = more expensive; typical drill, complete & tie-in costs are $2.5 - $3.5 million per well, on average 60-70% of the times they are abandoned therefore we're out of pocket & our annual budget is $50MM for everything).

 

On a per unit basis here's a simple way that we look at our current difficulty in trying to stay in business.

 

Cash left to reinvest after we sell our product:

Average price: $7.0/mcf (in the US; Alberta's is actually closer to $6/mcf) LESS

Cost to operate:

[wongrs]

I'm not sure I understand why so many jobs will be lost because of this royalty review. The fact is that the lifting cost for a barrel of crude is between $20 and $30 per barrel averaged over the life of the project. This includes oil sands operations which is the most expensive recovery in Alberta (that I'm aware of). Current price of oil is $70+ and increasing. Investing 20-30/bbl to get back 70+ doesn't seem like too much of a risk to me. Also take into consideration that the review included taxes (termed total government take). Even when they considered taxes + royalties Canada was still low comparatively. Then include that a member of the panel worked for Shell as the director of Oil Sands operations (he actually comments on the radio that he believes royalties should be increased). Perhaps the smaller operations won't fare as well as they don't have as much capital as Rick suggests. I still don't understand how so many people will lose their jobs. Yes, there is a slow-down in the industry. Of course there is. Once the dust settles, I think business should pick back up again, would it not?

 

lifting cost of $20-30/bbl

+ >$70/bbl selling price

+ royalty review affirmed by oil sands executive

+ politically stable country

======================

= mega profits

 

 

for me, i make less than the average person who works in O&G and have to deal with the high inflation that is driven by the excess disposable income people have. I don't have that disposable income so it becomes more and more expensive to live in this city. Like dang, I can even find an indian lunch buffet in the downtown for less than $15!!

[trailhead]

Does your lifting cost include the F&D costs? Or are you basing that on proven reserves and the associated production costs?

[reevesr1]

Rich,

If the above is true, then why were some of the majors already pulling back a bit, and in some cases a lot? The perception that Alberta is a land of huge profits is just wrong. While the last couple of years have been fantastic exceptions, it is not the rule. We are coming back to the norm, and activity is dropping. This is before any change in royalties. Also, do not forget about the dollar change lately. That has negatively impacted the industry as well as they get less Cdn Dollars for their product.

 

Also, except for heavy oil (which is admittedly a notable exception) the price of oil, in Alberta, is an irrelevant number. Look at gas, nothing else. There is no appreciable conventional oil left in Alberta. (And the only lifting cost that matters today is heavy oil. I don't know what the number is, but it is way north of $30.

 

I know I am not going to convince anyone of this who doesn't already believe it, but I can't stress enough how this perception of mega-profits is just not true. The cost of operating in Canada is huge (with political stability comes a highly trained work force which also means highly compensated). The profits are small, compared to other hydrocarbon producing countries. You can think of Canada (and the rest of North America for that matter) as a bond fund. The developing world is the stock market. When things are good, money goes into the stock market and leaves the bond fund. Things are good now in the rest of the world and the money is leaving. Don't believe it, look at rig count. Way down this year. Again, before the review.

 

As I said, I don't claim to be able to predict what will happen post review. I just want everyone to know what they are playing around with. In many cases history is a fantastic predictor of the future. Using my best Forest Gump impersonation "I may not be a smart man, but I know what a bust is." It's happened too many times in the past, and do not kid yourself that it cannot happen again.

[wongrs]

I'll find the reference for the lifting cost later on tonight. But for now, a news article!

 

http://www.canada.com/edmontonjournal/news...k=80683&p=1

[reevesr1]

I'll find the reference for the lifting cost later on tonight. But for now, a news article!

 

http://www.canada.com/edmontonjournal/news...k=80683&p=1

Interesting. My bet is all the left wing nuts are on the side of increasing the royalty, more than the committee for that matter. It's never very difficult to determine which side of any issue the nuts will fall on (hey, I just made a pun).

 

I can also safely assume I know which side of the fence the reporter of that article falls on.

 

Edit: I just looked at the title to the article. "Oilpatch showing paranoia and fear"

 

He got the fear part right! But....

 

According to Wikipedia, "Paranoia is a disturbed thought process characterized by excessive cognitive modules anxiety or fear, often to the point of irrationality and delusion. Paranoid thinking typically includes persecutory beliefs concerning a perceived threat"

 

 

A couple of points: 1. The threat is real, not just perceived and 2. To paraphrase Mel Gibson in some movie with Julia Roberts-"just because I'm paranoid, it doesn't mean I'm wrong" or something like that.

[wongrs]

Alberta Chamber of Resources, 2004. Oil Sands Technology Roadmap. Accessed online at http://www.acr-alberta.com/Projects/Oil_Sa...ogy_Roadmap.htm

 

Figure 2.2 on page 12 has cost info. Operating costs for mining and in-situ extraction follow in subsequent chapters.

 

If this info is not accurate, then I'd be happy to take a look at any other info that can be supplied. I don't really know the oil sands business so others might have more insight.

[reevesr1]

Alberta Chamber of Resources, 2004. Oil Sands Technology Roadmap. Accessed online at http://www.acr-alberta.com/Projects/Oil_Sa...ogy_Roadmap.htm

 

Figure 2.2 on page 12 has cost info. Operating costs for mining and in-situ extraction follow in subsequent chapters.

 

If this info is not accurate, then I'd be happy to take a look at any other info that can be supplied. I don't really know the oil sands business so others might have more insight.

 

I know very little about Oilsands as well. But a report from Jan 2004 means 2003 (or maybe 2002) numbers for costs. Multiply by 1.5 to 2 for today's cost would be my bet. Others can probably firm that number up. Also, what they don't tell you is that bitumen does not sell for the same as WTI or Brent, it sells for significantly less.

[rusty]

Correct me if I'm wrong - but isn't AB currently on the low side of royalties worldwide? I've heard that this puts us more in the middle of the pack. The current 1%/25% setup seems like BS to me.

 

I just can't believe that these megaprojects are "hardly profitable" when their costs double their budgets and they still recover their costs in a matter of ~3 years.

 

The cost of heavy oil recovery seems high because you're trying to recover a massive investment over a short period.

 

Can't speak for the NG folks, but the heavy oil side needs some downward pressure or you're going to be paying more insane prices for labor and materials in 2 years than you are already.

 

In twenty or thirty years heavy oil will be the only game in town. These resources belong to Albertans and we should be getting as much as we can for them.

 

Besides, do you really think that "big business" is going to roll over and play dead when they're asked to turn a bunch of money over?

 

I think the best solution is to phase in the royalty program over 5-10 or so years and come up with a good plan to ensure that future generations benefit from the enormous wealth we've all been blessed with.

[rusty]

Also, what they don't tell you is that bitumen does not sell for the same as WTI or Brent, it sells for significantly less.

 

Exactly! And that right there is why there needs to be more upgraders built here. Alberta needs to think long term and in terms of "value-added" instead of being a warehouse for natrual resources.

[reevesr1]

Where did the 3 yr number come from? Not doubting, just curious. I agree that would seem pretty quick for billion dollar projects.

 

I totally agree that Oil Sands will be it for the future, and it will be produced. But today is Natural Gas.

 

And I do have another question:

I always hear people say that you need to protect the resource for the future. What makes people think that is not happening now? Oil and gas have been produced from Alberta since the early 1910s. Population in 1910 370,00 plus or minus. Today, the population is 3 million, plus or minus. Seems like the industry has been protected pretty good so far, or is there an industry I am missing here?

 

Edit-and I couldn't agree more on the upgraders.

[skiff]

Troubles with completing my first post, so here it goes again...

 

I can't speak for the heavy oil guys as our company is 80% gas. Here's how our "Profits" are calculated in the Natural gas business in today's environment (all numbers from my companies latest quarterly results)

 

Sale Price = $6.5/mcf (What people bought our gas for on a per unit basis)

LESS

Operating Costs = $1.3/mcf (What it cost us to operate our wells, etc)

AB Royalties = $1.6/mcf (25% of price; would rise to 30% or $1.95 under the new proposal)

G&A Costs = $0.3/mcf (Salaries, office rental, paperclips, etc; NOTE - the new royalty adds the equivalent cost of doubling our workforce & office space to our cost structure)

==============================

Total Cash Left to Reinvest = $3.3/mcf

 

It cost most Junior O&G companies like ours approximately between $3.3/mcf and $4.3/mcf just to find & develop (F&D) new gas last year ($20-$26/barrel oil equivalent)

 

So you can see that in today's price environment we get back between $0.75-$1 for every $1 of investment ($3.3 / $3.3 or $4.3). Under the new royalty the numbers drop to $0.7-$0.9.

 

Our beef is not that we have to pay royalties, or even that they need to be adjusted, it is just that under the proposed system, at today's prices, you're making an unprofitable business even less profitable which means we have to curtail capital spending until either the service sector costs go down sufficiently (reduces our F&D costs; less work for the rural areas & associated communities) or the price of gas rises sufficiently to offset the higher service costs that go along with that increas.

 

Just my $0.02.

Tite lines, not tite government