Reality of 1 billion dollar royalty break not as simple as critics contend.

This is from the Edmonton Journal. This is great propaganda for Big Oil masquerading as logical argument. Here is one argument:
The government argues that even though the concession to deep wells might mean less money than expected in the short term, it will mean more money in the long term. The government is forgoing $1.2 billion over five years, but expects the royalty break will actually encourage so much new drilling the province will collect $2 billion over a 10-year period as the wells continue pumping out oil and gas -- for a total net benefit of $800 million.
It is true that there is a net benefit over the ten years--assuming the estimates are not just picked out of a hat-- but there are many neglected aspects that are not factored in. The price of oil is quite high and may go higher over the next few years. The number of new finds is drying up so that companies will be willing to invest even in higher royalty areas. Hence the scenario painted by the argument is not the most likely one. If Alberta just leaves the oil where it is the resource value is most likely to increase from its value now and the relative differential in royalties vis-a-vis other locales to diminish. Of course it is also possible that Sask. could elect another NDP government that would try to outdo the Sask Party in generosity to Big Oil. But it is more likely that people will waken up sufficiently to demand a better share of the pie for provinces from Big Oil.
The other neglected aspect is that the province itself could invest in its own drilling operations and pocket the profits itself. Of course since Big Oil runs the province in effect as far as the oil business is concerned this option does not even appear on the radar screens of the mainstream press. The whole frame of discussion is within the private for profit sector. This limits the freedom of the province to develop its own resources.


Sunday » April 13 » 2008

Realities of $1B royalty break not as simple as critics contend

Graham Thomson
The Edmonton Journal


Saturday, April 12, 2008


EDMONTON - Twenty-five hundred metres is not a significant distance in daily life. It's how far you might drive to the nearest pizza place for some takeout.

It's how far you'd walk a small dog and about half the distance of a decent jog.

But it becomes a terribly big distance if, say, you're climbing a mountain face in the Rockies. And it's not much fun if you're drilling a well for natural gas.

The Alberta government might not be doing much these days for mountaineers -- but it is offering help to those drilling deep wells.

The government is giving a billion-dollar break over five years to energy companies drilling wells deeper than 2,500 metres for natural gas and 2,000 metres for oil.

The break is part of a government plan to deal with the "unintended consequences" of its new royalty framework announced last fall. Under that framework the government hopes to collect an estimated $1.4 billion more a year through higher royalties. Or at least it was supposed to. The new break on deep wells means the government's estimated take will be cut by $200 million a year.

Critics have been quick to accuse the government of breaking its promise to squeeze more money from energy companies. NDP Leader Brian Mason, who predicted during the provincial election the government would make new sweetheart deals with energy companies once it was safely re-elected, is now saying in so many words, "I told you so."

But it's not that simple.

The government has been saying all along it would have to give a break to companies drilling deep wells, particularly for natural gas. We just didn't know how big a break it would be.

The companies were due a break because last September's report from the government-appointed royalty review panel didn't properly factor in the steep costs of deep wells. When the government announced its new royalty framework on Oct. 25, it still hadn't been able to figure out how much of a break the deep wells warranted.

"The government will revamp the Deep Gas Drilling Program," said the government in its 19-page framework. "Some members of the Alberta Royalty Review Panel have conceded their report erred by not mentioning Alberta should keep a benefit for deep wells with high drilling costs. Support from deep gas drilling is instrumental to the viability of gas development in Alberta."

Cynics would say the governmentdeliberately withheld the amount of the revamping from the public until after the election.

Again, it's not that simple.

The government argues that even though the concession to deep wells might mean less money than expected in the short term, it will mean more money in the long term. The government is forgoing $1.2 billion over five years, but expects the royalty break will actually encourage so much new drilling the province will collect $2 billion over a 10-year period as the wells continue pumping out oil and gas -- for a total net benefit of $800 million.

According to Energy Minister Mel Knight, the government is thus still on track to collect $1.4 billion a year more in royalties.

"Based on new, updated commodity-price forecasts and anticipated production levels, the New Royalty Framework will meet or exceed the revenue expectations outlined when it was announced in October 2007," said a government news release on Thursday.

We will, of course, have to wait and see.

Nobody knows what the price of oil and gas will be in five months, never mind five years.

Oil today is trading at $110 a barrel, which brings us to another twist in the political labyrinth that is Alberta's royalty regime. The price of oil is rising so quickly it is fast approaching the $120-a-barrel rate cap set out in the new royalty framework. That means the government's sliding scale to collect more money as the price of oil increases will top out at $120 a barrel.

Knight doesn't think that will become an issue, predicting the price of oil will "plateau" at around $85 to $95 a barrel. However, if it keeps climbing and hits $120 a barrel we might find ourselves in a whole new royalty rate debate.

Not that the current debate is entirely finished. The oilsands giant, Syncrude, has yet to sign on to the government's new royalty rate regime, a signature that is crucial for the system to be implemented smoothly.

The regime is scheduled to take effect in January 2009, which means Alberta is still collecting royalties under the old system that even according to the government's figures is shortchanging Albertans by $1.4 billion this year.

That's a lot of money. More than enough to cover everyone's health-care premiums, for example. Or give everyone a cheque for $450 -- with maybe a little left over to cover life insurance policies for mountaineers in the Rockies.

gthomson@thejournal.canwest.com

© The Edmonton Journal 2008








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