I'll admit that most of the time, I wouldn't touch it with a ten-foot pole. But sometimes, politics are unavoidable — especially when they directly affect our investment decisions.
I'm not referring to U.S. politics, which are about as nasty as it gets. Today, my attention is fixated on Alberta: Canada's Energy Giant.
The Beginning of the End
I've been covering the ongoing debate over Alberta's oil and gas royalty changes for several years. In fact, I distinctly remember the day the Alberta Royalty Review Panel's report crossed my desk.
The title of the report was "Our Fair Share." The conclusion was easy enough to guess... In a nutshell, the report stated that Albertans do not receive their fair share; it went even further, saying that the government had failed to collect royalties already owed.
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I don't blame you if this sounds far-fetched...
In fact, if I hadn't met the man who traveled 1,400 miles to track me down — just to hand me a photo — I wouldn't have believed it, either.
But once you take a peek at the snapshot, as well as the three reasons it could make you rich, I have no doubt you'll change your mind.
From that moment on, I had this eerie feeling that Alberta was in for some trouble.
And sure enough, five weeks later, I read another report about the new royalty framework. The first sentence stood out: In the words of Alberta's Premier, Ed Stelmach, "I made a commitment and I delivered."
His commitment was to review the current oil and gas royalty structures in Alberta.
Well, he definitely delivered.
Unfortunately, he sent energy companies scrambling to get out of the province.
Trust me, the ball hasn't been dropped this bad since Edmonton sold Gretsky to the Kings... I'm sure my Canadian readers — especially those of you in Alberta — still have some anger issues over that debacle.
Of course, when it comes to politics, the approval of your constituents could mean the difference between another term and a plane ticket home...
So how have things turned out for Mr. Stelmach?
Suffice to say you'd be hardpressed to find someone with lower approval ratings.
Okay, maybe it's not fair to compare Ed with U.S. presidents... but just to give you an idea, think about our pal G.W., who left the White House with a 22% approval rating — the lowest in history. Now compare that with the abysmal 14% carried by Stelmach at the end of 2009.
Sure, you can pin the blame on the economic turmoil. Or can you?
Remember how I said that these royalty changes have sent energy companies running? Well, you can take a guess on where those companies went. Don't worry — you won't need more than one. Saskatchewan Premier Brad Wall is enjoying a 58% approval rating — the second highest rating among the provincial leaders.
Then again, he's reiterated his stance on not changing Saskatchewan's royalty structure too many times for me to count.
Considering 30% of Alberta's revenue comes from royalties from non-renewable resources, driving away that oil and gas development certainly isn't helping matters.
The Competitiveness Review Report: Stelmach's Last Chance to Save His Job
Since I first read that report in 2007, it has changed approximately five times. But this is this simply a case of "too little too late" for attracting more energy companies.
Believe me, the new set of changes needs to sweeten the pot if Alberta wants to keep up with its neighbors.
Something else to consider is whether or not Alberta has burned its bridges with the energy industry.
Anyone else remember Chavez nationalizing Venezuela's oil industry? Do you find it surprising that their latest auction for oil-drilling rights only brought in two bids? Only three projects received offers.
Alberta hasn't dug themselves that far into a hole, but time is running out.
In a matter of weeks, we might have our answer. Alberta's energy department is expected to release a new competitive review report. The competitive review was first announced last summer, as a growing number of companies flocked to neighboring provinces.
Profiting from Inevitability
While there's no doubt the upcoming revisions in the competitiveness report will be favorable for Alberta energy companies, the terms may turn out better than expected. Offering more favorable terms is the only thing Alberta can do to save face with the energy industry.
How far the government is willing to go is another matter itself, but we'll know the conditions soon enough. I'd love to hear you weigh in on this subject — especially my Canadian readers. Just click on the Comment/Rate this Article button below to give me your two cents on the matter.
Judging from the latest conversations I've had with my readers living in Alberta, I'm not alone in pointing out Stelmach's failures.
It's time for Alberta to sink or swim.
You see, upcoming unconventional plays like the Horn River Basin in British Columbia, or even the mighty Bakken oil play in Saskatchewan, are constantly stealing the spotlight.
It's difficult for me not to talk about some of those plays.
Take my readers at the $20 Trillion Report, for example. They've made a small fortune from Canada's energy war. One play alone has given them gains of 241%, 300%, 127%...
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Yet no matter how much Alberta's situation appears to be nothing but doom and gloom, don't think that Alberta is down for the count.
In fact, there's one very specific reason why Alberta getting back on track.
I like to think of it as the ace up Alberta's sleeve. Within the next few days, I'm going to tell you all about it — including several investments that are giving Alberta oil fever all over again.
Until next time,
Keith Kohl
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With the capital intensive investments required for oil sands development, in particular, there has to be a high level of certainty that the rules just won't change.
The Canadian Oil & Gas Industry has a long memory.
Mike Glennon
President & CEO
Evolve Energy Partners
You need to go back 30+ years to when Alberta unilaterally raised royalties followed by the federal government's disallowance of these royalties in the subsequent National Energy Program to see a comparable industry reaction. While I haven't been following the situation closely, I believe that Alberta has modified the increases causing the "exodus". Part of the reason for the exodus however is the maturity of producing fields and the increasing costs of finding and producing new discoveries. It is interesting to note that "socialist" Saskatchewan has not altered the royalty rates despite the progress in the Bakken/Williston Basin.I suppose they are looking to make up any losses in revenue from potash.
Rick Parton
Alberta O&G enjoys a scale advantage right now, that Sask will soon catch up on, but right now all my money is in Sask, Bakkens and Potash and will remain there until I see the frontier spirit return to Alberta.
I did not know exactly what was the problem in Alberta, although I have owned a great stock in the area on and off over the last 4-6 years approximately, not sure when I first got involved, Baytex..
also they are in the Cardium amongst some other area plays. Now that you have explained clearly and concisely on the situation, I vey much appreciate..Thank you!
Stelmach is a red Tory from all reports - his farming background no doubt contributed to this. Please be aware that there are NO real business friendly parties here in Canada. We have only varying degrees of socialist dolts who love to tax and spend much like Obama and Pelosi. Stelmach has squandered his political good will and seems determined to drive out the oil companies with increased royalties. When Alberta has no surplus, watch what happens. Quebec won't have anyone to hand them billions in transfer payments. You'll be able to hear the rest of the country laughing all the way down in Florida! The USA shouldn't look for intelligent business practices here. At least we have a quasi-conservative Prime Minister who doesn't attack Bay St. and the banks!!! Saskatchewan was NDP socialist for many years and now it's the place to be on the continent. Go figure.
At a meeting of the Wildrose Party in 2007, before we joined forces with the Alberta Alliance, we had Allan MacRae as a guest speaker. Mr. MacRae was involved in and explained to us the 7 year long negotiation process that originally decided the royalty structure for Suncor and Syncrude many years ago. Then the Our Fair Share team went to work in 2007 and in a mere 4 months, without seeking significant input from industry insiders who know the economics, the jolly Sharistas decided Alberta should breach the remaining 16 years of our contract with Suncor and Syncrude and "renegotiate" their royalties.
A senior player in the Wildrose Party is involved in gas, and I asked him if there are really so many marginally profitable gas plays in Alberta that what seemed like a minor increase in gas royalties would shut them down. His unequivocal answer? Yes. Gas is a risky business and even a small hit to potential profitability is enough to prevent exploration and development. As you noted in your article, Alberta lost and BC and Saskatchewan gained. They reduced their government take, Alberta increased ours, and investment went where it was welcome.
The new royalty regime came into effect on Jan.1/09 and was supposed to bring in an additional $1.4 billion per year in royalties. But already in 2008 Alberta LOST nearly a billion dollars in lease sales, while BC and Saskatchewan each gained hundreds of millions of lease sales to reach unprecedented record investment levels. Alberta's exploration industry moved next door and, again as you note in the article, Stelmach's gang who couldn't get their policy straight have 'adjusted' the new royalties 5 times already. Like you, we are hoping and expecting that the government will get it right this time with its new study of the issue. Meanwhile, we're happy to see BC and Saskatchewan making themselves open for business and developing their resources. With Alberta back in the game it will be a good 3 way competition for investment and development.
Gas prices are slowly crawling out of the 'financial crisis' meltdown and Alberta's fiscal situation is improving, but a combination of the Our Fair Share attack on our energy industry and the collapse in oil and gas prices put debt-free Alberta into deficit in 2009. But with the continuing push from us Wildrosers and Albertans natural culture of work and entrepreneurship I think Alberta will soon be shining again.
The voters in Alberta, having been whipped into a frenzy over royalties by the Press and the Opposition,wanted a Review and changes to the royalties. I mean 80% of the voters wanted that. Stelmach had absolutely no choice but to review the Royalties. Alberta's royalties are less than Texas!And about middle of the road for most jurisdictions. The oil companies and related service companies have been complaining about it ever since. However, if you read about new oil sands developments, there will be a boom in construction again, and there is a predicted labour shortage in the next 12 to 18 months.
If you talk to southern Albertans, they are against the royalty review, if you talk to northern Albertans, they don't think the government went far enough.
First of all I have been following E&C for 2-3 years now and I would agree with most of what is said about global energy. The negative side of getting every last bit of oil and gas isn't talked about much though. The oil sands are a FUCKING DISASTER! To think we can treat the earth this way and get away with it indefinitly is insane! But the few in power and the redneck Albertan simply won't look at any other options. Let me make this very clear...most Albertans are not benefiting from the boom (that we HAD). Only a select few made a bundle while the rest had to deal with huge increases in price on everything, pollution, traffic etc. We did get sold out for our energy and the companies walk away from the environmental catastrophies.
We have some of the best solar and land based wind resources in Canada and yet we are falling further behind in those sectors. I have been looking into renewable energy for a career change and I talked to a solar distributor here who told me Ontario is the place to be. Other Solar companies have told me that pretty much any other provice is better for renewables because of their provincial support. Alberta wants to be energy leaders but they don't want to touch the future of energy. Go figure?
I have worked in the Tar sands for nearly 10 years and it seemed to get bigger and bigger each year. In fact it was mind boggling. I realize there has been a bit of a recession last year but not only has there been mass lay offs in Fort Mcmurray, it looks like it will be stagnant until.......exactly as you had predicted. Until the government gets back in the act and levels off the royalties. I also think that Alberta is charging lower royalties than what they should but they are now in a position where it is 'shit or get off the pot' They either have to be prepared to hold out, which will negatively affect their economy in the short time but will bring increased royalties in the future ( the oil is here and everyone is going to want it and the longer Alberta holds onto it, the more value it has) or lower their royalties and reap the benefits today. Tough decision. I don,t think you should be dissing Stelmach for trying to make a tough decision that might look bad today but will bring higher dividends in the future. You talk a lot about "peak oil" which means that Alberta's tar sands could become much more valuable in the future. As I said, it is a tough decision for Stelmach to make as so many people in Alberta are used to making "tons" of money therfore are harder hit when times slow down a bit.
I really enjoy your reporting.
I am "riding" Wesport Innovations right now, any tips?
Steve
Alberta, Canada
I might be able to put one penny's worth, first the Oil comp'ies are some what like corp bums, they expect to keep it all, they got so used to this free ride (not paying royalties), not being charged the same as other countries,and the more Mr Panick Ed gives the more they ask for, why not that was their success under King Ralph
so why not try with Mr. Ed.
Your statement that Alberta has to act now to sink or swim may be a little over stated. I'm may be wrong but I believe about 70% of the wells drilled in Canada are still drilled in Alberta plus the Oilsand spending would equate to alberta recieving the lion share of energy spending in spite of Eddy.
Its nice to see things spread out to give Sask BC Newfoundland some much needed $$4 and employment.
Is there any jurisdiction that charges a lesser royalty than Alberta? Alberta pumped oil for 60 years before Norway (pardon the swearword)and has $11.0 bil in its Heritage Fund, while Norway has $400.0 bil, and Venezuala $0.8 bil During the war years (Alberta vs Trudeau 1981-1985)(Trudeau lost)During this period Venezuala pumped $153.7 bil of oil, Norway $42.7 bil, and Canada $105.9 bil.Now, seeing as how the right wing in the Canadian Press always maintain that Trudeau got $100.0 bil of that $106 bil, Trudeau did leave Alberta $6.0 bil to man the pumps. Right!? So, during this awful period, Norway pumped 17% of the oil and now has $400.0 bil in the kitty, vs $12 bil for Canada/ Venezuala. Oh yes, East Timor, a little over a million people, and pumping a little over 100,000 boed started their fund in 2004, and now approaching $5.0 bil. So who do you say are the smart people? Taras
What? You do know that every man, woman and child in Alaska is paid off monthly by skimmed oil revenue, right?
Ed must have been nutured,early in life,Wasn't Mr. ED a horse?We need to send him back to his farm and strap him in front of a plow,with a whip cracking over his head,thats about the only thing that,that guys good for,HE IS NOT A LEADER.This is a perfect example of that you have to experience some bad before you can find someone good.
Wild Rose Alliance GRoup and the people of Alberta's slogan will be,that we're going to "SHOOT SHOVEL AND SHUT UP" where Mr Ed is concerned and anyone who chooses to hold little Ed's hand.
I pray to God+ that the Good Old Boys in the Oil and Gas industry and World Wide will beleive in the true Alberta people,that we will fix this problem to the benefit of us all and for the success of the future of our Alberta.She belongs to everyone who has benefited from her wealth of resources.And SHE will rise again.Cheers to our future success!
I follow energy closely because when I am not flying for a major Canadian airline , I manage and aquire Real Estate in Canada. My first RE purchase based on fundamentals lead me to Alberta 2 years ago, specifically Fort Mcmurray. It's been an incredible learning experience to invest in another province as I live in the "have not province" as they call it, Ontario. My many years of flying also have changed in a new and strange way since investing in Real Estate and learning everything I can about energy. I meet so many amazing people on my flights. The past month I met 2 geologists as I have been flying to Phoenix , AZ... I also met someone on the way home from Phoenix.. the logo on the papers looked Canadian... I am always curious... well it turns out that this person is with CPP: Canadian Petrolium Producers. I expressed my intrigue in energy... started asking questions, looking for an opinion.The response is always funny because they are ALWAYS surprised that I know what I know... because I READ YOU! This person changed after a few minutes in our conversation... seemed more relaxed as I asked about Alberta's Royalties and their lack of competition with their neighbours. This person sat back in the business class seat and was very confidant that the Royalty review was going to be just fine. " Don't worry","we are fixing that"... Hey, it's not much but you know this is my first post and I wanted you to know that one more person is reading YOU in Ontario and learning from you to GUIDE me in a more precise direction. I will always do my due diligence. I tell my friends that Alberta is the place to be for a job, for growth and for it's tax benefits! Since I can not live there, I decided to invest there! The world is a small place, I know that much! Sincerely, Diane PS: I agree with a post below , Ontario is the place to be for F.I.T. My plan is to make a profit from the "black gold" to buy Green Energy!