The Globe and Mail‘s David Ebner has an occasionally wordy but comprehensive survey of Alberta’s oil patch, which is holding its breath waiting for an announcement from the provincial government on whether and how it’ll change the royalty scheme whereby oil and gas companies pay the government to exploit an officially public resource.
In a nutshell, this is how it works: Alberta’s oil and gas, like that of other Canadian provinces, are owned by the provincial government. Oil companies lease the rights to explore and exploit those resources, and pay the government a percentage on what they find, extract and sell. And Premier Ed Stelmach is to make up his mind by the end of the month on how much that percentage will increase.
Stelmach, responding to a sense among Albertans that they were being taken for a ride by low royalty rates set when the industry was practically dormant, asked a review panel to make a recommendation on new rates. Simplistically put, the panel recommended jacking up the royalties on mature projects from 20 per cent of profits to 33 per cent, on the grounds that, indeed, Albertans weren’t getting a “fair share” of the profits from their publicly owned natural resources.
Aaaiiiiiiieeee!, the oil industry responded, including in an instant-classic analyst’s note from Deutsche Bank comparing Alberta to Venezuela (PDF). Behind that overblown rhetoric from the kind of Wall Street analyst who gives Wall Street analysts their superior reputation for probity and manners, there’s a fair point: Alberta’s oil reserves are exceptionally expensive to extract. Many projects are borderline even with oil costing $80 a barrel, and if Alberta wants to increase its royalty rates, maybe riskier but higher-profit projects in places like Saudi Arabia and Angola make more corporate sense.
Partway into Ebner’s story is this reminder that for all the talk of the economic riches and environmental perils of the oil sands, work on “unconventional” reserves in Alberta is really just getting started:
The critical and most controversial issue – natural gas – has underpinned Alberta’s economic success and its overflowing treasury. The so-called Calgary oil patch is in fact a gas capital, with a shift only now beginning to swing to the oil sands. Canadian Natural Resources Ltd., the country’s second-largest producer, is the embodiment of this evolution, beginning life in the deep recession of the late 1980s as a scrappy gas producer and growing into a giant gas producer – and now making a big, long-term bet on the oil sands.
But the oil sands remains a tomorrow story, a key source of the province’s long-term revenues.
And the key to that key source of long-term revenue is just how much Alberta wants to extract from the oil companies. This is not a simple question, as Ebner explains.
It’s Stelmach’s job to try to set a royalty rate that maximizes the oilsands’ value to his taxpayers and voters. His trouble is that it’s an impossible task, requiring him not only to set one provincewide rate where rates for individual projects would be more appropriate, and to “balance,” somehow, the reasonable arguments made in Deutsche Bank’s note with a vague “feeling” among Stelmach’s voters that they’re being hard-done-by. Not only that, but we’re talking not only about maximizing the price the province gets from the oil, but maximizing the oil’s long-term value — which means factoring in the other economic activity the oilsands support.
The Star‘s David Olive points out that in the long term, the vastness of Alberta’s reserves likely matters more than the cost of extracting them:
Global oil firms are desperate for reserves, and Alberta’s oil sands represent more than 50 per cent of the world’s reserves available for non-state investment. Threats to move to other jurisdictions are almost laughable. Where will the producers go in search of a similarly giant reserve base that also boasts a politically stable regime – Russia, Kazakhstan, Iraq, Venezuela, Sudan?
In other words, whatever the royalty rate Alberta sets, there will eventually come a world oil price where digging all that oily muck is worth the effort. Indeed, the longer Alberta makes the oil companies wait, the more the oil will be worth. But all the jobs in pipefitting and trucking and fabrication and engineering are worth an awful lot, too, in 2007 prosperity that could set the stage for an oil-independent economy by, say, 2050.
You’d almost think that this problem of trying to maximize the oilsands long-term value would be one better set by, well, a market, rather than this system, reminiscent of the Klondike era, of staking claims and paying arbitrary percentages and having provincewide policy decisions made by one guy.
What’s a particular project worth to an oil company? Why not make them put their cards on the table and bid? Let the companies do all the exploring they like (and no leasing exclusive exploration rights that are little more than lottery tickets with multibillion-dollar payouts) but before they can put a steamshovel in the ground, they’d have to tell the government what they’re willing to pay for the oil they get out. A flat amount, a percentage, whatever the company thought would be fair. Let anyone else bid, too, and take the best, maybe with some automatic payout to the finder if that company doesn’t win the bidding.
Whatever form it took, it’d almost inevitably be superior than leaving Alberta’s whole economic future to one farmer from just northeast of Edmonton, no matter how clever a fellow Stelmach is.