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Alberta under siege Province hit by royalty increase backlash; struggles to preserve surpluses; minister insists a ‘lot of producers’ will benefit Gary Park For Petroleum News
The Alberta government has just emerged from a year of helplessly watching as its financial outlook and public image have been smeared in ways no one could have imagined … and the worst may be yet to come.
It entered 2008 locked in combat with its keystone petroleum industry over royalty increases, a battle that shows no signs of diminishing, and now faces a mountain of previously unimagined worries, ranging from the future development of oil sands, criticism of its environmental record that has gone global and a monumental struggle to preserve 13 straight years of budget surpluses.
The government is also being quietly lobbied by the industry to link up with the Canadian government by taking steps to soften the impact of the financial and credit crisis and shaky commodity prices.
The upshot is a growing sense of a Fortress Alberta mentality as the province looks for friends wherever it can find them.
Premier Ed Stelmach traveled to Texas a month ago for a tete-a-tete with Gov. Rick Perry, officially to talk about energy development, infrastructure and other issues.
Political observers in Alberta are certain there was a more serious underlying agenda — notably the establishment of an informal Alberta-Texas alliance to counter whatever environmental regulations and costs are imposed on both sides of the 49th parallel.
Stelmach has no problem sharing the views of Perry, who has argued that any measures reducing the ability of Texas to provide energy is ludicrous, given that his state created more than half of all private sector jobs in the U.S. over the past year.
He said Washington is threatening to “run the Texas economy right off the tracks into the ditch” — a sentiment Alberta shares as it seeks reassurances from Ottawa.
Norway is also on Alberta’s itinerary in January, as Finance Minister Iris Evans tries to figure out how that oil-producing nation has stuffed C$300 billion of oil revenues into a savings account since the 1990s, while Alberta has put aside a mere C$15 billion since the 1970s.
Under attack for not saving enough of its cash, Alberta has decided to check out Norway, the Netherlands and Ireland to see how they approach savings and pension plans.
Vision crumbling But it may be too late for Alberta to mend its ways now that its grand vision of an extra C$1.4 billion a year in royalties is crumbling and its commitment to spend its way out of an economic downturn in 2009 is on shaky ground, with an estimated C$2 billion in oil patch investment having been transferred to British Columbia, Saskatchewan or the United States, or simply been put on hold.
The verdict on the royalty overhaul is growing louder, with the province entering 2009 with only 36 percent of the fleet, or 224 rigs, active in the first week of January — the lowest count since 1993 — and the first land sale of the year attracting a paltry C$20.2 million, the lowest return for the year’s initial auction in 10 years.
Stelmach told the Edmonton Journal his government is “looking at a technical deficit” to preserve its momentum, which could mean tapping into a C$7.5 billion Sustainability Fund — set up to help the province navigate economic storms.
“We’re going to be very prudent in our budgeting,” he said. “I’m asking (cabinet ministers) to look at their programs. Are there some frills in the budgets or something that won’t necessarily support families and seniors?”
Although still projecting a 2008-09 surplus of about C$2 billion — down more than C$6 billion from its original forecast — the Stelmach government is faced with paying the price for its unpopular royalty overhaul.
As production levels decline and oil and natural gas prices remain on an uncertain path, there is the prospect that royalty revenues will also drop.
But that alarmist view is not shared by Energy Minister Mel Knight, who told the Calgary Herald that Alberta is not in “any danger” of collecting less royalties under the plan that took effect Jan. 1.
In fact, he argued that in “situations of low productivity and low commodity pricing, a lot of our producers in Alberta will actually see some benefit in the new royalty framework. It won’t be negative for everybody.”
He has said the government is in discussions with the industry, ranging from those involved in capital deployment to those in the service sector, but won’t indicate whether there is any chance of relief over the short- or long-term.
A spokesman for the Department of Energy said the crossover point at which the new royalty program will collect more or less cash is US$45 per barrel for conventional crude and C$5.50 per gigajoule for gas, with both commodities currently clinging to levels slightly above those thresholds.
Industry says it is threatened Regardless of government efforts to take an upbeat view, the Canadian Association of Petroleum Producers said producers face higher royalties that threaten their competitiveness, with the royalty curves set too high and rising too fast, taking an unfair slice of the benefits from the risk-taking producers.
The Small Explorers and Producers Association of Canada said royalties climb so rapidly during a high-price period that benefits gained from period of lower royalties “evaporate almost immediately.”
Roger Soucy, president of the Petroleum Services Association of Canada, said the damage has been done by the new royalty system and to be “brutally honest” there is not much the government can do right now to fix the problems.
But, over the longer term, he said Alberta will be forced to undertake yet another overhaul of the regime if the oil and gas industry is to have any chance of moving ahead once the economy stabilizes and commodity prices recover.
Soucy said British Columbia and Saskatchewan have a clear competitive edge on Alberta, whether or not Alberta is prepared to make that concession.
He said the Alberta government may realize that it blundered, but is not yet willing to face the political heat of undoing the royalty framework other than in stages.
Similarly, the Canadian Association of Oilwell Drilling Contractors believes the government must face the inevitable and accept that its royalty increases and fiscal changes were flawed.
Ducks still an issue While grappling with that challenge, Alberta is losing ground in its campaign to sell the oil sands as a vital part of North America’s energy security, instead of a “dirty oil” source that caused the death of 500 ducks at the Syncrude Canada operation and copped a black eye at December’s United Nations climate-change conference in Poland, when a Canadian youth delegation set up an aerial photo display of oil sands operations under a banner that read “Canada’s dirty secret.” The display, at the urging of officials with a Canadian government team, was eventually dismantled after the damage had been done.
If anything, 2008 was a possible turning point, when years of carefully grooming the oil sands were undone, not least by Larry Burns, a vice president of strategic planning at General Motors, who asked whether it made sense to create an oil sands industry.
“I think it’s a pretty bizarre way to get gasoline to a corner station,” he said. “It’s an awful lot of capital and an awful lot of work to pull it off.”
Tired of becoming an international target, the Alberta government will take a proactive role in counteracting “misinformation” that is often spread by environmental groups that “conveniently ignore details (and) distort facts,” Deputy Premier Ron Stevens declared in December.
But the Syncrude duck episode won’t go away. Jeh Custer, a representative of Sierra Club Canada, launched a private prosecution against Syncrude on Jan. 7 to ensure those deaths do not become status quo in the oil sands.
Ecojustice filed the documents on behalf of Custer under federal legislation which prohibits the deposit of a harmful substance in an area frequented by migratory birds.
It has been nine months since the incident was reported, but Alberta Environment said it has two years to complete an investigation and lay charges and, according to a spokeswoman, won’t “act quickly on this just because everyone wants a decision.”
Stevens said he and Stelmach are determined to prevent “special interest groups from gaining more of a foothold in their efforts to restrict (U.S.) imports of oil sands oil. That scenario is potentially devastating for all of Canada and harmful to U.S. energy security.”
Whether the oil sands can reduce U.S. reliance on crude imports from politically volatile regions or have set the stage for environmental ruin is a topic that could dominate all other issues Alberta has to deal with this year.
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