The Alberta government knows all about the folly of trying to turn royalties into a cash cow.
Over almost four painful years from 2006 it learned the truth of a business adage: Pigs get fat and hogs get slaughtered.
A new royalty regime was supposed to swell government coffers by C$1.4 billion a year.
Instead, it triggered an outflow of billions of dollars in capital spending and the loss of thousands of jobs, many of which remain unfilled to this day.
Having learned a hard lesson, the government rewrote its royalty framework. What it presented as new looked a lot like what was old.
There was an almost immediate turnaround in land sales, well permits and drilling — the benchmarks of a healthy industry.
Helped by robust oil prices and exports, the province could return to a balanced budget in 2012, two years sooner than forecast earlier this year, although Premier Ed Stelmach said his government remains wary, given the recent history of oil slumping from $145 a barrel to $37 in the same year.
Even so, the underlying message is clear: Mess with royalties at your peril.
At stake for Alberta alone, if estimates by the Canadian Energy Research Institute are accurate, is a C$1.42 trillion infusion into gross domestic product over the next 25 years and C$85.3 billion in provincial taxes.
British hiking production taxesWhether the British government is aware of Alberta’s experience, or even cares, is not known.
But there is a familiar ring to its unexpected decision to hike North Sea production taxes to 62 percent from 50 percent and the industry’s reaction to cancel or postpone expansion plans.
Few are better qualified to speak than the Calgary-based companies that bore the brunt of Alberta’s royalty changes and now face a similar financial hit in the British North Sea.
Canadian Natural Resources, Suncor Energy and Talisman Energy are adding their voices to an industry-wide railing against the British government. Only Nexen is taking a softer approach by talking about proceeding with expansion plans.
Talisman ‘carefully’ reviewing plansTalisman Chief Executive Officer John Manzoni said his company is “carefully” reviewing its North Sea development plans and may reconsider some of them, especially those rated as “marginal.”
“In the strategic sense, in the long term, (the tax hike) clearly has an impact on one’s attitude towards the predictability of (the North Sea) as an investment place,” he said.
Manzoni said “there’s a conversation to be had with the UK government and I think we fully intend to have that conversation to spell out for them the implications.” Until then, he plans to hold back on any decisions.
Canadian Natural scraps plansCanadian Natural President Steve Laut expects the British government will ultimately realize it has made a “short-sighted” move.
But Canadian Natural is not waiting for signs of a change. It has scrapped plans for a second drilling string, cancelled a program for the Murchison project this year and dropped its contract for a subsea vessel in 2012, he said.
Laut told analysts he is confident the government will realize it has lost revenue and jobs as “investment dries up and production declines.”
He said that if the result is a 7.5 percent decline in North Sea production, the British government revenues will be “identical to where they were before the tax changes. Everyone loses.”
Laut noted that Alberta was forced to back down in 2009 from a royalty hike when “they realized they’d hurt more than helped themselves. We feel the same thing will happen in the UK.”
The North Sea accounted for 34,101 barrels per day of Canadian Natural production in the first quarter — down 2,778 barrels per day from a year earlier — representing 6 percent of its total output. The company’s North Sea guidance for all of 2011 is set at 28,000-33,000 barrels per day.
However, Laut said Canadian Natural is likely to remain in the UK, where it will continue to high grade all North Sea prospects for potential future development opportunities.
Suncor views changes as ‘extreme’Suncor Chief Executive Officer Rick George said the industry “should pursue discussions (on the tax changes) which we view as an extreme measure.” But he has not volunteered to join that campaign.
Suncor, which inherited its North Sea position from its takeover of Petro-Canada, has identified its international projects as a stable source of cash to fund its oil sands operations.
Mike Percy, dean of the School of Business at the University of Alberta, said the British move is further evidence that “governments tend to forget how mobile capital is” by looking only at profit and production and ignoring the cost of dry holes and other risks.
In its first quarter report, Talisman estimated the cost of two dry holes in the North Sea and one in Indonesia at C$104 million.