Hardscrabble to hardball

Alberta premier draws on roots to tackle Big Oil; tells critics ‘this isn’t a compromise’

Gary Park

For Petroleum News

Ed Stelmach has done what none of his predecessors dared to do in the past 60 years — rewritten the province’s oil and gas royalty regime.

Whether inspired or foolish, that’s not bad for a man often portrayed as plodding and, as one acid-tongued critic put it, having “the charisma of a roof rack.”

Whatever the verdict, and it may take years to determine, no one will ever again underestimate Stelmach, assuming he survives the next election.

To understand some of what motivates the 56-year-old leader of a province described as Canada’s economic engine, it helps to understand his roots.

His grandparents came from Ukraine in 1898, settled northeast of Edmonton and, like so many of their stock, overcame a harsh environment to turn bush into a farm.

Stelmach continued that agricultural tradition when he returned home from law school after an older brother died suddenly.

He takes considerable, but quiet pride in his heritage, which is a potent force in Alberta where about 250,000 of 3.5 million residents claim Ukrainian origins.

A year ago he defied all odds by snatching leadership of the Alberta Conservative Party from a highly touted former cabinet minister and business executive and becoming premier.

Soft-spoken and seldom ruffled, Stelmach wasted no time acting on his central campaign promise — a review of a royalty system he did not believe was delivering a fair return to Albertans, the resource owners.

He stood his ground against threats that meddling with the regime could drive billions of investment dollars and thousands of jobs out of Alberta, ruining the province’s international reputation as a safe predictable place to invest.

One Albertan, herself of Polish heritage, described Stelmach as typical of his ethnic stock. “When you push a Ukrainian from that part of the world, they push back,” she said.

Oct. 25 unveiling

And, typical of his upbringing, he told the industry and Albertans he would not be bullied or intimidated.

Sure enough, on Oct. 25, he unveiled the framework for a new royalty regime that is likely to set the stage for an election this fall or next spring.

In the process he spurned arguments from the review Chairman Bill Hunter that the government should implement the panel’s findings in total, or risk losing the potential benefits.

Again Stelmach set his own course, accepting in whole or in part 15 panel recommendations, but rejecting 11, and introducing one of his own.

Amid the next-day fallout, Stelmach dug in.

“The decision has been made,” he said. “We’re not moving off of the decision — period.

“This isn’t a compromise. I have confidence we have got this right.”

Under fire on an open-line radio program, Stelmach showed the depth of his feelings, by portraying himself as “trustee” of Alberta’s non-renewable resources, which hold the key to North America’s only debt-free jurisdiction and its ability to underpin the infrastructure and programs needed to handle a projected 40 percent increase in population to 5 million over the next 20 years.

Legislation must be drafted

But Stelmach has a bumpy ride ahead as he drafts 11 pieces of legislation to revamp the royalty system and convince investors.

As the reviews started to roll in and the stock market appeared to take the royalty proposals in stride, Stelmach got a rousing reception from 400 delegates to his ruling Conservative party’s annual policy convention Oct. 27.

He told the faithful that the new framework will enable Alberta to “plan for a financially secure future,” dominated by the need to pay for infrastructure and programs to support a 40 percent surge in population to 5 million over the next 20 years.

While the industry raged, convention delegates rallied to Stelmach’s side.

“I think it takes a lot of courage to do what he did and I think the people are recognizing that,” said Calgary delegate Marnie Marr.

“I think the premier spelled it out exactly the way it is and exactly the way the people of Alberta wanted,” said Clyde Elford.

During one of the rare moments when he flares publicly, Stelmach answered those who suggested the changes would put Alberta in the same league as Venezuelan President Hugo Chavez, who is nationalizing his country’s oil sector.

“Certainly in the last few weeks I’ve been called a lot of names,” he told reporters. “We’re not Communists. I’m not whatever-his-name-is in Venezuela. This is Alberta. We share the returns of our economic rent with all Albertans.”

As former premier Peter Lougheed said prior to the royalty announcement, Stelmach has entered a “political watershed” and he’s apparently done it with his eyes wide open.

Alberta royalties — New, old and proposed

• Changes will be implemented Jan. 1, 2009, a year later than the review panel wanted.

• The new system is projected to boost the royalty take by C$1.4 billion, or 20 percent, by 2010. The panel proposed an immediate 20 percent hike or C$1.9 billion a year, with the increase rising to 26 percent by 2010.

• For conventional oil, the government plans a single sliding rate formula, with royalties rising to 50 percent at an oil price cap of C$120 per barrel, compared with current maximums of 30 percent and 35 percent for old and new oil, with the price cap set at about C$30 per barrel. By 2010 the change is expected to generate an additional C$460 million from 2006 returns, compared with the panel’s estimated C$456 million.

• For natural gas, royalty increases will range from 5 percent to 50 percent from the current 5 percent to 35 percent, with rate caps set at C$16.59 per gigajoule (compared with the existing cap of about C$3.75 per gigajoule), boosting 2010 revenues by C$470 million from current levels, compared with the panel’s recommended C$742 million hike. The government also plans to revamp a deep gas drilling program and apply lower royalty rates over a wider price range for less productive wells.

• The government estimates that 88 percent of all gas wells and 57 percent of conventional oil wells will see a reduction in royalties.

• The government said it intends to implement a “shallow rights reversion” to maximize extraction of natural gas. Under this policy, mineral rights to undeveloped geological formations above zones that are being developed will be returned to the government and made available for resale. The objective is to maximize recovery of known gas resources which are being bypassed by operators pursuing deeper targets.

• For the oil sands, base royalty rates during the period when developers recover their capital costs, will start at 1 percent when the West Texas Intermediate price is C$55 per barrel and climb with each C$1 per barrel rise in oil prices to 9 percent when WTI reaches C$120 per barrel. The current pre-payout rate is a flat, 1 percent of gross revenues After developers recover their capital costs, royalties, currently at 25 percent of net revenues, will be 25 percent starting at WTI prices of C$55 per barrel and grow to 40 percent when oil hits C$120 or higher.

• Scrapped from the review panel’s recommendations is a new Oil Sands Severance Tax that would have started at 1 percent when oil prices were C$40 per barrel and built to a peak of 9 percent.

• The government will consider taking oil sands “royalties in kind” rather than cash in an effort to stimulate the construction of projects in Alberta to upgrader bitumen into synthetic crude. As part of that review it will consider a new royalty credit, allowing developers of upgraders and refineries to charge 5 percent of construction costs against royalties.

• In what shapes up as the most controversial issue, the government will attempt to rewrite agreements with oil sands pioneers Syncrude Canada and Suncor Energy. Those contracts expire 2016, but the government wants the two companies to be under a new royalty regime by 2009. If there is no deal within 90 days, the government “will take other measures to ensure a level playing field for all industry stakeholders.”

—Gary Park