Premier Ed Stelmach faces either his “finest hour or his final hour” beginning today as the Tory chief embarks on a strategy for Alberta’s oil and gas royalties, one of the most important public policy decisions confronting government in years.
It starts tonight when the rookie premier appears in his first recorded television address, laying out his vision for the province and briefly touching on the royalty review that has sparked an emotional debate across the province.
Stelmach will then unveil Thursday afternoon in Calgary the government’s much-anticipated royalties strategy, released more than a month after an expert panel proposed hiking royalties to ensure Albertans get a “fair share” from the development of publicly owned energy resources.
I’ll bet we have oil industry readers who have opinions/predictions/observations to share. They’re welcome in the comments.
Bovit:
OK, I’m a liar.
The oil sands development keep 99 cents out of every dollar until the costs of their multi-billion dollar plants are paid off.
Lets take today’s price of $88 a barrel and discount it $30.
That would leave a $58 value per barrel (88-30).
I may be mathematically-challenged, but under the Lougheed foruma of a flat 25%, $43.50 would go to the contractor (oil company) while $14.50 would go to the owner (under all legal conventions, the people of Alberta).
Let me pose this question for the third time, since the quibble seems to be about how much a barrel actually sells for.
Can an oil sands company make a profit with a cash flow of $43.50 a barrel?
Bovit:
One more point, if I may, on the varying nature of royalties and taxation.
Royalties are what companies pay for the priviledge of having extraction and sale of a commodity.
Corporate taxes, on the other hand, and paid as a share of profits.
In the case of corporate taxes, as a nominal owner of a business my wife runs, I understand that the costs associated with my wife’s business are legitimate write-offs against her businesses income.
I assume oil companies pay corporate taxes and that the multi-billion dollar (I hear$12 billion is typical) cost can be written off against federal taxes.
If that is the case, why are oil companies able to gain a double benefit? Since the costs of construction are already used to offset federal taxes, how is it right that those exact same costs can also be in any good conscience be written off against royalties, that is something under provincial jursidiction?
My wife cannot write her expenses off her federal taxes (under sole proprietorship) and at the same time use it as write-offs against municipal taxes.
Allowing this write off of costs associated with developing plants is exactly how Ralphie was suckered in by the Calgary head offices.
Oil companies, in effect, are being allowed to write off the costs of building their plants TWICE.
Would you consider this a fair practise?
Well, if it doesn’t matter whether it’s $80/bbl or $50/bbl, it shouldn’t have mattered when it was $10/bbl. We should have instituted the 20% increase in royalties back in 1998.
But, seriously, to answer your question, it depends.
If you’ve got existing oil sands projects, you will probably be profitable at $43.50/bbl. You built the infrastructure at lower costs, which you’re depreciating against your current output, and you’re covering your operating costs, even though they are rising too.
The point is that the price of oil isn’t the only thing that’s moving. Some of the components you need to build plants and pipelines with are driven by global markets also (steel, for example), so those costs are astronomical too. You actually need to buy oil to dilute your product so you can ship it down the pipe (holy crap! that costs $80/bbl), the welder who joins the pipe joints wants a massive hourly wage increase to keep up with inflation, and so on.
The real answer is that some of the proposed projects will really no longer be viable, or not worth the risk under the proposed royalty regime.
Some people think that’s a good thing, because the economy is overheated. What hasn’t been assessed or addressed by the panel is what percentage of future projects fall into this category. What if the slow down winds up being more than you bargained for?
And, one last point. Lots of people point out that other jurisdictions are doing the same thing, and where are you gonna go? Russia? The companies have another option, and some are already taking it. Some large corporations are buying back their shares, effectively shrinking themselves. It’s not just a question of Alberta or Yuckistan.
Being from Windsor Ont, I would love it this new tax slowed down the Alberta economy. Our economy is killed down here. A lower dollar and lower interest rates would do wonders for us 🙂
Think of it as helping us out too!
Spencer:
There is a difference between taxes and royalties (see my post above).
Otherwise, they’d both be called taxes.
Royalties are what oil companies pay for the priviledge of extracting and gaining profit from the sale of the commodity. Oil companies are considered the contractor while the legal owners are the people of Alberta.
Qustion: Can an oil sands company make a profit at $43.50 a barrel. Yes thay can make a “Profit”.
The question is the fundemental problem with the discussion. There is adiffernece between profits and “return on Investments (ie Capital). If you look at many of the Oil Companies quarterly and Annual Reports you will that yes, they are making an operating profit of between 25 and 30 per boe (barrel of oil equivalent). You may also want to look at what we in the industrey call finidin & development costs, those are in the neighbourhood of 20-25 per boe therefore the actual return on investment for the company is generally in the range 0f 5-10%. when broken down not necessarily as rosy a picture as presented.
The $80 USD per barrel with the Cdn. dollar par versus $55 USD at 0.66 CDN (Hint: the are almost the same) is a discussion for another day.
Funny how the Oil Companies can wank about a COLLECTIVE 2 Billion of a Royalty adjustment, but can’t seem to muster the same amount of outrage when their projects come in Hundreds of Millions or Billions over budget, or the excessive amount of waste in their day to day operating budgets or their (CEO’s and upper management)inflated wages/stock options. A lot of the “good ol’ boys club” shouldn’t be managing your local 7-11, nevermind a large petro facility. If they don’t like the royalties, they can move to, um….say Venezuela??? Perhaps then we can catch our breath and catch up on some of our infasturcture deficiencies. Oh, by the way, I work in the patch so I see the above EVERYDAY!
Funny how the Oil Companies can wank about a COLLECTIVE 2 Billion of a Royalty adjustment, but can’t seem to muster the same amount of outrage when their projects come in Hundreds of Millions or Billions over budget, or the excessive amount of waste in their day to day operating budgets or their (CEO’s and upper management)inflated wages/stock options. A lot of the “good ol’ boys club” shouldn’t be managing your local 7-11, nevermind a large petro facility. If they don’t like the royalties, they can move to, um….say Venezuela??? Perhaps then we can catch our breath and catch up on some of our infasturcture deficiencies. Oh, by the way, I work in the patch so I see the above EVERYDAY!
Funny how the Oil Companies can wank about a COLLECTIVE 2 Billion of a Royalty adjustment, but can’t seem to muster the same amount of outrage when their projects come in Hundreds of Millions or Billions over budget, or the excessive amount of waste in their day to day operating budgets or their (CEO’s and upper management)inflated wages/stock options. A lot of the “good ol’ boys club” shouldn’t be managing your local 7-11, nevermind a large petro facility. If they don’t like the royalties, they can move to, um….say Venezuela??? Perhaps then we can catch our breath and catch up on some of our infasturcture deficiencies. Oh, by the way, I work in the patch so I see the above EVERYDAY!
Funny how the Oil Companies can wank about a COLLECTIVE 2 Billion of a Royalty adjustment, but can’t seem to muster the same amount of outrage when their projects come in Hundreds of Millions or Billions over budget, or the excessive amount of waste in their day to day operating budgets or their (CEO’s and upper management)inflated wages/stock options. A lot of the “good ol’ boys club” shouldn’t be managing your local 7-11, nevermind a large petro facility. If they don’t like the royalties, they can move to, um….say Venezuela??? Perhaps then we can catch our breath and catch up on some of our infasturcture deficiencies. Oh, by the way, I work in the patch so I see the above EVERYDAY!
comp issues, sorry for multiple posts.
here you go dork, the alberta royalty formula. figure it out for yourself. its volume and price based. it isnt 25% across the board.
http://www.energy.gov.ab.ca/Oil/769.asp
most of the production in alberta is conventional and gas is a bigger number than oil.
royalties are not deductable for income tax.
for all those wankers crying about excess profits you can get in on the largess – invest
as you are so much smarter than anyone else it should be an easy decision.
be greedy and get more than your “dat is not fair share of the izzy money”-Borat Dion.
cal2:
So, it’s OK then to write off costs of building a $12 billion plant against federal taxes AND provincial royalties.
Seems to me like somebody’s getting the short end of the stick and it’s not the oil companies, who are able to write off costs against both tax and royalty regimes.
Just watched Stelmach’s announcement.
Instead of keeping 99 cents on the dollar (after their double-dip writeoff), they now get to keep 95 cents on the free dollar.
Boo, hoo, hoo. Poor opressed oil companies.
you are an accounting moron, there is no writeoff of capital onto provincial tax.
dont mix up royalties and taxes.
Actually the huge increase in oilsand plant costs reminds me of some ‘cost plus’ projects the federal govt used to build (and maybe still does?).
The first priority of the contractor was to get the project done no matter what it cost to do it, because their paycheck was in addition to the project cost.
The most famous of these type of projects was the Big Owe in Montreal.
A friend told me that he knew of gravel trucks going into one end of the stadium loaded and then driving out the other end still loaded, because no one was keeping track of the unloading.
And then they drove around to the other side and went back in with the same load!
Maybe no one wanted to keep track because it was that famous Montreal ‘izzy money’ (thanks Cal2).
Anyway the infamous cost-plus Big Owe cost taxpayers about $1.5 billion, just slightly up from the initial estimate of $400 million.
Gee, maybe its the same guys building the oil sand plants?
Heh.
cal2:
Are oil companies allowed to write off capital costs against federal corporate taxes?
Are oil companies given credit for capital costs under Alberta’s royalty regime … where they now get to keep 95 cents of every dollar?
Just an ignoramus trying to get a straight answer.
BTW, I always tell my kids the first one to name-call loses the debate.
Could you please try to answer my questions without name calling, please?
set you free – so now I am intolerant and a bigot because I said Stelmach was a dumb Ukrainian. What, a Ukrainian can’t be dumb? They are all bloody brilliant or something? Sorry, but I married one and gave birth to little half Ukrainians, so it isn’t anything against Ukrainians – I was just pointing out the fact that Stelmach was a dumb one.
Big oil companies are in it for the money, not the thrill of having to deal with all the crap that comes along with big business. I’ve been in business with oil companies, and they’d have no problem turning tail and walking away leaving thousands of devasted workers to hand the keys to their houses into the banks.
Using your example – with oil at $80 a barrel, and $20 going to royalties, hypothetically, you’ve just asked the oil companies to give 25% of their earnings to royalties, which means the $60 left over has to pay for all their expenses, wages, research and development, environmental obligations, etc. I don’t know, but it seems to me that 25% of earnings seems like a lot of dough, especially when most of it will go via Ottawa to the have-not provinces anyhow.
I’m all for oil companies paying their fair share, especially when it comes to helping pay for the infrastructure in the communities where their workers live, but a dollar amount off the top of someone’s head doesn’t seem like good business sense to me.
It is fallacious to argue, as so many above have, that the oil companies carry the whole burden of cost and risk. Royalties are very close to non-existent until all costs are recovered, I consider that a direct subsidy. As well, many of these ventures have various government ‘loan guarantees’ that cushion the potential blow of ill fortune. Tax write-offs of all sorts abound. In short, they do not bear all the risk themselves, and arguements based on the premise that they do are unfounded.
“Once again I ask, with oil at $80 a barrel, how can anybody seriously claim oil companies cannot survive on a cash flow of $60 a barrel.” by set you free
It isn’t a matter of whether they can survive or not, it is a matter of whether they will bother to continue operations. And what about if there is a decline in the price of a barrel of oil – we are talking record prices for oil these days. I don’t think it is fair to state 25% of earnings should go directly to royalties and that is it – that does not even make business sense, let alone good business sense. Oil companies have fixed costs, and they’ve been expanding in order to meet demand and make big bucks. What do you think is going to happen when the oil companies cannot meet their fixed costs before they can even produce a barrel?
Comment below to Cal2:
“BTW, I always tell my kids the first one to name-call loses the debate.
Could you please try to answer my questions without name calling, please?”
Posted by: set you free at October 25, 2007 6:38 PM
Why don’t you take your own advice – name caller yourself! I guess this means you lost your debate with me – o-tolerant and unbigoted one.
1. Both the NEP and Royalty Review was and is political (pointing out the obvious).
2. I would rather decisions and concequences be local as opposed to dictated from afar.
3. The Alberta economy has been overheated and inflationary for the last 5 years. A hyper-inflated market is not healthy in the long run.
4. Some people argue for no change. Where was that argument when Alberta lowered the rates to help kick start the patch ten+ years ago? Change is constant.
5. By some arguments, little royalty is good. By extension that might mean NO royalty is better.
Trick is to find a balance and governments try to do that with taxation and regulations, unfortunately not always successfully.
I don’t think government should mess with people’s livelihoods until they know their decisions will improve the lives of Albertans, not the opposite. And as Mike_RoA states – “Trick is to find a balance……” It doesn’t seem to me that the Albertan government, at this moment, has a clue where to put the surplus they have already accumulated, let alone know where to put a number of billions more.
yes , oil companies are allowed to write off capital costs, do you need to know on what basis.
CEE- Canadian Exploration Expense -100% also available to individuals directly or thru flow through shares.
CDE- Canadian Development Expense – 30% on a declining balance
Fixed Asset Processing – 30% per year less recovery on CCA and processing on third party.
Flowline 30% declining balance.
Gathering Lines 20 year straight line depreciation\
Major Processing Plants 20 year straight line depreciation.
Nova/TransCanada pipeline – guarenteed utility rate of return. this is an expense to the gas producer and a deduction from income.
Direct operating expense , lifting cost , direct 100% deduction.
Seismic 100% CEE, but any resale value is direct income back with no depreciation.
Royalties, direct deduction from income but no deduction from income tax.
what else do you want to know?
Land and lease- paid to Alberta government , land is depreciated over 10 years or 3 depending on the life of the lease.drilled or dropped.
Municipal taxes – paid on vertical depth of wells , lengths of pipeline, value of compressor stations , pumpjacks , separator buildings, oil batteries tankage, drops to 50% if the well is shutin for more than a year,but does not disappear. average time to reclaim a wellsite after it has stopped producing 5 years.
Alberta Royalty deductions for oil – trucking.
no deductions for any capital items.
Alberta Royalty deductions for gas.- Gas Cost Allowance GCA – processing costs plus a 10%ROR on gathering systems and processing facilities plus a one sixth working capital allowance on the facilities. these have to be agreed to by the province. the present up till a few hours ago royalty system had royalty rates of up to 40% for high rate gas wells.
Alberta rig utilization rate as of monday oct 22, 28%.
anyone want a run down on the geology of the basin , the statistical finding rate ,the average operating cost ,the finding cost and the average ROR of the industry?
cal2:
Thanks. Appreciate your inside knowledge of an issue that’s way too complex for me.
Are any of these capital cost writeoffs that can also be written off against federal corporate taxes?
If there’s no duplication, then I’d have no problem. If there is, Albertans have been fleeced.
set you free
You are tenacious, and also mathematically challenged.
You bet all those things are deductible for federal income tax, they’re also deductible for provincial tax. Just like they are for any other business in any other industry.
If you don’t think that’s OK, then tell your wife to send money back on her tax returns because she got to “double dip” by deducting her expenses for provincial and federal taxes too. And your municipal tax example makes no sense, since municipal taxes are usually based on property ownership or licenses, and have nothing to do with income.
You make no sense when you say that companies get to deduct twice, for royalty and tax. The capital spending (plants, roads, wells, pipelines etc) used in the royalty calculation is simply part of a formula that calculates the final royalty amount, which is a COST to the organization.
Again, you may not like the calculation – I favor a percentage derived by dividing the CEO’s weight, in kilograms, by his/her number of children (just think, if he has none the royalty percentage would be infinite) – you’d like a straight percentage, but I can’t see where the deduction comes in.
That’s also why it’s “INCOME” tax, it’s not called revenue tax.
So, the simple formula is:
Revenue
less royalties
less operating (direct) expenses
less administrative expense
less allowable deductions from tax pools (as described by Cal2)
——————————————–
= Taxable Income
X Tax Rate
——————————————–
= Tax
Re: Jon at 7:29
“Royalties are very close to non-existent until all costs are recovered”. Incorrect. Royalties are paid on conventional oil and gas on the first drop from the well, there is no mechanism for recuperating costs before paying royalties. The Oilsands, on the other hand, do pay a very low royalty rate until the capital costs are recovered. Without this we wouldn’t have an Oilsands industry at all. The Pembina Institute and others have characterized these royalty deferral schemes as subsidies for years – giving the impression to the public that the taxpayers are handing over their money in subsidies to the oil and gas industry.
On the matter of “loan guarantees”, maybe you could provide a link to some facts to back up your argument. I’m unaware of any such guarantees.
I’d be interested to know how the government or the owners share in any of the risk in the conventional oil and gas business. As I pointed out elsewhere, the industry alone discovers where the resource can be tapped (if you think this is easy, there may be many overpaid Geologists and Geophysicists in the Calgary office towers), bid for the rights to exploit the resource, drill, complete and pipe it to markets. All of this is done exclusively with the expertise and capital of the industry. There is shared risk in the Oilsands, I would agree, but the risk is disproportionately on the industry side.
Any chance any of you guys can do a couple of sample calculations showing the difference in netbacks pre-revision and post-revision based on the new cap levels? I had maxxed out my RRSP on Suncor, UTS, etc. being fully willing to accept cost overruns due to labour inflation based on my assessment of future supply/demand (in short that cost overruns would exist, but based on existing royalty agreements if I held for 10 years+, I’d do well). I’m concerned tomorrow is going to be the mother of all bloodbaths as the fine Mr Stelmach appears to have dramatically moved the risk/reward tipping a great deal after my money was already invested….
Many thanks in advance, Matthew.
I’m afraid Stelmach has just pushed the plunger to blow up the Alberta economy. The only good thing you can say about his announcement is that at least it wasn’t as bad the review panel’s recommendations. There will be short and long term consequences from these royalty changes.
The short term impacts will be felt In the natural gas business, where 63% of production (and by extension 63% of gas royalties) come from 5% of wells producing in excess of 500,000 cubic feet per day. At current prices these wells will go from paying 30% royalty rate to 50%. No one in their right mind can say that the government can take an additional 20% out of the industry and expect no impact. The fallout will be that the big players in the industry will abandon drilling the expensive high productivity gas wells immediately and move the capital to jurisdictions with better royalty and tax regimes. Expect a radical slowdown in drilling activity in the western part of Alberta in the 2007/8 drilling season.
The longer term impacts of the royalty changes will be felt in the Oilsands business. At current world prices, the pre-payout gross revenue royalty rate will go from 1% to 4%, while the post-payout net royalty rate will go from 25% to 32%. These changes will have little impact on existing and in-progress oilsands projects – the companies are trapped, they invested their money on certain assumptions and now all they can do is make the best of a poor situation. The projects still on the drawing boards have choices and some of them will fall as a casualty of poorer economics under the new royalty structure. We won’t see the impact of these losses for several years.
I think the solution presented by Stelmach is actually brilliant… and the way-smaller-than-expected reaction on the stock markets this morning supports my opinion. And really, the proof is in the markets.
Seems Stelmach is indeed the decent, ethical and highly intelligent leader I hoped he’d be.
The markets have spoken and the Chicken Littles are scurrying for the exits.
“There is a shared risk in the oilsands, I would agree, but the risk is disproportionately on the industry side.” R Saunders
Might have been a one time but isn’t anymore, if you know what Peak Oil is all about.
Companies know where the oilsands are, all they have to do is mine it and process it.
And oilsands production is such a small part of the total world demand, it will be one of the surest investments any company could make.
World economics may cause a decline in the rate of increase of demand for oil, but the projected increasing decline of world production has virtually taken all of the risk out of the equation in oilsands production.
That’s why so many companies have and are jumping in lately.
And why nuclear power plants would be needed to supply them all.
I see where the TSX energy index finished up 0.23 per cent today.
I hear through the grape vine, there has been a compromise between Stelmach and the oil sands – seems Stelmach had his brain flushed and what he accepted for royalties is a mere smidge of what he was asking for.