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Jim Letourneau's Blog

Investing, Technology, Travel, Geology, Music, Golf. I think that covers it.

Comments on The Big Picture on the Alberta Royalty Review

I wanted to post  a representative sample of the responses to my article - The Big Picture on Alberta Royalties. It will be interesting to see what the ACTUAL new royalty structure will look like. The industry currently feels betrayed by one of its own. 



On average, the Alberta political landscape changes every 25 years or so. Alberta has seen only four parties form governments,
none of which has returned to power after a single incumbent defeat.   



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I just love your Big Picture Newsletter; Thanks for sending it to me!

Now a thought on the initial impact of the full implementation of all of the Alberta Royalt Review's
recommendations:

1.  Two billion dollars ($2*10**9) are taken from the oil patch.
2.  Half of this is then spent by the Alberta Govt on Alberta Infrastructure Projects.
3.  The average salary of a Canadian oil patch employee = $75*10**3.
4.  The average salary of a non-oilpatch Albertan employee = $60*10**3.
5.  There will be no additional PUNITIVE cuts in spending by Can. oil patch companies (ie. the only $
removed will be the 2 billion $).

a. Then an estimate of the initial, direct jobs lost over the next year(+/-) to the Canadian OIL PATCH is:

$2*10**9/$75*10**3 = 26,667 ~ 27,000 jobs.

b.  Initial, direct, new jobs gained in Alberta through new, Govt, direct Infrastructure spending:

$1*10**9/$60*10**3 = 16,666 ~ 17,000 jobs.

c.  Approximate net loss of jobs in Alberta:

(27000-17000) ~ 10,000 (almost all in the Oil Industry).

A simple calculation; but in 1985-1986 an analogous estimate I made proved to be pretty good in hindsight, 4 years later!  I concede that oil industry employment will rebound, but how fast I do not know.

So we oil industry peons should brace ourselves; a blow is coming, for most Albertans want higher
royalties.

Cheers!



R
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I am a third generation Albertan who has been
employed in the oil industry for almost thirty years. Like you, I was concerned
but not dismayed by the Royalty Review findings, and watched bemused as the two
sides faced off in the typical rhetorical corners. And as an investor, I thought
there would be opportunities created by the turmoil
.



 

Ah - wait a second. You know that the industry is
in the midst of capital budgeting right now. Well, we just got our economic
models updated for the proposed changes, and when the industry says
billions of capital spending will be cut, it's not a threat. The impact of the
proposed changes is shocking. I've seen foothills prospects go from good
economics to not making the grade. I was so surprised after we reran our entire
budget database (thousands of wells) that I tore apart the new assumptions
absolutely convinced that the software vendor had made a critical error.
Nope.

 

Sure I'd like to see provincial coffers grow, but
as more information comes out about the assumptions of the review panel, I'm
starting to wonder if it wasn't under some sort of pressure to "produce"
results. And after seeing the results first hand and sitting in budget meetings
discussing billion dollar capital spending cuts I'm very, very
worried.

 

I think this is going to have impacts we can't
imagine. I think companies will fail - how for example does Peyto Energy survive
when they have no other strategy than drilling high productivity Alberta gas
wells? Yeah, if the changes go through I'm shorting it, but yikes, we may
be talking about Armageddon here.

 

I think we should all sit back here for a bit and
gather ourselves - THIS IS SERIOUS.

 

R H
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...what is clear to me is that share prices have not been
adjusted for the 2,000 m plus natural gas drillers if you believe the rules
will be enacted as proposed.  But I do think the government is more
interested in the oil sands changes and there is a good chance they will not
kill natural gas exploration.




We have had very good success in Alberta drilling for
tight gas even with today’s prices.  With the royalty changes we
would spend a fraction of the $ we spent in the past even at $8.00 gas.
We would concentrate on our BC plays.  The problem is the cost and risks
of drilling deeper wells.  Even @ $8.00 the math does not work when you
take 50% of the revenue and it cost $2.5 million + to drill, complete and tie-in.
That is why I think these proposals will change, maybe not in the next few weeks
but at least in the next few years, it’s just a math thing.





A M

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As a Canadian, I appreciated this article and your
comments.  Think its important to differentiate individual shareholders
from "institutional shareholders" or "investors" as they are called.  Too
many CEOs of International Oil Giants and Institional Investment Houses at the
Alberta Oil trough.

 

Imagine the standard of living in Canada had the
Canadian people had proper government representation protecting their
interests instead of giving our resources away to foreigners.

 

It isn't like these "investors" are going to go
away.  The US wants Canada's Oil.  The bigger questions for our
Provincial and Federal Canadian governments is; how best do we serve Canadians
and their oil resource for their needs as well as provide a resource for export
to the rest of the world.

 

Regards,

 

H W
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The reason the Abu Dhabi bot the trust was
there is a rush for all Arab cos to get rid of US $ & acquire assetts which
wont depreciate!!!
!!


H R
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Appreciated your report.  Of course there are conflicting
interests.  Each 'side' would like to see as much of a return as
possible. At the same time we also should want to see everyone receive
an equitable and fair share.
 



In my feedback I
mention that "Albertans should benefit from their natural resources."
I also mention that I favor companies who work for the benefit of the
people and communities they live in.  I have seen local Floridians go
without work while outside companies bring in outside labor.  It does
not make for good community relations.


I also expressed support for increasing royalty
payments but tempered by the reality that much of the development work
is fueled by investors (including many Albertans) who in many cases are
risking hard earned savings to fund the developers.  So I recommended
increasing royalty
payments ncrementally instead of all-at-once.  This would be done on a
per company basis as each company reaches the level of profitability.
This would allow early investors to receive an early return for their
"risked" capital. Thereafter, royalties would increase annually until
reaching an equitable maximum level. The maximum level under this
arrangement could even be slightly higher than an "all-at-once"
adjustment so that the ultimate amount of royalties collected would not
differ materially from the current proposal. At the same time, an
incremental approach would be less of a shock to the market.



"Albertastan?"
This I am sure is a premature or so-called "knee-jerk" reaction and
those who make such comparisons may later apologize.  Maybe they should
consider the recent visit and comments of President Nazarbayev of Kazakhstan
to and in support of the Varvarinskoye project (EPM). Maybe we can even
learn from this example how govermnent and commerce can work together
for the benefit of all in the community.



Thanks for your helpful and detailed summary.


J
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