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Jim Letourneau's Blog

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

The Big Picture on Alberta Royalties

This article sums up my thoughts on the big royalty debate in Alberta that is impacting the outlook for Canadian oil sands companies. There will be more certainty in a few weeks - I think the government goes 75%+ of the way to implementing the recommendations which could create a nice buying opportunity - either for speculators or the long list of international buyers of Canadian assets.

While
some have sold "all things Canadian" we've rolled up our sleeves and
discovered numerous Canadian energy investments that are immune to
changes in Alberta's royalty regime.*



The Our Fair Share
recommendations of the Alberta Royalty Review panel were recently
released after consultation meetings which started in April of this
year.




 

Let me confess to some inner conflict. I am a native Albertan who
would like to see some thought put into how to manage the ever-looming
oil bust (after all, where there's a boom, there's always a bust to
follow  - even if its 10-15 years away). On the other hand I've been
bullish on Alberta oil sands companies for some time now and want to
see the value of my shares increase.

I would rather have you
read the Alberta Royalty Review Panel Final Report (or at least the
executive summary and some of the pretty charts), than listen to
industry spin. The media's penchant for sound bites has led to cries of
"Albertastan" and comparisons with Venezuela. I find these comments
extremely repulsive and ignorant.

Big players in the oil
industry have not been shy about their concerns. After all, they are
working for shareholders who want to get the best deal possible.
Earlier this month the big hitters of the petroleum world weighed in
while enjoying some Alberta hospitality at the Superbowl of the horsey
set, Spruce Meadows:

I say be very careful and recognize that none of us know what oil prices are going to be - none of us
Rex Tillerson, CEO Exxon Mobil


Surely
they are smart enough not to kill the thing that is driving the Alberta
economy, that is driving all aspects of it, it's driving housing, it's
driving salaries, it's driving all of the commerce in Alberta... and in
other parts of the country as well. 

Clay Riddell, CEO Paramount Resources

 Click here to download the Alberta Royalty Review Panel Final Report.

My
opinion as an Albertan is that there was no logical reason for Alberta
energy resources to be subject to a royalty rate that was significantly
less than that of other jurisdictions. Had the royalty review panel not
come to the conclusion that royalties should be raised it would have
lost all credibility.

My opinion as in investor is that the
Alberta oil sands will remain a favored destination of international
capital - though we may see short term volatility in the face of
uncertainty. My accounting friends tell me that higher royalty rates
decrease the net present value of energy projects (as do higher
construction costs and compliance with improving environmental
standards). However if you read on you'll see that international
companies with very deep pockets are not guy shy about investing in
Alberta projects.

Alberta royalty rates haven't been looked at
since oil was $35/bbl so the findings of the report should NOT have
been a surprise to anyone. King Ralph (former long term Alberta
Premier, Ralph Klein) finally retired leaving a strategic vacuum in his
wake. Bold innovative ideas don't come from politicians nearing the end
of their political careers. Alberta's government was faced with a
"catch-up" situation due to a lengthy period of benign neglect.

The
noise will soon abate and everyone's spreadsheets will be updated with
the new parameters. Alberta will be back to business as usual, for a
while.

BOTTOM LINE...

The market now knows the worst-case scenario (full implementation
of the report's recommendations) and is now waiting for a mid-October
formal response to the report by the Alberta government. We know that
Alberta Premier, Ed Stelmach, will not increase royalties beyond the
recommendations of the panel. Alberta royalty rates are going up.

A BIG PICTURE TREND...
The
global hunting ground for the major oil companies has been continually
shrunk by the prevalence of state controlled oil companies. In fact,
state owned oil companies control about 80% of the world's oil.



The feeding frenzy on Canadian energy assets will continue because they remain a free-market oasis of energy reserves.
Alberta royalties will remain lower than those in socialist hotbeds like Texas, Wyoming and Colorado.



The Alberta Royalty Review Panel released its report on September 18, 2007. Less than a week later
the Abu Dhabi National Energy Co. (TAQA) struck a deal to take over PrimeWest Energy Trust of Calgary for $5-billion. This transaction speaks volumes on the value of Canadian energy assets in the eyes of international investors.



The last major oil industry PR campaign was to combat the Canadian government's plan
to reduce industrial air pollution (Turning
the Corner: An Action Plan to Reduce Greenhouse Gases and Air
Pollution).
It was interesting to see Statoil
(64% owned by the Norwegian government) waltz in and buy North
American Oilsands for $2 billion one day after
Canada announced the plan.



Numerous challenges face the Canadian
energy sector (low natural gas prices, high labor costs, increased royalties,
and rising environmental standards), however Canadian assets remain attractive
to international buyers.



*subscribe now to find an Alberta based oil sands producer that is completely immune to provincial royalties.