Please protect the green grass,
Please protect the sky,
but don't give away my economic pie!
(thanks to Canadian Poet Dennis Lee for Alligator Pie!)
Wednesday, October 03, 2007
Submission to the Government of Alberta's Royalty Review website
I am writing to express concerns about the report on royalties titled "Our Fair Share." Numerous errors and the lack of understanding of the oil sands business shown in the report mislead all who read it. It would be irresponsible of the Government to make a decision on this flawed basis. I ask that you delay implementation of all of the recommendations until industry has been properly consulted. I know that the Report's recommendations, if fully implemented, will threaten continuing investment in the Province, and lead to a substantial loss of jobs in Alberta.
The report demonstrates a lack of understanding of the forces affecting the bitumen market (pages 79 and 80). It seems to suggest that producers can somehow control the prices and deliberately "spike" the price down to decrease royalty payments. Perhaps you could let the authors know that the bitumen price tends to drop in the winter because of a decrease in demand. The demand decreases because it is hard to pave roads when the ground is frozen. Bitumen is used to make asphalt for roads. It is my understanding that bitumen is often produced at a loss in the winter.
Setting the Oil Sands Severance Tax on the WTI price is not a reasonable proposition. Examine the figure on page 80 of the report. It should be apparent that the price differential between WTI and various heavy oils is far from constant. The market for WTI is different than the market for heavy oil. Would you tax oil sands bitumen based on the price of natural gas? Probably not. Taxing bitumen based on the WTI price is no more reasonable. Taxing gross revenue in a low margin business is a harsh proposition even if the tax rate were tied to the correct price. Trying to justify this tax based on administration and compliance issues with the Revenue minus Cost royalty scheme is ludicrous. If, in fact, the Alberta Government does have problems administering and enforcing the royalty scheme, fix the problem instead of penalizing the people who pay the bills. OSST equals no future investment in oil sands.
When comparing Alberta with other jurisdictions, the authors of the report fail to consider the relative returns of the projects in these areas. While oil sands projects don't have a high exploration risk, they have enormous capital and market risks. The project costs used in the report are unrealistically low. Not only have the costs risen significantly since the data used in the report was generated, but changes in regulations have added additional future cost burdens. The federal action on climate change will have a significant impact on the feasibility of oil sands projects. Significant investment in technology development is required over the next 2 decades to meet the GHG reductions. It is safe to say that implementation of GHG reduction technology, should it be developed, will come with a high capital and operating cost. The Alberta "Water Conservation for Oilfield Injection" policy is a good tool for conserving Alberta's fresh water resources. The royalty report fails to recognize that the continuously increasing water recycle requirements will have a significant impact on project costs. As an Albertan, I would rather see revenue from the oil sands being spent on water conservation measures and greenhouse gas reduction than on royalty payments.
The future of Alberta rests on this decision. I urge the Government to take the time to fully understand the facts so that there will be no doubt that they make a reasonable decision. Convicting the oil and gas companies without fair trial will serve no one. Would a good judge allow a trial to be decided by public opinion without hearing the facts from both sides?
Sincerely,
Kate Easton
Calgary - Elbow
The report demonstrates a lack of understanding of the forces affecting the bitumen market (pages 79 and 80). It seems to suggest that producers can somehow control the prices and deliberately "spike" the price down to decrease royalty payments. Perhaps you could let the authors know that the bitumen price tends to drop in the winter because of a decrease in demand. The demand decreases because it is hard to pave roads when the ground is frozen. Bitumen is used to make asphalt for roads. It is my understanding that bitumen is often produced at a loss in the winter.
Setting the Oil Sands Severance Tax on the WTI price is not a reasonable proposition. Examine the figure on page 80 of the report. It should be apparent that the price differential between WTI and various heavy oils is far from constant. The market for WTI is different than the market for heavy oil. Would you tax oil sands bitumen based on the price of natural gas? Probably not. Taxing bitumen based on the WTI price is no more reasonable. Taxing gross revenue in a low margin business is a harsh proposition even if the tax rate were tied to the correct price. Trying to justify this tax based on administration and compliance issues with the Revenue minus Cost royalty scheme is ludicrous. If, in fact, the Alberta Government does have problems administering and enforcing the royalty scheme, fix the problem instead of penalizing the people who pay the bills. OSST equals no future investment in oil sands.
When comparing Alberta with other jurisdictions, the authors of the report fail to consider the relative returns of the projects in these areas. While oil sands projects don't have a high exploration risk, they have enormous capital and market risks. The project costs used in the report are unrealistically low. Not only have the costs risen significantly since the data used in the report was generated, but changes in regulations have added additional future cost burdens. The federal action on climate change will have a significant impact on the feasibility of oil sands projects. Significant investment in technology development is required over the next 2 decades to meet the GHG reductions. It is safe to say that implementation of GHG reduction technology, should it be developed, will come with a high capital and operating cost. The Alberta "Water Conservation for Oilfield Injection" policy is a good tool for conserving Alberta's fresh water resources. The royalty report fails to recognize that the continuously increasing water recycle requirements will have a significant impact on project costs. As an Albertan, I would rather see revenue from the oil sands being spent on water conservation measures and greenhouse gas reduction than on royalty payments.
The future of Alberta rests on this decision. I urge the Government to take the time to fully understand the facts so that there will be no doubt that they make a reasonable decision. Convicting the oil and gas companies without fair trial will serve no one. Would a good judge allow a trial to be decided by public opinion without hearing the facts from both sides?
Sincerely,
Kate Easton
Calgary - Elbow
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