Energy Politics in Alberta

Alberta has commissioned a royalty review panel to evaluate the current system of royalties in the province. Their report, and related comments, are available here:
http://www.albertaroyaltyreview.ca/index.html

If you live in this province, this is extremely important to you, even if you don't work directly in the oil and gas industry.

I wholeheartedly disagree with the report... there are elements of sense and utility to it, but the report itself demands to be accepted or rejected in whole. So I reject it.

My action at 7:30 am the next morning was to sell my oil and gas stocks that are Alberta based. I now own none. My initial findings when I stayed up the night it was released were as follows below, that the image of more revenue from conventional oil and gas production royalties was a lie.

"One point I'd like to draw attention to is the table on page 17 of this report. It shows estimated revenue impacts using a production forecast out to 2016 based on current and proposed royalties. Naturally, it shows an increase in royalty revenue under the higher royalty scenario as proposed.

Sure, in the short term this will happen, as the industry can't adjust on the first month.
However, both scenarios use the same production forecast. Wouldn't you think that raising royalties by 20% might reduce capital investment over a 10 year time horizon? And that oil and gas production might decline under that reduced capital environment? And therefore that the extra revenue shown (up 37% overall, 20% up on conventional) as take for Albertans in 2016 is FALSE ADVERTISING and SIMPLISTIC and maybe the populace isn't that dumb?

I've made a rough production decline/reinvestment model out to 2016 in an attempt to reverse engineer the forecast included (for conventional oil and gas only), and calibrated it to the numbers on page 17. I've assumed plugged a 15% basinwide decline, as well as $20,000 flowing barrel capital efficiency, which necessitates an annual capex solve of about $8.5bn to make the forecast production as shown in 2016. If you assume that a 20% increase in royalty costs takes $2bn a year out of private industry pockets, I've correspondingly reduced capex by $2bn/year to generate my new forecast.

Removing $2bn a year of capex for a decade results in 40% less production at the end of the forecast period ceteris paribus rather than the stoic "(same)" as indicated in the table. Higher royalty rates on a lower production base... the result is that 2016 royalty take off conventional production could be 20% lower as indicated by this calculation than the base case scenario rather than 20% higher as shown for conventional. Higher decline assumptions and worse capital efficiency make this worse.

Hmmm.... Higher taxes on a smaller base doesn't mean more revenue... Haven't we heard this before?"