The recent recommendations from Alberta’s royalty review panel put me in your mind in the old joke. Here’s the abridged version:
Alberta spares oilsands companies in new royalty regime based on revenues, not oil prices
The Alberta government’s $3 million royalty review, which in fact had the ability industry tied in knots for months, ended up being a costly lesson.
Continue reading.
A reporter gets used on investigate tales from the fantastically gifted pig who resides across the farm from city. So he drives for the farmhouse around the warm summer’s day and knocks round the door. Door opens, there stands a handsome, three-legged pig, who proceeds to just accept reporter’s hat and coat, shows him for the family room, and serves him a glass of lemonade.
The farmer joins the reporter along with the interview proceeds, the reporter dutifully taking notes round the amount of Wilbur (this is actually the pig): What sort of farmer realized Wilbur’s smarts when young; how he educated the porcine prodigy around the arts, background the how to go about household service; how Wilbur helps the children with homework; and so on. Even while, Wilbur does his thing – preparing coffee and sandwiches, collecting the lavatory (and doing them), even playing the piano just a little for your human duo’s entertainment.
As the interview approaches its conclusion, the reporter asks his final, perhaps most delicate question: “How,” he asks, “did Wilbur reached lose among his legs?”
“Oh well, you realize,” answers the farmer matter-of-factly, “you avoid eating a pig similar to this at one time.”
Rimshot.
OK, so nobody was laughing either following a Alberta royalty review panel found its long-awaited conclusions, which basically recommended the province not eat anymore from the pig, but undoubtedly many within the oilpatch were breathing a sigh of relief.
Just to recount, the panel was appointed months ago through the NDP government of Premier Rachel Notley. Notley’s invective within the existing royalty regime during last year’s provincial election – for the effect that Albertans appeared to be scammed – had some inside the oil industry fearing the worst.
Well, the worst (or even the best, depending on how relative it’s) didn’t happen. Individuals who be familiar with ins-and-outs of royalty schemes won’ doubt their very own more in depth views, nevertheless the important takeaway is the panel’s recommendations were pretty middle-of-the-road, and doesn’t likely find yourself changing greatly.
Should investors care? Well, sure. Under Alberta’s royalty regime, the federal government collects 60 to 70 % of the oil revenue remaining after operating and capital costs. Whether that’s fair otherwise – well, you select. In contrast to other oil-producing jurisdictions, it’s virtually competitive. (Saskatchewan, though, requires a smaller share.)
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Another point is the panel’s recommended royalty structure will reward low-cost operators (who’ll possess a bigger slice of the action) and punishes high-cost operators (who will low on remaining after operating costs to discuss). Because the oilpatch concentrates on costs and actively works to improve efficiencies, that kind of structure seems to be the better choice.
So, overall, it might are in fact much worse for Alberta energy producers. The panel’s recommendations claim that the NDP government need reason during the skin of ideology, no less than occasionally, and the industry might expect some level of policy stability moving forward, at least with regards to royalties.
Lord knows it’s enough changes to consider in other locations. Nobody yet knows what the impact from the province’s new carbon tax plan’s likely to be. Too, the newest federal government’s method of pipeline approvals, environmental reviews as well as the role within the National Energy Board comprises another unknown on the regulatory level.
But the reality is it doesn’t matter greatly towards the short-term prospects of Canadian energy companies or their investors. To combine my animal metaphors, vulnerable to elephant inside the room – quite simply, an elephant not space, but a lot of miles away.
Last week, energy stocks rose, with S&P/TSX capped energy index up a lot more than Eight percent. You won’t ever tell simply how much that rise revolved around Alberta royalties, but most likely not really a lot. Since oil prices rose more than Ten percent – from below US$30 for West Texas Intermediate to north of US$33 – what’s really determining the cost of Canadian energy stocks is, well, energy prices.
And those are now being determined far away from Canada. Russia states that OPEC has proposed a five-per-cent production decline together with non-OPEC producers. Research from Saudi Arabian television on Sunday suggests that the Saudis are for sale to dealing with other producers to help industry.
Who knows once the resulting speculation will be borne out. Maybe OPEC has received time selling inside the cheaper. Or maybe it’s just seeing how long it might talk up oil prices without actually cutting production.
Either way, what this highlights, kind of by comparison, may be the insufficient pricing power for Canadian oil producers. Better export infrastructure – i.e. more pipelines – is needed, as Canadian product currently sells for an inexpensive price to global prices partly because it is expensive to get free from the country. But given background the federal government government’s signals, that path is much from clear.
At least the royalty review panel has removed a potential irritant. When oil prices recover, the possible lack of uncertainty might encourage, or at best not discourage, re-investment within the oilpatch, which will enable Canadian producers to know the advantages of rising prices sooner.
But for many investors now, and charges still within the basement, you will find bigger things to concern yourself with in Canadian energy – and to expect.
