ALBERTA'S OILFIELD CAPITAL SPENDING TAKES A HIT
As the numbers come in for 2008, the Premier of Alberta has tried to deflect the reason for the large economic pull-back towards factors other than his Government's adoption of a new royalty regime.
Pointing to the high dollar and moderate gas prices, the Premier said that the Royalty Review conducted by his government had nothing to do with the downturn marked by a drop of nearly 1/3rd of capital expenditure related to oil and gas in Alberta.
With spending going down to 2000 levels, there is a serious problem related to the large influx of workers who moved into the province during the time between 2000 and 2007.
Employment figures from oil and gas in 2000 show that 183,000 people were employed directly and indirectly by the the energy industry. By 2006, that number has climbed to 275,000. That is a differential of nearly 100,000 jobs.
With a removal of a significant component of the funding of this work force, there is some concern that unemployment will rise sharply.
(numbers taken from CAPP)
Monday, December 03, 2007
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7 comments:
The graph clearly shows that the decline in capital expenditures after the royalty announcement is perfectly consistent with the decline in capital expenditures before the royalty announcement. Therefore, one might conclude that the royalty announcement had zero effect on capital expenditures.
An alternate explanation for the decline in capital expenditures is high operating costs and low natural gas prices.
Hi Greg,
The numbers for capital expenditure in the oilfield 2007 are a total dollar number for the year.
The point at which the royalty review was began affected the total value for the year which is then visible in the slope of the graph.
Better data would have shown the month by month progression of investment spending in the oil and gas industry to demonstrate that the down turn occurred when talk of the Royalty review became public. This data is not available unfortunately.
A clearer indicator of the relationship between the Royalty Review process and the Downturn in investment is the fact the BC and Saskachewan have seen a marked upturn in investment in the same time period.
It is obvious that if commodity prices were an issue, the down turn would have been universal rather than being restricted to Alberta.
I'm pretty sure it's not an either or proposition.
Going down that path in a documentary is about the same thing as emulating Michael Moore IMO!
So unless your prepared to go deep enough into the cause and effect ... or benefit / constraint kind of analysis I believe you'll be doing everyone a disservice.
Good luck and I hope to see your work.
Hi Ommag,
You are right. It is not an either or position.
Certainly if the Government felt they needed more revenue, they could raise royalty rates and try to find a balance that does not destroy the economy and allows it to do the things that Governments need to function.
Here are the issues that I am concerned about:
The government said that it was going to raise royalties by 20 percent.
People felt that they could handle the adjustment. 20 percent is not an exorbitant amount to add to the the royalty rates. The details of the Review came out and it turns out that it was not a 20 percent increase but rather an additional 20 percent on the 30 percent that was already in place.
The sleight of hand made people distrustful of the Government and and worried about its motives.
Another issue is of course why it was necessary to impose a large increase in taxes when the government was already in a very strong surplus position. What reason would a government have to make an annual 4 billion dollar surplus into a 6 billion dollar surplus?
The government is not a profit-driven organization (at least in Alberta.)
The final issue for me is this:
The government gained political acceptance of the plan by proclaiming that it would not affect the economy because it was carefully calibrated. People respected them and believed that they had done their homework.
It turns out that they had not done their homework because they seemed surprised by the downturn and they started blaming the downturn on other factors like exchange rates.
If the government wanted to be fair, they should have released the royalty plan with an honest assessment of what the fallout of a royalty rate hike would be.
Hiding it and being deceptive is unacceptable in Alberta.
Those who think that Stelamch's new royalty regime is not having an effect should be trying to look for work. I am and I'm not having much luck. I left my job as a senior geologist (27 years experience) with a major oil company for personal reasons in July 2007. I was getting employment offers from other companies at that time.
By the time it began looking for work again in November 2007, there was already very little activity. That trend has continued for the past 6 months and I am still looking for work.
Don't tell me there is some kind of "Alberta Advantage." This government made the wrong move at the wrong time - when the gas industry was already hurting. Non-industry Albertans, and the government were just motivated by greed with little thought to the implications.
The result? Major companies have begun spending $billions elsewhere. Landsales and drilling activity are soaring in Saskatchewan and NE BC and are in rapid decline in Alberta. Companies have had layoffs - a few here and there so they have stayed under the radar but BP is rumored to be laying off 200 soon. Petro-Can, CNRL, Apache and other majors have laid off staff. Smaller companies are looking for ways to exit Alberta and invest elsewhere, or are being swallowed up in acquisition activity.
The place where most of the hiring is happening now is the oilsands. I wonder what those investments will look like if the oil price goes down to $70/barrel.
The greedy folks are still screaming about oil company profits. Oil companies are now profiting from wells that were drilled years ago when prices were $30 dollars a barrel and $3 and Mcf. No one cared about profits then, but the companies took the risk and drilled anyway. Now they are being rewarded.
Ed Stelmach and his government have mortgaged Alberta's future since the investment that is leaving Alberta now will NOT be paying royalties in the years to come. Ed is the best thing that ever happened to Saskatchewan.
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