Our Alberta Advantage

ALBERTA'S PREMIER IS GETTING LETTERS

There is probably a frenzy of letters being sent to the Premier of Alberta.

Here is an example of such letters that are making their way to Premier Stelmach's office.

Dear Premier Stelmach,

Your remarks to “Dear Friends” in the latest PCAlberta Newsletter show a lack of understanding of the oil and gas business and of the “predictability and stability” investors look for to feel comfortable investing.

First of all, changing royalty rates on existing leases and agreements after companies have risked billions of dollars based on economics dependent on such leases and agreements does not provide predictability and stability.

Secondly, as royalties are a percentage of the oil and gas price, they already go up when prices go up and down when prices come off.

Thirdly, taking an additional 20% off the top can, depending on operating costs, increase the royalty to 100% of the net operating revenue. Beyond operating costs there are the drilling and equipping costs to recover, not to mention the cost of dry holes. You have made special allowances for deep gas wells. What about costly, risky, potentially high productivity oil wells? In my view it is not “fair,” or economically prudent, for the government to take more than 30% off the top, no matter what the commodity price level. What incentive is there for a company to drill in a marginal price environment if the potential up side of higher prices down the road is clawed back by an increase in the percentage taken off the top? 30% of a higher number is already a higher number.

The oil sands, which are no longer in the R&D stage, can possibly bear more than a 1% royalty before payout. But that should not apply to those companies (Suncor and Syncrude) that have risked billions as pioneers.

With respect I believe there are major adjustments required to your plan to have it make sense. The real danger to you and your government is that the reduction in investment that will result unless significant adjustments in both the mechanics of the plan and the underlying philosophy are forthcoming is that the treasury will not gain $1.4 billion dollars, but will receive less. Lower production will mean fewer royalties, and a slow down in the innumerable businesses dependent upon and benefiting from the oil and gas industry will pay less tax as will the employees that are laid off.

Yours truly,

James A. Hutchison, C.A.