Alberta's vanishing take

David Ebner, January 29, 2007, Globe and Mail -- When Alberta Premier Ed Stelmach decided to raise royalties on conventional oil and natural gas last October, he projected hundreds of millions of dollars in new money rolling into the treasury.

Now, he frets about “unintended consequences.” Royalties are going up—but is Alberta’s take falling?

Here’s an “unintended consequence:” The money paid for new leases to explore for conventional oil and gas are at their lowest in more than a decade. In the first two auctions of the year, Alberta received just $25.9-million from the sale of new exploration rights for conventional energy.

That’s one-third — a huge collapse — of the $78.9-million received last January and down 91 per cent (reminds me of Nortel) from the big boom year of 2006 and the $304-million haul that juicy January.

At the outset of last year’s royalty review, the facts clearly suggested higher rates in the oil sands were easily justified. But nobody talked about higher conventional royalties until the six-person public review panel in September surprised everyone by calling for increases across the board.

The fragile conventional business, led by natural gas, was already hurting. It’s in a coma now, looking at the land sale results, which are a harbinger of future activity. (Perhaps the rebound in gas prices holds. That’s a big perhaps.)

For Alberta, and the future of Mr. Stelmach’s government, land sales are not some little thing. Land sales, as a percentage of energy revenues, account for about 20 per cent of the total that comes to the provincial treasury — and in the boom year of 2006, when the province took in a record $3.43-billion from conventional energy and oil sands, land sales accounted for roughly 10 per cent of the province’s entire budget.

In the oil sands, the take from land sales is down, too. The January sales brought in $24.4-million. That’s down 82 per cent from last January’s $134-million.

But oil sands sales tend to ebb and flow more than conventional energy. Excluding the booming years of 2005-07, and given the fact most of the good land in the oil sands is already leased, the $24.4-million isn’t completely shabby. In 2004, the January take was $3.4-million. In 2003, it was $414,092.

And, separately, investment dollars keep rolling into the oil sands (most recently BP PLC). That cannot be said for conventional oil and gas in Alberta, where at least $1-billion of spending for 2008 has been scrapped by the likes of EnCana Corp. and Canadian Natural Resources Ltd.

All in, Alberta January land sales were $50.3-million, down 76 per cent from $213-million a year ago.

That's bad news for the provincial treasury. And maybe bad news for Premier Stelmach, who has been on the job thirteen months and is expected to call an election within days.

The links to the stats:

www.energy.gov.ab.ca/Tenure/877.asp
www.energy.gov.ab.ca/OilSands/827.asp

Final points:

-In terms of conventional royalties, and based on the fact the province appears only to provide month-by-month statistics online going back to 1996, we can say the start of 2008 for conventional oil and gas land sales is the worst on (digital) record.

-Exploration rights in Alberta are sold in a blind auction twice monthly, except in February, when there is one sale (Feb. 6 this year - the January sales occured on the 9th and 23rd). The Crown owns about 80 per cent of the mineral rights in the province and companies make requests for certain parcels to be put up for auction. Once approved (don’t worry, it’s easy!), the parcels are posted and then companies submit blind bids. The highest figure wins - good for the province, as it encourages bigger bids. Companies generally have about five years to do something with their land and they also have to secure surface rights to drill (say in the middle of some farmer’s field or similar). In the oil sands, tenure lasts longer, generally 15 years.