Magic Ed’s Discount Land Auction Mart

June 28th, 2008
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Evidence continues to accumulate that the province’s decision to raise royalty rates (not to be confused with the loosely used term “higher royalties” which implies an increase in actual revenues collected) is self-destructive.
Most readers will have heard of the roaring rebound in natural gas prices, which blasted through $10 per thousand cubic feet (mcf) or million British thermal units (mmbtu) in spring and last week were over $11 per mmbtu, up from the $6 per mmbtu range last year and the low of $4 per mmbtu in the late summer of 2006.
The sudden return of gas prices (as well as continued record high crude oil prices) has certainly rescued cash flows and share values of producing companies and oilfield service providers alike. Capital budgets and drilling rates have stopped their decline and will either be flat or more likely up somewhat year-over-year (still below 2005 and 2006 levels, however).
This is all to the good, but it masks the damage being done. As we’ve said before, much of it will be in the form of foregone opportunity. There’ll be no weeds pushing through the cracked concrete of idled factories, with a few laid-off workers forlornly picketing at the locked gates. It’ll simply be things that never got done, impossible to photograph and difficult for most people even to visualize.
Premier Ed Stelmach last fall declared that if the industry went down following his announcement of higher royalty rates, it would only be because of low commodity prices. Don’t blame him! It seems he had it exactly backwards. It turned out that if the industry didn’t go down, it would only be because of absurdly high commodity prices. The coming new regime appears to have been pre-emptively rescued by the price rise.
But there is hard evidence of the damage being done, as alert reader Paul S. pointed out in a recent e-mail. Alberta has by far the highest oil and natural gas production of the three western-most provinces and the largest land area with oil and natural gas potential. Naturally, it normally accounts for the lion’s share of revenues from auctions of mineral leases (also known as “land sales”). But today it’s routinely being trounced by B.C. and Saskatchewan. We mentioned this phenomenon in several previous blog posts, especially this one in which we pointed out that land sales revenues have virtually collapsed. (Land sales are suggestive of future activity as undeveloped land is required to drill new wells into new, heretofore unrecognized or overlooked oil and natural gas prospects.)
The decline is continuing into the summer, as the Daily Oil Bulletin pointed out two days ago:
Alberta petroleum, natural gas and oilsands rights drew $35.48 million on Wednesday to put the six-month land sale total this year at just under $451.7 million, down considerably from the $745.88 million in 2007 and leaving the province well behind the pace being set by British Columbia and Saskatchewan.
B.C., by contrast, has generated more than $960 million and Saskatchewan over $600 million so far this year.
The two “weaker” energy provinces have drawn well over three times as much in freely given auction funds – these are not taxes or royalties, remember – as Alberta. Even starker are the average prices: B.C. nearly $3,700 per hectare of mineral lease, Saskatchewan over $2,100 per hectare. Alberta? $307 per hectare. No, there isn’t a 1, 2 or 3 missing from the front. Saskatchewan made its money with just three sales all year so far, in contrast to Alberta’s bi-weekly auctions.
“It’s a new dawn!” Paul enthuses with the faux zeal of a Maoist Red Guard. “You have to be magical to make revenue disappear with these commodity prices.”
“Magic Ed” Stelmach doesn’t have quite the ring of “Steady Eddy” that his acolytes gave him. Sounds more like a discount furniture huckster. Perhaps that’s suitable, given that he’s now handing out mineral leases for next to nothing.
Paul adds: “I hope someone points out the lost revenue to Alberta, just like they pointed out the ‘lost’ royalties [due to allegedly low previous royalty rates].”
Paul notes that Canada’s natural gas production (the overwhelming majority of which comes from Alberta) is down by a whopping 1 billion cubic feet (bcf) per day year-over-year, or about 6 percent. At today’s prices, that’s $4 billion in gross revenue – of which a solid $1 billion would have accrued to the province as royalties. In fact there’s every chance production in Alberta is down by more than 1 bcf per day, since B.C.’s gas production continues to grow. More of that foregone opportunity.
Natural gas production is also growing strongly in the U.S., where royalty rates are…wait for it…low. This allows producers to plough last year’s cash flows into this year’s new-technology-driven gas plays.
Sadly, we suspect Paul’s hope for big media publicity over Alberta’s “lost” revenues is in vain. Bad effects are only ever pointed out by the news media and activists when caused by conservative governments. They’re irrelevant when coming from the left. Because it’s not the act or the consequence that counts – it’s the intention. And the intention was to get Albertans their “fair share”. That’s all you need to know. Hmm…perhaps Our Fair Share just happens to be far lower than that due to British Columbians and Saskatchewanians. Through, um, lower royalty rates.
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By John Weissenberger