Alberta Gov’t incentive “plan” sounds economically illiterate
As many of you know, there has been lots of recent discussion about Alberta’s competitive advantage compared to other regimes in the Western Canadian Sedimentary Basic (WCSB), and other jurisdictions. Recently, a few reports have suggested that Alberta is the highest cost region in the highest cost basin in the world right now. There are a number of reasons behind this, but the one that continues to pop up is the contributions of Alberta Royalty Framework (ARF, previously called the New Royalty Framework and prior to that “Our Fair Share”). Now some of these ARF problems may merely be perceived, but they are significantly affecting investment.
The general industry concensus is that Alberta is unattractive due to very low netbacks (prices less costs, i.e. net prices), which translates into relatively lower land purchase values, lower investment (in drilling and related construction) rates, and through that a significant drop in the use of oilfield services. This means that whole portions of the industry are poised to bleed jobs. And, all because of exceptionally poor margins.
What does the economically inept Alberta government do? They realize that the whole ARF updates were a mistake - surprisingly never thinking that oil (or even gas) prices would drop to where it is today. They then scramble to do a patch update (Transitional Royalties) hoping that it’ll take the sting off of the “tough decisions” that they feel they had to do in 2007. And then further, yesterday, they obtusely talk about incenting the smaller producers to do more activity in the province, but are fairly adamant that it’s not going to be a royalty reduction, instead it’ll be some sort of tax incentive or who knows.
Since the problem in the patch is that netbacks in Alberta are too low for a variety of reasons - due to low commodity prices, higher relative royalties, higher operating and capital costs - you’d think that they’d tackle the core of the issue, i.e. help producers increase or realize a higher net price. Tax incentives (possibly better capital depreciation rates, or investment credits, or whatever) are not going to change the fact that even once drilled a lot of wells cannot be economically produced. Only if the government starts to hand out cash to drill new wells - a poor idea since fiscal stimuli are generally poorly conceived and
Are these guys incapable of doing basic math? It’s like they’ve never seen a cash flow report before.
At this stage with very low net prices, the Alberta government may not have many economic tools to make things look better, but their choice of attempting to affect after tax income rather than the core of the problem (low netbacks) shows that they are likely to continue to screw things up.
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And as a followup, it would seem that others believe that not tackling the netback problem (especially royalties) is likely not to make a big difference. I especially like the quote by Derrick Jacobson, president of Quattro Energy Services:
“I don’t see them operating into losses just to get a tax break.”
http://www2.canada.com/calgaryherald/news/calgarybusiness/story.html?id=05bb8a28-6943-4723-8416-4b1d47ecea4b