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Alberta Energy

Jim Letourneau
October 1, 2007

While some have sold "all things Canadian" we've rolled up our sleeves and discovered numerous Canadian energy investments that are immune to changes in Alberta's royalty regime.*
The Our Fair Share recommendations of the Alberta Royalty Review panel were recently released after consultation meetings which started in April of this year.
Let me confess to some inner conflict. I am a native Albertan who would like to see some thought put into how to manage the ever-looming oil bust (after all, where there's a boom, there's always a bust to follow  - even if its 10-15 years away). On the other hand I've been bullish on Alberta oil sands companies for some time now and want to see the value of my shares increase.

I would rather have you read the Alberta Royalty Review Panel Final Report (or at least the executive summary and some of the pretty charts), than listen to industry spin. The media's penchant for sound bites has led to cries of "Albertastan" and comparisons with Venezuela. I find these comments extremely repulsive and ignorant.

Big players in the oil industry have not been shy about their concerns. After all, they are working for shareholders who want to get the best deal possible. Earlier this month the big hitters of the petroleum world weighed in while enjoying some Alberta hospitality at the Superbowl of the horsey set, Spruce Meadows:

I say be very careful and recognize that none of us know what oil prices are going to be - none of us
Rex Tillerson, CEO Exxon Mobil

Surely they are smart enough not to kill the thing that is driving the Alberta economy, that is driving all aspects of it, it's driving housing, it's driving salaries, it's driving all of the commerce in Alberta... and in other parts of the country as well. 
Clay Riddell, CEO Paramount Resources

Click here to download the Alberta Royalty Review Panel Final Report.

My opinion as an Albertan is that there was no logical reason for Alberta energy resources to be subject to a royalty rate that was significantly less than that of other jurisdictions. Had the royalty review panel not come to the conclusion that royalties should be raised it would have lost all credibility.

My opinion as in investor is that the Alberta oil sands will remain a favored destination of international capital - though we may see short term volatility in the face of uncertainty. My accounting friends tell me that higher royalty rates decrease the net present value of energy projects (as do higher construction costs and compliance with improving environmental standards). However if you read on you'll see that international companies with very deep pockets are not guy shy about investing in Alberta projects.

Alberta royalty rates haven't been looked at since oil was $35/bbl so the findings of the report should NOT have been a surprise to anyone. King Ralph (former long term Alberta Premier, Ralph Klein) finally retired leaving a strategic vacuum in his wake. Bold innovative ideas don't come from politicians nearing the end of their political careers. Alberta's government was faced with a "catch-up" situation due to a lengthy period of benign neglect.

The noise will soon abate and everyone's spreadsheets will be updated with the new parameters. Alberta will be back to business as usual, for a while.

The market now knows the worst-case scenario (full implementation of the report's recommendations) and is now waiting for a mid-October formal response to the report by the Alberta government. We know that Alberta Premier, Ed Stelmach, will not increase royalties beyond the recommendations of the panel. Alberta royalty rates are going up.

The global hunting ground for the major oil companies has been continually shrunk by the prevalence of state controlled oil companies. In fact, state owned oil companies control about 80% of the world's oil.

The feeding frenzy on Canadian energy assets will continue because they remain a free-market oasis of energy reserves. Alberta royalties will remain lower than those in socialist hotbeds like Texas, Wyoming and Colorado.

The Alberta Royalty Review Panel released its report on September 18, 2007. Less than a week later the Abu Dhabi National Energy Co. (TAQA) struck a deal to take over PrimeWest Energy Trust of Calgary for $5-billion. This transaction speaks volumes on the value of Canadian energy assets in the eyes of international investors.

The last major oil industry PR campaign was to combat the Canadian government's plan to reduce industrial air pollution (Turning the Corner: An Action Plan to Reduce Greenhouse Gases and Air Pollution).It was interesting to see Statoil (64% owned by the Norwegian government) waltz in and buy North American Oilsands for $2 billion one day after Canada announced the plan.

Numerous challenges face the Canadian energy sector (low natural gas prices, high labor costs, increased royalties, and rising environmental standards), however Canadian assets remain attractive to international buyers.
*subscribe now to find an Alberta based oil sands producer that is completely immune to provincial royalties.

-- Jim Letourneau, P.Geol.
October 1, 2007

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