« NP: Liberal warfare, at home and abroad | Main | Keep the car running »

Straight to hell

A reader asked a little while ago what I think about the controversy over the proposed increase to oil royalties in Alberta, which is currently being pondered and undoubtedly finessed in the office of Premier Ed Stelmach. The short answer is that I think it’s ridiculous that we have to discuss it. The government, ideally, should not be in the business of setting a price for oil, in the ground or anywhere else. The issue does not exist in the American jurisdictions where subsurface rights are attached to land titles, as they traditionally were under the common-law doctrine of ad caelum et ad inferos. But that divorce was decreed in Canada long ago and cannot readily be reversed. Since the government has no choice but to set a price for the oil, the test for any given price level should be pretty simple: does it maximize revenue? Stelmach, in his mushmouthed way, has actually tried to advance this idea. The problem is that in principle no one, including him, knows whether the new price regime he imposes will accomplish this.

But the place to go for the best guess is the market. The oil companies and their investors reacted to Bill Hunter’s report on royalties, issued Sept. 18, with indignation and accusations that Alberta was going Chavista. The skeptic might consider looking at energy companies with a major Alberta presence to see whether the shareholders are really all that troubled by Hunter’s rhetoric. Since Sept. 17, the last day on which the information in the report was not public, we can see the effect it has had on the prospects for future profit in the sector. The share price for the Canadian Oil Sands Trust, for one, has plunged from $33.30 to $34.95. A battered Suncor, which stood at $98.71, has slumped to $100.84 per share. Husky Energy Inc. has plunged from $41.22 to $43.28. Clearly Stelmach must take a stand and call a halt to this financial bloodbath!


TrackBack URL for this entry:

Comments (10)


You concentrate on companies that have a definitive Canadian presence only and only on their recent stock price? This is only part of the story. Suncor aside of course, with their "special deal".

First of all, I think investors are in your above company examples for the short term price inflations and value on reserves on oil sands than necessarily even the development. you think the same valuations would hold on a spot price of $60? you have to account for the bullish long term pricing market.

As well, the investors for the most part are on the betting side of this royalty revision is not going to go through at least as as proposed, or even close to proposed. We can see how things may change after next week.

The other significant problem is money will come out of Alberta and be placed ELSEWHERE. The companies are certainly not going to just turtle here, they will simply move to other opportunity, Do people thing oil sand opportunity just magically disappears at the Alberta Saskatchewan Border? More diversified companies with other opportunities, such as an EnCana,BP or Conoco,will go play in a sandbox somewhere else if they have to. Its not that they will not continue to invest in Alberta, but in the past these or similar companies preferentially invested more of the portfolio in Alberta than other North American opportunities partially because of royalty and tax balance being advantageous. Take the advantage away and why drill in Alberta for lower commodity pricing results than can be gained in the Mid Continent region?

As for my example companies, EnCana can remain strong on USA and BC operations, BP and Conoco on world wide opportunities. So you may not see a significant long term deterioration in stock price on the oil companies or "fat cats" everyone is talking about taking money out of the pcokets of. Just less jobs for our fellow citizens and a potential housing / cost of living crash in Alberta. I hope all the people in Calgary in their 400 bucks a square foot houses are ready for a little market correction. If you thought the credit crush here in the states was bad, wait until this happens.

At the end of the day, Alberta is a one trick pony as an industrial power. Pony comes in with a split hoof, things are going to get ugly...

From my perpsective, with a father close to retirment up there in Alberta, I welcome the change to some extent. His dollar, safely tucked away after a 40 year career in the oil patch, will strech a little farther, my brother in laws well service industry in BC will floorish, and I will continue to enjoy sunny Colorado's low housing prices.

But thinking this proposed change is not going to cause a significant Alberta economy down turn of some level could be sticking ones head into ones ......


Two points here:

1. While I'm not accusing you of anything, generally looking at stock prices relative to any official announcement date is misleading, and gives investors far too little credit. What happened to the stock price when rumours that Hunter's committee would be struck first became credible? How about when the committee was officially struck? I think an instructive example is changes in interest rates: often the market goes in the opposite direction that you would expect, macroeconomically speaking, when the BoC base rated is moved (or the market doesn't react at all); investors have already "reacted" long before, and there's not much that catches them off guard.

2. Shouldn't the test for any given price level be, "Does it maximize the wealth and well-being of Albertans?" I realize that I'm being a bit naive here (and disingenously so), but royalty revenues is not exactly a perfect proxy for What's Best For Albertans.


I'm not sure what your point is. Are you saying that, over a period in which oil prices have increase about 13%, these firms' stock prices have only appreciated 3%-5%, so the market is factoring in a negative impact of a potential royalty increase? Or are you trying to suggest that, given the same increase in oil prices, the market should have cratered the stock prices of these companies in the face of an as yet unverified royalty increase?


I've been following this story since I have a small position in Canadian Oil Sands Trust, but I don't think it's quite that simple. The price of oil has been increasing steadily recently so there is an upward lift to all of those share prices from that.

See, for instance



Focusing on the economic rationale behind an increase in energy royalties ignores the fact that the policy is driven more by populist politics than economics in any case. A lot of Albertans are frustrated by the side-effects of the boom - the high real estate prices, cost inflation for almost any good or service, more traffic, etc. Then they see a lot of people getting rich off the energy boom, and are unable to perceive a similar payoff for themselves. The result is a jealous and petty conclusion that the oil companies should be paying more, irrespective of how much ancillary benefits the energy boom has been spilling into the economy. It's that sort of sentiment that's provoked political action, not a rational economic analysis.

A rational plan would include some sort of analysis that tries to model the total economic impact of energy business, including royalties as one factor. Does an increase in royalty rates provoke a disproportionate loss in tax revenue due to reduced economic activity? What is the risk imposed by the royalty rate in the case of a slide in energy prices? A rational plan would also have a plan for how those increased revenues should be used. Investing in the Heritage Fund might be one answer. Spending on infrastructure might be another, although not particularly efficient in an overheated economy where services & materials are already at a premium. Increased spending on programs would be idiotic, and could land Alberta right back where it was under Don Getty in the late '80s and early '90s.

It's amazing how quickly people forget how much the Alberta economy hinges on energy prices. Economic diversification gets attention in the down times, but is hampered by a lack of funding. Then during the booms, it's quickly forgotten again.


There's a paper in Canada called the National Post. Just yesterday, there was analysis of how Alberta energy stocks are depressed relative—that's the key word here—to energy firms that operate in other jurisdictions. Here's the link:


As other commenters here correctly point out, investors react to a variety of factors and stimuli, so this analysis may be every bit as unscientific as your own, Colby. But at the very least, you must recognize that the thesis "stock A went up a bit, so investors must be A-Okay with the panel's report, and completely disregarding relative equity values, broader market performance, commodity prices, management issues, buyback schemes, etc., etc., etc., is grossly oversimplistic to say the least.

M. Grégoire:

Why can't they set royalty rates using an auction process, at least for new developments?

Isn't it enough that oil companies employ thousands of Albertans and pay out multi-millions in salaries that result in multi-millions in income tax payments to greedy governments? The fact that so many Albertans favor Chairman Stelmach's tax grab is proof that people just don't know a good thing when they've got it.

'But at the very least, you must recognize that the thesis "stock A went up a bit, so investors must be A-Okay with the panel's report, and completely disregarding relative equity values, broader market performance, commodity prices, management issues, buyback schemes, etc., etc., etc., is grossly oversimplistic to say the least.'

True, but if stock prices had began to plunge, don't think that it wouldn't be used by those opposed to the royalty review.

Remember, Colby wasn't positing a theses; he was positing a guess.

So, after all the overnight screaming today about how the 20% royalty increase for 2010 was going to send the TSX crashing through the floor today, I open up the TSX page for the first time today to see...

up 62 points already, about half a percentage point over yesterday's close. When it had been up again.

NOTHING to see here, people.


This page contains a single entry from the blog posted on October 18, 2007 7:07 AM.

The previous post in this blog was NP: Liberal warfare, at home and abroad.

The next post in this blog is Keep the car running.

Many more can be found on the main index page or by looking through the archives.

Powered by
Movable Type 3.35