19 February 2008

Oil profits ignore Alberta's royalty increase

The whine from the oil industry was positively ear-splitting during the recent royalty debate in Alberta. When the Royalty Review Panel released its report last September stating that oil and gas royalties should rise significantly to ensure Albertans a "fair share" of their resource revenues, industry spokespeople trotted out the predictable doomsday projections.

EnCana warned it would slash spending in Alberta by $1 billion in 2008 if the full report was adopted. The president of the Canadian Association of Petroleum Producers called the report "unrealistic," claiming its recommendations would lead to a significant cooling off in the Canadian energy industry. Former oil industry CEOs Gywn Morgan (EnCana) and John Buckee (Talisman Energy) warned that capital would flee the oil patch. Increasing royalties like the report recommended would be a major blow to growth and investment in the energy sector, went the refrain.

Not everyone in the industry went into panic mode. Suncor CEO Rick George, for example, expressed confidence the Alberta government's approach wouldn't harm the industry. As it turned out, the sane voices were right.

When the government raised royalties along the lines of the report's recommendations, the sky did not fall. Neither did the stock market. And industry just kept on keeping on. BP PLC, which abandoned Canada a couple of decades ago, returned with a bang, announcing it would participate with Husky Energy in a $5.5 billion joint venture to develop Husky's huge Sunrise oil sands project and retrofit a BP refinery in Ohio to handle the bitumen.

The Conference Board of Canada now predicts oil industry profits will soar to new heights in 2008, hitting almost $23-billion, up 18 per cent from 2007. The Board also expects Alberta’s royalty increases to have little effect on investment in the industry.

All the critics of the recommended increases were not wrong, however. Some said they weren't enough. It now appears those critics were closest to the mark.

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