Andrew Leach's energy and climate blog
In today’s Edmonton Journal/Calgary Herald on-line leaders debate (a great format, BTW), the leaders were asked the following question:
Do you believe in climate change? What should be the provincial government’s response to climate change, or should the provincial government wait for a plan from the federal government?
Tonight, I am looking for some informed opinions on a topic about which I do not know much. I spent some time this evening looking into whether a differential royalty regime for oilsands bitumen based on its eventual use would survive a challenge under either the NAFTA or the WTO. This inquiry was was motivated by a line in the Alberta NDP platform which commits to, “develop a differential royalty system on bitumen and upgraded products that encourages value added in Alberta.” While the NDP are the only party proposing a differential royalty regime, other parties are proposing various measures with the desire to drive more upgrading in Alberta.
My question is this – when, and under what conditions, would such a policy survive a NAFTA or WTO challenge? I think the answer is clear – a differential royalty rate for exports would not stand up in almost any form.
Bitumen royalties accounted for 10% of total Alberta government revenues in 2010-2011, and that is expected (according to the most recent Alberta Budget) to climb to approximately 20% of total government revenues, or $9.9 billion dollars by 2014-2015. Both royalty revenue estimates and royalty rates make for contentious subjects in Alberta, and this post is intended to provide a primer into how the royalty regime works and how it impacts investment decisions. My hope is that every Albertan will become more engaged in how this resource is managed, and the first step in that direction is understanding how it’s managed now, so here you go.
What will determine my vote on April 23rd? I suppose it will surprise no one that I will vote based on the energy and environmental policies of the parties. My key issue list includes 5 categories: 1) Savings, transparency, and accountability; 2) Market access; 3) Local environmental management; 4) Global environmental credibility; and 5) Getting the most value for our resources. Here are some of the questions I’ll ask the candidates who visit my house during the campaign, and some context for why I’m asking them. How does your party line up?
This week, the question of whether or not and, if so, how, the Government of Alberta should encourage upgrading and/or refining of bitumen in the province is back on the front page. Much of this coverage is due to backlash over the Government’s decision to not proceed with the Alberta First Nations Energy Center (AFNEC) under the Bitumen Royalty in Kind (BRIK) program. There are as many myths as ever bouncing around this, and so I’ve spent the last little while trying to untangle them for myself. Here are some thoughts and, as always, your comments and clarifications are welcome.
Last night, I wrote a long post on exchange rates, and discussed the impact of the Canadian dollar appreciation on our purchasing power. As usual, the best way to demonstrate that increase in purchasing power is with a graphic, so here you go: What you’re looking at is the relative changes in gas prices, in local … Read more
Last week, BC economist Robyn Allan weighed-in on the McGuity-Redford fiasco with a post of the effect of oil extraction on the Canadian dollar, and the knock-on effects of a high dollar on Canadian industry, including the oil and gas sector. Ms. Allan makes some important points, some which surprised me, but she also makes some points which are simply not accurate. Let me start with the good, and move on to the bad.
Why would you buy an oilsands lease, or if you had one, why might you chose to invest billions of dollars of your money, up front, to produce oil for the next 40-50 years? The answer is pretty simple – given your view of future oil prices, the costs of building and operating the plant, and the share of your revenues that the government will take in royalties and taxes, you’d have to be confident that you could make a rate of return on your capital equal to or greater than what you could earn on it in a similarly risky investment somewhere else. If not, why do it?
The same is true for the decision to invest in an upgrader or refinery. Upgraders and refineries make money when the value of the output is high enough, relative to the value of the inputs, to earn a competitive rate of return on capital – they are spread bets. For an upgrader, what you’re really interested in is the expected future spread between heavy oil or bitumen and light or synthetic crude oil. If you look at the figure below, bitumen had an implied average price of $65.50/bbl in 2011, whereas a barrel of lighter, higher value synthetic crude sold for an average of just over $102/bbl – a premium of $36.50/bbl – let’s call that the coke spread, since most upgraders or integrated refineries will employ a coker to strip out the heavier ends of a barrel of bitumen. Looking forward, according to Sproule Associates, the average spread is expected to be a little lower than that, at about $32.20/bbl over the next 10 years.
So, can you make money on an upgrader in Alberta with a $32.20/bbl spread? As with anything in economics, the answer is it depends. It depends on how much it costs you to build and operate the upgrader, what tax incentives you might receive, as well as whether you can profit from any synergies between extraction and upgrading. Without tax incentives or significant co-benefits, the short answer is likely no.
Last night, I wrote a long post on the EU Fuel Quality Directive, on which a vote is expected next week. The Fuel Quality Directive has attracted a great deal of attention here in Canada because it would assign a higher emissions rating to Alberta oilsands than to other sources of crude oil, and I have argued that it will do so despite the fact that some of these other crudes may or may not actually have higher emissions per barrel than oilsands.
The response to the blog post was quick. Naturally, both Government and industry representatives were supportive as it reinforced their positions, while environmental groups were less enthusiastic since it called into question their contention that the FQD would apply to oil other than oilsands, including that produced from Venezuela. Thanks in particular are due to Hannah McKinnon of the Climate Action Network who was most helpful in providing context for her comments which I referenced in my blog.
I’ve spent a lot of time today sorting through reports to either refute or validate my own conclusions about this policy, but I haven’t been able to do either conclusively. At least I have learned a lot about the resource bases in both Canada and Venezuela as a result of this search. Here’s a little of what I’ve discovered.
Next week, the EU is expected to vote on the Fuel Quality Directive which would assign a higher emissions rating to Alberta oilsands than to other sources of crude oil, including some which may or may not actually have higher emissions than oilsands oil.
One of the many arguments against this policy made by Canadian government and industry officials is that it exempts other similar sources of oil, and turns small differences in actual emissions into large differences in rated emissions. Environmental advocates, such as Hannah McKinnon, the campaigns director for Climate Action Network Canada, have countered that, “the oil industry was using bogus arguments against the European legislation since bitumen estimates in the policy applied to the resource in all countries, including Venezuela.” As far as I can tell, that’s not true, and the reason is viscosity.