High-yield/macroeconomics (fka YIELD)

[rfj1862]

Behold, Albertastan

What do you call it when a government enacts multiple huge tax increases and then prevents companies from selling themselves to foreign entities? Nationalization, perhaps?

http://www.fool.com/investing/international/2007/10/03/behold-albertastan.aspx

Toby Shute
October 3, 2007

"Alberta must be internationally competitive and developers must be rewarded for their risks and investments. Nonetheless, the fact remains that the resources do not belong to the developers; they belong to the people."

-- Our Fair Share: Report of the Alberta Royalty Review Panel

Since its release in mid-September, a startlingly anti-business report has caused some serious shudders up in Alberta. The above statement pretty much sets the tone for the 100-plus-page tome. The report's premise is that Albertans aren't benefiting enough from oil and gas development in the province. The panel's prescription is to hike the government's take by 20%, or about $2 billion annually.

You can imagine how industry players have reacted to this report. Our neighbor to the north has been dubbed Canazuela, or -- my personal favorite -- Albertastan. As much as I love wordplay waggery, this characterization is clearly over the top. There's no expropriation suggested here, and no revocation of licenses on legal technicalities. Alberta still offers one of the most stable political and business environments of any hydrocarbon haven in the world. Conducting business there just might get meaningfully more expensive.

Cost inflation is a tax
The timing here probably couldn't be much worse. Costs in the Canadian oil patch are running extremely high. EnCana (NYSE: ECA) cut their expenditures by $400 million this year on account of cost inflation, and Precision Drilling Trust (NYSE: PDS), which depends on high exploration and development activity, has gotten drilled.

Now, enormous EnCana, which has an enterprise value greater than Devon Energy (NYSE: DVN) and even Occidental Petroleum (NYSE: OXY), has stated that if the new royalty regime is implemented as outlined in the panel's report, the company will slash 2008 Albertan investments by $1 billion, a 30%-40% cut.

Now, I don't know what good all that marginal oil and gas will do for The People when it's left in the ground. But I can envision the economic harm from all of the secondary and tertiary employment that would evaporate if the energy companies pack up and shift their resources to projects elsewhere.

Running the numbers
The CEO of TransCanada (NYSE: TRP), Canada's largest pipeline operator, presents some useful numbers in a recent op-ed. Between finding and development (F&D) and production, average costs in Alberta have risen from $8 per BOE in 1996 to somewhere between $20 and $30 today. Operators aren't selling Alberta's heavy oil and bitumen anywhere near the $80 spot price for light, sweet oil. That's why I say a lot of this supply is marginal -- raise the government take, and it won't be economic to produce.

The most interesting figure, which is one that I would have expected the royalty panel to calculate, is the amount of money that will disappear from the economy for each marginal barrel left in the ground. TransCanada's CEO pegs it at $20 to $30. I'm not equipped to evaluate that assertion, but a panel stacked with economists and industry analysts surely was. The closest the report ever comes to acknowledging the impact of its recommendations on activity levels is the statement that "higher royalties and taxes will slow the pace of oil sands investment."

The Foolish bottom line
Is this specter of disappearing jobs just an industry bogeyman? I don't think it is, but then again, I don't have much information at hand. This panel of experts spent reams of pages pointing out how much the government can get away with, and very little space addressing the implications of the hike, other than the fact that the take will be more on par with places like Texas.

I can only guess that the likes of Imperial Oil (NYSE: IMO) and Petro-Canada (NYSE: PCZ) will follow EnCana's lead. Shops, hotels, and restaurants will get pinched. And a few years out, government receipts will actually be lower than had they left the current scheme in place. The people deserve better.