High-yield/macroeconomics (fka YIELD)

[rfj1862]

Rogers: Alberta reverted to 'theft'

I think the headline speaks for itself

http://www.theglobeandmail.com/servlet/story/LAC.20071027.STELMACH27/TPStory/National

October 27, 2007

The Alberta government's decision to sharply raise royalties on oil and gas has damaged its international reputation as a stable place to do business, analysts warned yesterday, as two prominent investment advisers recommended that clients steer clear of the province.

Despite the fallout, several industry analysts expressed relief that the government stopped short of adopting the full report of the royalty commission - which called for an additional $1.9-billion in royalty payments - but instead found some middle ground.

They argued the industry would likely continue to invest in oil sands projects, and other oil production, so long as robust world prices do not fall back below $60 (U.S.) a barrel.

But the compromises weren't enough for influential commodity investment guru Jim Rogers. He said the government's U-turn on royalties - after years in which it had promised a stable investment climate - was "astonishing."

"All politicians revert to theft when conditions work for them. I must confess I thought Alberta's would be among the last sellouts, but clearly I was wrong," Mr. Rogers said in an e-mail exchange from China yesterday. "This is not going to lead to more production from Alberta. Politicians always go for the short-term fix to help themselves and could care less about the long term since they will be gone in the long run. May I suggest everyone be leery even of Alberta."

Dennis Gartman, publisher of a popular investment newsletter, suggested the Alberta royalty plan contributed to a new record oil price - oil closed at $91.86 (U.S.) a barrel yesterday - because it could slow the growth of supply from the oil sands.

"Mr. Stelmach has sided with the populist farmers of rural Alberta who've long looked upon the oil industry with disdain, and has moved to increase the royalties upon much of the oil industry to what we consider to be onerous levels," Mr. Gartman wrote in The Gartman Letter.

"This, in our opinion, is lunacy, mincing no words, and it shall serve to make less oil available, not more available, from Alberta in the future."

Leo Drollas of the London-based Centre for Global Energy Studies, said Alberta should expect repercussions from tax hikes, especially as it looks to attract investment from international firms. "It muddies the waters for the future," he said.
"Governments have to be careful how they handle this. We can understand how they're under pressure to change the terms and extract more from the activity but they have to balance that with investment needs in the future."

Derek Butter of Edinburgh-based Wood Mackenzie Ltd., took a more sanguine view of the royalty changes. He said Alberta is following the lead of oil-rich states around the world by demanding a larger slice of the revenue pie as crude prices have hit record highs in recent years. Just this week, Nigeria announced it is reopening production-sharing contracts with all foreign oil firms operating there to reconsider their "generous terms."

In an interview from Edinburgh, Mr. Butter said Alberta has taken a relatively moderate approach. The government decided to leave the royalty rate unchanged when prices are below $55 (U.S.) a barrel. Wood Mackenzie has calculated the average new oil sands project will have a "break even" threshold of $50, meaning a 10-per-cent return on investment at that level.

"The government has helped the industry by protecting that downside," he said. "There is much less chance of the cancellation of proposed oil sands projects under the government's plan than under the panel's proposals."

Fadel Gheit, analyst with Oppenheimer & Co. in New York, had sounded the alarm after the review panel released its report last month urging more aggressive royalty increases.

But now, Mr. Gheit said sharply higher oil prices will offset any reduced profits the companies would face from the increased royalties.