The new royalty structure is largely a nonevent (see New Royalty Framework document (PDF, 950kb)). I expect that most oil companies have long term oil price projections of $55 to $65 WTI, with $55 being the more likely target. Companies are conservative by nature.
At $60, the terms are very nearly back to 1% gross revenue royalty and 25% net revenue royalty. So in terms of future development, the net effect should be muted. At higher prices, new entrants are discriminated against relative to existing players.
It is only at significantly higher prices that larger provincial takes kick in.
The markets, despite all the hoopla, have largely shrugged off this event. Suncor Energy Inc. (SU) and Canadian Oil Sands Trust (COS-UN.TO) were off less than 1.5% combined—easily within daily trading noise—yesterday, the first business day after Premier Stelmach's proclamation.
Some might think that these Suncor and Canadian Oil Sands were already down in anticipation of the royalty review. Not so, this link to a Yahoo price chart shows Suncor in U.S. dollars and Exxon Mobil Corporation (XOM) in U.S. dollars. You will note that Suncor has outpaced Exxon during the last three months. It did not tank prior to or after the Panel's published report.
Without crunching the numbers, a worthwhile exercise, I think the terms that existed during the mid 1990s were possibly harsher with the higher provincial and federal taxes that were about 50% higher than today's percentages. It is only under significant and sustained high prices, say $75+, that the new regime might be more punitive. And even that might be moderated going from synthetic crude oil to bitumen royalty regime. This entire last paragraph is intuitive guesswork that should be more thoroughly investigated.
With regard to the royalty percentages exceeding 25%, I would not be surprised to see the federal government cap royalty deduction at 25% of resource income. If that happens, then there will be a slight further hit to the oil companies. I remain skeptical that the federal government will offer to pay about 20% of the oil companies' increased royalties.
Given the final outcome, I am disappointed with the Panel's work. They had the opportunity to create a meaningful and workable royalty regime. Instead, they presented a wonky royalty regime with an oil sands separation tax, which was not tax deductible and extraordinarily difficult to pass politically. That combined with a royalty rate above 25% would have been very punitive on the oil companies.
After I think more about the Premier's new framework, I will likely comment further. I might even run some numbers through my economic models and discuss the comparisons. At present, however, I think the new framework is largely a nonevent.
I also urge you to read two other weblogs that discuss the new framework: WTF Journal by Ian Langdon and Ken Chapman by, you guessed it, Ken Chapman. My view differs from those of both writers. And that is okay. Blogging should be about informing. Our differing views will allow others to see arguments from different perspectives—a good thing.
Calgary model Jennifer Nguyen is featured in the photograph, which is hosted at Flickr. If you click on the picture of Jennifer, you will be taken to where you can view a larger version and see even more pictures of her.
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