Mowat Touts Need For Provincial Energy Strategy

Daily Oil Bulletin
By: Elsie Ross

Alberta needs a long-term strategy to help it find the right balance between renewable energy and fossil fuels, says the chair of the province’s royalty review panel.

“I think there is an opportunity for us to be strategic as a province and really kind of figure out how we move forward,” Dave Mowat said Tuesday during a sold-out presentation to a Calgary Chamber of Commerce audience.

“A royal flush [in poker] is when you hold all the cards,” the ATB Financial president and chief executive officer told Chamber members in his first public speech in Calgary since the government released the panel’s report in late January (DOB, Jan. 29, 2016).  

“Renewables just require brains and investment but nobody else has the fossil fuels, so if you combined over the next 100 or 150 years the ability to master renewable energy and to master fossil fuels, I think you have a royal flush,” he said.  “The last time I looked, that kind of beats everything.”

If the province is going to shift its power generation to renewable energy, then natural gas will provide the baseload, significantly increasing gas demand, said Mowat, who said that it needs to think in terms of multi-decades. Gas also plays an important role in oilsands bitumen hydrocracking and SAGD, he noted.

Most people agree that the price of natural gas is going to be depressed for a long time in the world and while that’s not good news for producers, it could provide the feedstock for a significant petrochemical complex in Alberta, Mowat suggested.

“We’re not saying that is the answer; it’s mostly that Alberta should have a strategy,” he said. With the growth in United States domestic light sweet crude production from Texas and North Dakota, the province’s strategy of shipping all of its crude to the United States via pipeline or railcar is going to have to change, according to Mowat.

As a province, Alberta has been “a little ad hoc” and has not stood back and planned where it is going for the next few decades, Mowat suggested. “We have a very valuable resource; renewables are going to be a big factor going forward but so are fossil fuels; it’s finding that mix.”

The modernized royalty framework, for which the government will seek approval in the spring session of the legislature which began Tuesday, is designed to reward companies that “are technologically advanced, have great management teams, good rocks and can do a good job of extracting the resource efficiently,” he said. The royalty framework establishes an average cost of drilling a well based on depth and length that is deducted from the royalty. If a company can do it for less than the average, it gets to keep the difference, offering an incentive for cost efficiencies.

Alberta is a long way from markets and has tough rocks and deep resources, the Chamber audience was told.  To be successful in the future, “we need the most innovative, well-financed companies that we possibly can to be the stewards of that resource,” said Mowat.

In the discussion on upgrading and value added, the royalty panel advised the government to stand back for a bit and acknowledge that the industry has changed.

“Be very current and get some real expertise so we can understand our bargaining position,” Mowat advised. “All too often proposals come from vested interests; somebody wants a subsidy to do something … but it’s always better if you figure out the cards in your hand and what’s the best way to play them in advance.”

In a question and answer session, Mowat said that during the public consultation his panel heard from more than 70,000 Albertans who responded online and there was general agreement that it was important the royalty system works as well at high prices as it does at low prices. 

The panel also heard about the need for environmental responsibility. “And it didn’t matter where you were: rural Alberta, Calgary, Edmonton,” he said. “Albertans want to be proud of what we do.”

Mowat also suggested that the government “has played its cards too close to its vest with industry” and that there is an opportunity for it to annually publish its objectives or key performance indicators. “If it’s got a red light, then we’d better be doing something about it and if they all are green lights, then I think Albertans are going to be at peace and can start to be proud of the industry they’ve got.”

In determining the right rate of return for industry, the panel simply used the proxy of investment because “if Alberta has no investment, it has no resources,” said Mowat. “If there isn’t anybody prepared to invest, it means it’s not a good enough deal and if we have a huge crush of investment — which we had for awhile — maybe we don’t have it right.”

The new royalty regime is denominated in dollars calculated on an industry average cost based on the length and depth of the well, providing greater cost certainty for the company.  However, it also contains provisions for “science experiment” wells that are super deep and super long and those wells are compared to other similar wells, he told an audience member who had asked about incentives for technological developments which cost more than the average well.

There also are special provisions for companies who can apply to Alberta Energy for a specific play if they are going to go really deep and really far, perhaps pushing into uncharted territory, said Mowat.

Responding to another question, the panel chair said he had never felt going into the review that the government had a preconceived notion of it as a “revenue grab or an attempt to shore up the public coffers.” Prior to the review, he sat down with Premier Rachel Notley and “she was very clear she wanted it to work,” said Mowat.

Asked about a panel recommendation that would require greater disclosure for oilsands projects, he said nearly all that information is currently available in different places, such as quarterly reports and presentations and annual reports. “But that’s not fair to Albertans if you have to kind of make it your life’s work to find that kind of information,” said Mowat.

“Maybe when there was only a handful of mines and it was super important what kind of technology you were using [that wouldn’t have been as necessary],” he said. “Now there are 100 and some projects up there.”

While the panel is not saying that the names should be put on every single one, Mowat believes they all should be published so that the public can see how many oilsands projects are in operation and whether they are in pre-payout or post-payout. “We have a public royalty system; it’s a public asset so why don’t we know that?”

He suggested that Albertans want to understand how the oilsands royalty rates are working out for Albertans and that publishing that information doesn’t put anyone at a competitive disadvantage but just allows anyone who is a researcher, for example, to reconcile what the province is doing and whether “we are doing what we said.”

The Energy Department is still on track to complete by March 31, 2016 the detailed calculations that will enable producers to determine the royalties they will be paying, Brad Hartle, a spokesman for Energy Minister Margaret McCuaig-Boyd, said Tuesday. 

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