Wednesday, 24 October 2007

Once More up Powderface

We had a few hours to kill last Saturday, and the weather was certainly nice, so opted for one last dash up our best short hike, Powderface North Ridge. Leaving the house at 12:15 PM, and stopping for gas, we were in the top meadows by 1:45, and sitting on the top for snacks by 2.

It was yet another great day to be on the top of a mountain.

Our favourite find of the day were the animal tracks in the snow patches. There wasn't much snow around; it's been too warm. But in shady spots, there were large thin patches, and ther we found vole tracks, mice tracks, bird tracks, and this spot, where there was an obvious pitched battle between a bird -- likely an owl -- and a small rodent -- likely a vole or gopher.

And we saw a rabbit, or more precisely, a snowshoe hare. He popped out of the trees, dashed around a bit, then dove back into the trees.

And on our way down, Karen found the remnants of an owl's dinner -- pellets in a bush.

We left the top at 3:00 and walked into the house at 4:45, 4 1/2 hours after we left. Not a bad way to spend an afternoon.

A Weird Fall in the Garden

It's been warm in Calgary this fall, and that means strange things have been happening in the garden. For starters, the roses have started blooming again.

Second, the plants don't seem to want to stop giving fruit. We still get strawberries at the rate of 1 or 2 every 2-3 days, and raspberries? Well, we're on our second crop, and picked 8 today alone.

We suspect that it's over, though. After a high today of 21, it's now ice raining, and it's not supposed to get above 7° for the next week.

Thursday, 11 October 2007

Royalty Review Update #2: Political Risk

For the better part of 7 years, while Crestar was working Latin American oil & gas opportunities, I evaluated economics and risks of projects in comparison to projects in Canada. Make no mistake, our projects were competing for investment in Canada. Companies invest to get a return, and why go somewhere else when you can make money at home. Now, that doesn’t discount the potential value in risk diversification, and I assessed that, too. But contrary to the belief of some, we don’t invest in one project over another because it makes more oil and gas, we invest because it makes more money.

Investing away from your back yard adds risk, simply because you know more about your back yard than somewhere else. In the oil business, there are several kinds of risk. There’s technical risk – are the hydrocarbons there? Will they come out of the ground? How much will come out of the ground? There’s capital risk – what will it cost? There’s competitive risk – will somebody else get it after I found it?

And there’s political risk. Throughout this process, one of the fundamental tenants of the Royalty Review panel is that people will still invest in Alberta because of the stable political climate, and that has intrinsic value.


As one who measured and estimated political risk, the way you assess it is the risk that a government will change the fiscal regime mid-stream without compensation or protection. The risk that they’ll, say, change the royalties without grandfathering – which is exactly what the Panel has proposed.

Companies don’t care if it’s right wing, left wing, centrist governments, or that elections happen and governments change (because they do). Companies care that the basis upon which they made their investment decisions change. That changes the reasons for investing in the first place.

When I worked Venezuela from 1997-2003, the risk we assessed was whether a change in government would result in creeping or overt nationalization of the industry. They had done it before, in the 1970’s when Exxon, Shell, Chevron and Texaco were nationalized out of the country and the assets formed PDVSA, the known national oil company. In 1998, Sr. Chavez was looking like he was coming to power, and he very clearly wished to regain control of the energy sector. And in 2006, he announced that PDVSA’s share of all production sharing contracts would increase from an average of 25% (there were about 50 contracts ranging from 5% to 60%) to a minimum of 51% in each contract. If the companies didn’t like it, they could leave and PDVSA would get 100%.

So changing the terms happens, and in that case we correctly predicted it would. But here’s the info no one seems to mention: for all their bluster, Venezuela has never done those moves without compensation. In the 1970’s, multiple billions were paid by PDVSA to the exiting companies –PDVSA “bought them out”. Now, one could argue whether or not the price was fair, but the Venezuelans paid a lot. In the 2006 stepchange, Chevron, BP and Total have agreed with the compensation offered in their projects, but Exxon and ConocoPhillips didn’t want PDVSA having 51% in their contracts, and chose to leave. Compensation negotiations have been ongoing. Exxon is going to arbitration because they don’t like the amount. But every company is going to get something.

Not in Alberta. Fiscal terms for Exxon’s Kearl Lake project in the oil sands would be changed without compensation in mid-construction. Fiscal terms for my oil and gas projects will arbitrarily get worse, and things we --and everyone else in the industry -- chose to do last year will now become retroactivly uneconomic.

Two weeks ago, Ecuador, where I operated the project my company owned for 4 years, decided to arbitrarily increase royalties, such that the government would get 99% of incremental revenues above a certain price. Alberta is better; it’s only 80% in the Panel’s proposal.

Alberta is acting like a third world country, and not a good one at that. By the measures I used to assess projects for Exxon, Crestar, Gulf and ConocoPhillips, Alberta just became one of the highest risk jurisdictions in the world from a political risk perspective. Even if the Alberta government only decides to implement some of the proposals, unless it grandfathers all existing schemes, it will stay right up there in political risk. And there is more oil and gas in Nigeria than here, which now has less political risk. I know where investment will go, and Talisman, Nexen, ExxonMobil, ConocoPhillips, PetroCan, and everyone else who can shift dollars overseas will indeed shift some -- and the companies have mentioned that, though it's being perceived as a "threat". Trust me, it's not.

Political risk = lower investment = lower spending = slowing economy = lower government revenues.

Next post: More on the two billion dollar myth.

Wednesday, 10 October 2007

Watching Politicians is my Life

Politics. Politicians. Why do both these words make me want to wash my mouth out with soap?

It is a civic election year in Calgary, and I’m willing to bet that by now:
1) You’ve had 32 chances to meet a sitting politician you haven’t met since the last time they ran for election, and they are all telling you what a fantastic job they have done for you;

2) You’ve learned that people you have never heard of are running for some of the positions; all are willing to tell you they are the right person for the job because they led a scout group or brush their teeth twice a day;

3) Some politician or political wanna-be has promised you that the community’s and/or city’s problems would all be solved by simply electing them. This includes crime, homelessness, graffiti, air quality, the environment, global warming, and the fact that pantyhose run the minute you put them on.

There are some things I admire about politicians. Virtually all are fighting to do something they think deep down in their core is important and right; they actually are trying to change the world. They’re consciously taking on a job that is normally thankless and where the single most important key to success is the ability to actually listen to their constituents. The latter also means they must recognize that you can’t please all of the people all of the time, so they are accepting a job where about half of the people will be unhappy at what they are doing at any given moment in time. By listening, their job is to listen to everyone equally; a tough thing to do when there exist lobbyists whose sole job it is to get heard more than you or me.

Sadly, there are a lot more things I don’t like about politicians. I don’t like the way they adopt motherhood statements and soundbites to talk of actual problems we could do something about. Motherhood is “more LRT cars, more busses, fewer cars.” Only naive people believe that is a workable solution when you add 500,000 more people to the city and we’re still running the LRT along surface tracks waiting for stoplights downtown. The occasionally touted “Go Plan” is little more than gussied up motherhood.

I really don’t like it when politicians tell me they’re doing something for my good, and then actually do it for someone else’s good. It’s “for my good” that they closed 6th Ave in Downtown Calgary for 10 months instead for partially closed it for 2 years – when in fact, it’s far cheaper for the developer to build his project in a year than spread over 2 years. Closing 6th Ave isn’t good for me at all. In fact, to me it’s just further evidence that the only people who matter in this city are the developers, and in particular, real estate developers. With the current slate of politicians, it seems that planning rules and guidelines appear to go out the window when the developers come ‘a calling. Communities like Crescent Heights have Community Association planning subcommitties to try to control as much of it as they can, and try very hard as they do, I’m not sure how much they can actually do.

And indeed I have lost all my faith in our current group of politicians as guardians of the city’s development. Some clear examples spring to mind. Council (spearheadded by my Alderman) are now committed to basically tearing down the Eau Claire Market, but they are proud that they did the right thing in putting in controls that allow city council to approve any redevelopment. Only trouble is they approved the mess they have by permitting it in the first place. Why should I trust them now when they haven’t gotten it right for the last 10 years? The redevelopment of the 7th Avenue transit corridor is the same; the rejuvenation promised by the original stations never happened, so we’re tearing down the old stations to build new ones, as if that will help. Arguably the most important piece of real estate in the city – Eau Claire and the riverfront surrounds from Edmonton Trail to 14th St – has lost its bus barns and its heritage and is being turned into condo central – just like Toronto did to its now characterless waterfront. The East Village isn’t a lot different; city council has created the mess, and now they can’t seem to fix it. The only interests that are being served here are the guys building the condos getting the prime real estate.

Urban sprawl exists in great part because developers buy up the land on the edges and build out subdivisions long before infrastructure is in place. Council lets – encourages – the developers build the missing infrastructure, so it gets built the way the developers want it. For instance, John Laurie Boulevard, a major thoroughfare, stops just short of connecting to Stony Trail, smack dab in the middle of the communities of Crowfoot & Arbour Lake, because the developer didn’t want it to split his development. I think my favourite examples of this are the numerous shopping messes areas we have, such as Crowfoot Village, Shawnessy Station and West Hills.

I could go on (and may do in a future post), but back to politicians. I don’t like that they hide their underlying political leanings. There’s a lot of difference between a civic politician who is a rabid NDP member and one who is an extreme right wing conservative. The former wants to rent control every apartment and put a homeless person in it, the latter wants to chuck them all out in the street. Personally, I think civic politics should be party based the same way federal and provincial elections are. Then you know what you are signing up for.
I don’t like politicians, who are elected and then disappear, only to show up 4 years later when they want their jobs back; kudos therefore to Jim Prentice, whom I hear from from time to time. I think my MLA is named Swann, but the fact that I can’t remember tells me he’s doing a lot for people, but it’s not you and me. I see our local alderman Druh Farrell’s name in the paper agreeing with whatever Mayor Dave Bronconier says, and that’s not staying in touch.

But I think most of all I don’t like politicians who claim to represent me, but in fact carry a completely different viewpoint. In the last 4 years, there’s very little that my local Alderman Druh Farrell has said or done that I agree with, and if there is, I can’t remember what it is. I have disagreed with her stance on 16th Avenue, on Downtown core and East Village development, on public transit, on fixing 7th Avenue, on Centre St. redevelopment, on redevelopment of the Eau Claire market, on housing the homeless, tearing down Plus 15s, the HOV lane… well the list goes on. She’s passionate, but not my right person to guide our city into the future, and she sure doesn’t represent me. This ought to tell you how I will not vote in the upcoming election. And I will vote.

But in the end, what matters is that everyone who reads this (and is eligible) actually does vote, because no elections impact your life more than civic ones. This election is about your city: your water, your garbage collection, your busses, your roads, your shopping centers, your parks, your swimming pools – your day to day life. It’s not about nebulous problems like Afghanistan, Chinese human rights violations or Arctic Sovereignty. And if you don’t vote, you don’t earn the right to diss Druh Farrell, Mayor Dave or any of the rest ever again.

Tuesday, 9 October 2007

Comments on the Royalty Review Panel Part 1: "Our Fair Share"?

The “Our Fair Share” report of the Alberta Royalty Review Panel has hit the public domain; you may have seen the response to it from various industry players and market analysts. Those of you who read this who are not in Calgary and the oil industry may be wondering what all the fuss is about.

I am uniquely qualified to offer some comments and observations on the topic. Why? Because for much of my 27 year career, I have worked comparing investments in other areas of the world to Canada, including virtually all countries in Latin America, the North Sea, offshore Africa and even Australia. I know what investment criteria are used, what costs have done, how projects are compared in a global company and how they compare. My experience comes from Exxon, from ConocoPhillips, from Gulf, from BG and now from Hunt Oil. I have assessed political risk, seen projects virtually nationalized away in Venezuela, and seen $9 and $90 oil.

Let me start this post with some of the underlying questions of what “our fair share” is, and whether royalties could or should rise.

Understand that a royalty/tax system is only one of a few basic types of petroleum fiscal systems. Under this system, royalties represent the portion of the take the government gets for the resources it owns. The government spends no money and takes no risk to access these resources, but since the resources are owned by the government in the first place, companies pay a royalty. Government take also includes the taxes we pay on the profits we make. So in a Royalty/Tax system, companies give the government a chunk of gross revenue up front, then a chunk more based on profitability. Imperial Oil, for instance, paid 904 MM$ in royalties plus income taxes of 1,056 MM$ in 2006.

So could royalties rise? That’s the equivalent of asking if taxes, like your personal income tax, could rise. Of course the answer is yes, and governments have been increasing taxes for years based on that premise. Do you like your taxes rising? Of course not, even when governments claim the increase is to pay for a program you want. So long as companies have profit, the government can increase their take of that profit. The consequence of that action is that companies can choose to spend less, sell out and leave, argue against the change – in short, what is happening now. EnCana and PetroCanada are two who have said they will spend less; Crescent Point is leaving Alberta and investing only in Saskatchewan.

What constitutes “fair” then? The Review Panel themselves don’t know. There’s 179 references to the word “fair” in the document, and only a brief note of the subjectivity of the word. I’ve always said that if the government was a charity, I’d donate for all the good work they do. What’s a “fair” donation? Alberta is currently running a 2,000 MM$ surplus, collecting a little over 10,000 MM$ in royalties alone from the industry. The flawed math in the report (more on why it’s flawed in a post or two) would increase that to 12,000 MM$. In total, the government currently collects about 24,500 MM$ from industry in royalties, taxes and land sale monies. To be frank, even though our provincial infrastructure is in a state of declining repair, the best the government can figure out to do with all this money is issue $300 cheques to everyone. I personally fail to see the need for the government to get 2,000 MM$ more when it can’t even figure out what to do with what it gets now. We could have the best teachers, the best hospitals, the best universities, the best transportation systems, the best public transit infrastructure, the lowest personal income tax rate, but the government would prefer to give everyone $300.

Another way to look at “fair” is what’s a fair income tax rate? Royalties and taxes are both general government revenues. Why don’t you tell me what a fair personal income tax rate is?

In short, one of the fundamental premises of the report is inherently flawed and arm waving – that Albertans aren’t getting their fair share, since there is no such thing.

Next post: Alberta as a third world country.

Sunday, 7 October 2007

We're Calling It "Done"

Week 22 of the Kitchen Saga: They came back and painted a few walls that we decided had to have their colours changed.

They mostly finished the handles, and started to fix the top of the wall of striped cabinets. But now we know they won't be back for "a while" and that assumes they can get replacement doors and the extra parts they need. Our "but list" is not short, but what's left isn't show stoppers to us calling it completed, just to calling ourselves happy with it all.

So we decided to call it "done". KC bought a bottle of Vieuve Cliquot, and on Saturday night, I roasted a duck (it's Thanksgiving, after all). A great dinner to close out the project, and now we can start having people over again.

The Head's Not Dead

Fall in Calgary means snow anytime with the odd day of summer thrown in. Thursday night was a wicked storm that put 15-20 cm of snow down in the Foothills and Canmore. This usually means the end of hiking (or at least the good hikes). But it cleared Saturday and was sunny; Sunday called for a high of 18 and sunny, too, and that sun and temperature at this time of year melts snow pretty fast on the lower elevations. Fearing at least snow covered trails, we decided to hike one of our favourite bush-bashing hikes, up the North Fork trail to climb a mountain that some call Mesa Butte (a name in use for at least 3 mountains and a campground in the immediate vicinity), others call the Big Hill (for a road that goes up it's side), or our favourite, Death's Head. It's a nice mountain, only 1,720 m at the top, and the hike takes about an hour or so and only climbs 350 m.

Fall hiking is frequently an exercise in trail finding. Trails in the forest become a carpet of gold.

Fortunately, this trail is heavily used by horseback riders and cows. Yes, cows. At this time of year, cows roaming in the grazing areas all come down to low meadows, and there were cows everywhere, just like last week on Windy Point.

In any case, the trail skirts meadows/pastures as it rises up the mountainside, with really nice panoramic views of the Ware Creek Valley.

The North Fork trail isn't all that interesting, so at the peak what you do is turn up the mountain and bush-bash your way up to the summit, another 120 m above the trail. You have to zig zag up through the aspens, which are pretty thick, actually.

I usually follow game trails when I'm doing this, but game seems to go across mountains, not straight up them. Worse, at the top is a small band of sandstone you need to find an OK crack in to work up the last 5 m. At the top are good game trails leading along the ridge.

The view at the end is what you go for. it's a 300° panorama which goes (from right to left in the photo below) from the City in the east, past Square Butte, the Threepoint Creek Valley & Maclean Creek OHV area, to Moose Mountain, Powderface Ridge, Nihahi Ridge, Forgetmenot Ridge, Allsmoke Mountain (the big one that's all trees), then to Mts. Glasgow, Cornwall and the Highwood Range.

Now here's some details. Square Butte with the City in the background...

...the City...

...Nihahi with snow on Powderface...

... and the Highwood Range, with Mt. Glasow (I think) on the right.

It wasn't a great day for wildlife other than cows, at least not live stuff. We found a part of an antler and a bone...

...and a couple of red tails soared overhead...

...and we found a number of porcupine lunch stops...

...and the Old Man's Beard in the trees was very interesting.

Hiking season is nearly over, but at least that means ski season's about to start. This wasn't a bad hike to end the season. Not a bad one at all.