24 August 2007

Masters of our domain: Williams concedes on royalties

As Bond Papers noted on Thursday, part of the Hebron deal will involve a change to the provincial royalty regime local media are characterising as a concession.

The Telegram reported on Friday morning that the province will indeed lower the initial royalty to a flat 1% on gross from an escalating regime that maxed at 7.5% until the project recovered its initial development costs.

After that royalties jumped to a combined 305 in two separate tiers. After simple payout, provincial royalties were based on net profits which provided the companies with a rate of return allowance.

Under the royalty regime for Hebron, the province will collect 1% for as long as it takes the project to recover start-up costs.

The Telegram reports Dunderdale as saying that the royalty then would climb to 5% until the companies exhaust something called a "return allowance". This would represent a new royalty layer not included in previous agreements and also is a piece of information not previously released by the government. No further details were contained in the Telegram story.

Only after the return allowance for the 5% rate is exhausted would the province receive the higher royalty rate of 30%. Terra Nova is currently paying at the 30% level. White Rose will also hit that level within three years of production start up. Hibernia - a considerably more expensive project comparable in some ways to Hebron - is expected to hit the higher tier royalties around 2011, 14 years after production started.

Under the three existing royalty arrangements and the province's generic scheme, royalties are tied to production levels and time, as well as costs. However, the so-called super royalty for Hebron of 6.5% is actually contingent on oil prices being above US$50 per barrel for West Texas Intermediate at a point beyond simple payout and exhaustion of the 5% rate.

The royalty re-arrangement is correctly described as a gamble. It trades guaranteed royalty levels that don't depend on oil prices to exist.

Dunderdale told news media that the changed royalty regime is designed to provide the oil companies with front-end protection - i.e. reduced costs - against plummeting oil prices. Those same low oil prices the companies needed insurance against on the costly Hebron venture would also wipe out the super royalty under certain conditions.

The Telegram reported her comments this way:
"The rationale behind these changes was the companies needed some downside protection if the price of oil went very, very low," Natural Resources Minister Kathy Dunderdale said.

"So, that was the trade off for us — to give them protection if oil prices really plummeted, to get a gain if prices were high, above $50. So, we traded off some risk on the low end for significant gains on the other end."
It's important to note, though, that the lowered royalty scheme in the province's concession essentially provides the protections sought by the oil companies in the first round of talks when they sought tax concessions. Those concessions were rejected at the time by the province.

Premier Danny Williams said in April 2006 that those concessions would have wiped out the benefits of the equity position he was seeking.

In April 2006, Williams also criticised a reduction in the generic royalty regime, considered at one time under Premier Roger Grimes, even though that is essentially what he announced on Wednesday. Grimes considered an adjustment to the royalty regime - including lower initial royalties as Williams agreed to this week - at a time when oil was well below US$50 per barrel.

CBC reported Williams attitude in 2006:
"I've indicated publicly before, when Mr. Grimes offered the more favourable royalty regime, that I wasn't in favour of that," Williams said.

" We now have a situation where we have plus-$55 oil … so there's a lot of profit in the oil industry … and so we expect to get a good return," he said.
The Telegram story - headlined "Province concedes on early royalties" - has been picked up across the country. It appears in Cape Breton Post, and a CBC version is available internationally on the CBC website.



bigcitylib said...

I guess the question is, did Williams get a better deal by raising a stink than he would have otherwise.

disgusted said...

i really believe that this deal was there for the taking last year. only difference being, this is an election year. Maybe it "looks" much better to stand on the soap box and let everyone know that you are their saviour, need not worry, i'm lookin after your best interests, no "big oil" is gonna have its way with Newfoundland and Labrador while i'm here. Then you turn around a year and a half later and negotiate a deal that is no different than could have been struck before all the "grandstanding". I truly dont think williams will go down in history as the province's greatest premier when it's all said and done, definitely not its greatest leader but no one can doubt that he is probably the best "politican" this province has seen.

Edward G. Hollett said...

Well, BigCity, and Disgusted, I;ve been working on pulling some information together.

It is scarce as you can imagine, given that the entire MOU and whatever details it contains are secret.

One thing that wasn't on the table last year was the significant changes to the province's royalty regime and so far Premier Williams has been willing to explain what exactly the cost will be to the province - a definite loss - versus what is potentially, theoretically available from the conditional Tier 3 royalty. Tht of course assumes that when the project hits payout and when all the other conditions are let that oil is above US$50 on average in any month after about 2027.

Do you know anyone betting on getting cash that far in advance with getting the cash or not getting it dependent entirely on the price of oil 20 years in the future?

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