26 August 2007

Masters of our domain: Andrew Coyne weighs in

An astute, perceptive comment from one analyst who actually can do math and thinks about things:
But here's another thing that bothers me, Danny. Leave aside how much you've given up in royalties to get that ownership stake. Why make such a trade at all? After all, the royalties in question are paid on gross revenues -- whereas ownership in the project entitles you, not just to a share of revenues, but a share of the costs. These have already climbed, from an estimated $6-billion to ... well, no one seems to have a very clear idea what it will cost at this point.

But let's say it's closer to $10-billion, all told. That 4.9% equity stake lets you -- or rather the taxpayers -- in for another $500-million in costs, against about $2.5-billion in revenues, if oil stays at US$70 a barrel, or $1.5-billion at $50. So your share of the profits, over the life of the project, are between $1-billion and $2-billion. If the same money could be collected, at considerably less risk, in the form of royalties, why the fixation on public ownership?

I know: it's to give the province "a window" on the industry. But at 4.9%, the province would have precious little say in the operation. And it's hard to see what sort of leverage it would have, as a shareholder, that it would not have as a regulator, or what information it would not be able to obtain from regulatory filings, legislative hearings and private talks. Indeed, there's something bizarre about the government paying for the right to participate in the extraction of a resource it already owns.
Food for thought, although the legions will find some reason to dismiss Andrew Coyne's common sense, typically by focusing on something other than disproving his common-sensical comments.


(h/t to an astute local Coyne reader who flipped Bond an e-mail.)