The Oil Drum

Topics include:

Economy – UK and Europe; Geopolitics - Caspian; Coal / China / Kyoto Protocol; Natural Gas - Iran; Russia - Wheat Exports; ASPO-USA P.O. Conf. – Media Response; Economy - USA

The Alberta royalty review continues to generate a predictable response from an industry which has seen costs rise more rapidly than prices in recent years. Even though Alberta’s take is comparatively low, Encana has announced it will withdraw $1 billion in investment if the new royalty recommendations are accepted by the province.

Elsewhere on the energy scene, Alberta looks to expand both wind and nuclear power, while Ontario reactors’ inability to deal with an unexpected spell of warm weather during maintenance outage season made electricity imports necessary.

Globally, questions are increasingly raised over the global warming effects of both ethanol production and hydro-power dams.

In environmental news the drought in Australia and the Ukraine has led to record wheat prices and concerns over feeding the world's poor. The Arctic warms ever more rapidly, for some an opportunity to exploit new resources, rather than a problem. If warming continues to accelerate, it just might become an 'insurmountable opportunity'.

'All bets are off'

In the 10 days since a provincially appointed panel dropped its bombshell report recommending that Alberta play hardball with the oilpatch, work inside Calgary's office towers has turned from planning growth to assessing damage and even eyeing an exodus....

...."Everybody is holding their breath right now," said Hal Walker, a long-time provincial Tory and real-estate developer who is critical of the review process. "All bets are off."....

....Deutsche Bank highlighted the escalating risk of investing in the province: "Risk, risk and risk, and there's risk. Above all, be warned about risk," it said.

As out of character as the panel recommendations seem in business friendly Alberta, observers say it has big support in rural Alberta and in Edmonton, areas that believe they have suffered the downside of the oilsands driven boom, while not reaping enough of the benefits.

Trust tax linked to private equity buyouts

The income trust structure was a major impediment to private equity firms buying up pieces of Corporate Canada, the Finance Department was told one day before Ottawa slapped a crippling tax on the sector.

"Private equity firms generally find it difficult to compete against the income trust alternative, said an Oct. 30, 2006, memo sent to Bob Hamilton, senior assistant deputy minister of tax policy at the Finance Department.

The memo was obtained by The Globe and Mail under access to information law.

For anyone at Finance who knew the trust tax was imminent, one conclusion that's easily drawn from the memo is that taxing trusts out of existence would likely usher in even more private equity buyouts by Canadian and foreign investors, which is what happened.

What Price Victory? (scroll down)

It’s reasonable to assume that, as professionals operating within a government department nominally charged with understanding affairs of finance, the folks working for Flaherty would have some rudimentary understanding of the way key players in the private space—private equity, for example—operate.

That is private-equity firms find undervalued, cash-generating businesses, strip them down and load them up with debt. Interest expenses basically wipe out taxes owed. That’s the nutshell.

What was that about “tax leakage”?

Either the professionals have no clue about their business, or they engineered the destruction of the trust sector. Secretive, incompetent and stupid is no way to run a government.

NAFTA Kicked Up A Notch

The North American Free Trade Agreement is the world's most advanced example of the U.S.-led free trade model. It's not just about economics any more. The expansion of NAFTA into the Security and Prosperity Partnership reveals the road ahead for other nations entering into free trade agreements. It is not a road most nations -- or the U.S. public -- would take if they knew where it led.

The first problem is that very few people know about this next step of "deep integration." In March 2005, Presidents George Bush, Vicente Fox and Prime Minister Paul Martin in Waco, Texas launched the Security and Prosperity Partnership with a splash. Although it had few visible results, the Waco meeting of the "Three Amigos" set into motion an underground process that spawned its own working groups, rules, recommendations, and agreements -- all below the radar of the legislatures and the public in the three nations. These rules and trinational programs have profound effect on the environment, the daily lives of citizens, and the future of all three countries.

The SPP not only further greases the wheels of corporate cooperation and potentially increases U.S. access to Mexican oil. Its security component represents a new and ominous form of integration, all in the name of counter-terrorism.

This is a guest post by chrisale.

A major policy speech introducing the new plan by the Conservative Party of Canada to reduce Canadian GHG emissions has been leaked to the Opposition Liberals... and in an attempt to avoid influencing the markets before they open today (Wednesday), the crux of the plan has been released.

The CBC reports:

The speech says that by 2020, the government hopes it will have reduced greenhouse gas emissions by 150 million tonnes.

It also says the government will explore emission credit trading with the U.S. and Mexico, something they have been reluctant to embrace in the past.

"The Tory government intends to stop the rise of greenhouse gases in three to five years".

Suzuki says Baird's climate plan 'not enough'

Respected environmentalist David Suzuki came out swinging Friday, calling the plan an embarrassment that was more of a sham than a strategy. Suzuki said the government must meet the terms of the Kyoto accord on time -- regardless of expense.

"Mr. Baird, you are the minister of the environment, not the minister of finance," Suzuki told reporters at a press conference. "Your job is to protect the environment."

He said Canada needs to set the example for other countries.

"If we can't do it, why should India or China or all of the other developing nations pay any attention to the issue of emissions reduction?" questioned Suzuki.

Sands are shifting for oil supply

The world continues to run rapidly out of oil and natural gas, which points to dramatically higher prices in a handful of years.

That was the message from Henry Groppe, a lanky Texan who advises oil companies and investors around the world about the world of prices. His firm, Groppe, Long & Littell, is based in Houston and was founded after he did stints as a chemical engineer for Saudi Arabia's Aramco, Dow Chemical, Monsanto and Texaco.

"The fundamentals always prevail, which is that the minute you start producing, you are depleting your resource," he told an audience of investors last week at a conference sponsored by Calgary's Pengrowth Energy Trust.

He showed production curves in the North Sea and Mexico that are catastrophically sudden in terms of their declines.

"This has a huge impact on the economies of Britain and Mexico," he said. "Britain became an oil importer this year for the first time in decades."

Oil production worldwide peaked months ago, but figures and prices don't reflect that yet because the production of liquids stripped from natural gas has been filling the gap, he said.

Clean up your own backyard, Stelmach tells Gore

Gore was in Calgary speaking at a sold-out Jack Singer Concert Hall about his Academy Award-winning documentary, An Inconvenient Truth, which argues global warming, spurred by the use of carbon-based fuels such as oil and coal, is the biggest threat facing the world.

He has targeted the oilsands, suggesting far too much natural gas is burned processing northern Alberta's bitumen.

But Stelmach, who hasn't seen the documentary, said Monday in Calgary the province is merely feeding Americans' insatiable demand for energy, so perhaps Gore should look closer to home.

Income trust imbroglio

On April 9, The Globe and Mail reported that Flaherty's tax changes, which were supposed to have brought Ottawa more revenue, are having the opposite effect. Not only is revenue lost instead of gained, Canada is losing ownership of its resources in the process, and investment in the energy sector is decreasing. "It would only take slightly more than 15 per cent of the trust sector to be bought out by foreign private equity, and non-Canadian firms, before Ottawa was losing annual tax revenue equivalent to what it said eluded its grasp before the trust tax."

In other words, Ottawa could lose $5- to $6-billion annually. The article quotes Sandy McIntyre of Sentry Select Capital Corporation: "If so-called tax fairness was intended to accelerate the sale of Canadian companies to foreign entities, then it is a success. If it was intended to increase Canadian tax revenues, it is a failure."

Billions at risk from wheat super-blight

An infection is coming, and almost no one has heard about it. This infection isn't going to give you flu, or TB. In fact, it isn't interested in you at all. It is after the wheat plants that feed more people than any other single food source on the planet. And because of cutbacks in international research, we aren't prepared. The famines that were banished by the advent of disease-resistant crops in the Green Revolution of the 1960s could return, Borlaug told New Scientist.

The disease is Ug99, a virulent strain of black stem rust fungus (Puccinia graminis), discovered in Uganda in 1999. Since the Green Revolution, farmers everywhere have grown wheat varieties that resist stem rust, but Ug99 has evolved to take advantage of those varieties, and almost no wheat crops anywhere are resistant to it....

....What's more, Ug99 will find agriculture has changed to its liking in the decades stem rust has been away. "Forty years ago most wheat wasn't irrigated and heavily fertilised," says Borlaug. Now, thanks to the Green Revolution he helped bring about, it is. That means modern wheat fields are a damper, denser thicket of stems, where dew can linger till noon - just right for fungus.

Another worry is that travel has exploded in the past 40 years. There have now been several documented cases of travellers carrying rust spores on their clothing. Some fear Ug99 will hitchhike as much as it flies - and its spread need not be innocent. New Scientist has learned that the US Department of Homeland Security met in March to discuss the possibility that someone could transport Ug99 deliberately.