Are we in the twilight zone? Did I read this right? Are Alberta’s tar sands operators really proposing a moratorium on developing the tarsands?
Via: Alberta Get Rich:
Companies including Petro-Canada, Suncor and Shell Canada signed a private letter last month asking the province to freeze land lease licences until 2011 in three areas around Fort McMurray that have not yet been developed, the Globe and Mail said Monday.
The provincial government sells the licences to allow companies to find and produce crude.
“Further granting of new surface and sub-surface rights would continue to reduce the available options for the establishment of new conservation areas that would serve to accomplish a balanced suite of regional outcomes,” reads the letter obtained by the newspaper.
WTF? Do Oil companies really have our best interests at heart here? Is the market functioning to balance sustainable development in a fair and equitable manner? Or is there something sinister at work here?
The economist in me can only explain this in terms of two things:
1. maximizing revenue by creating barriers to entry.
The Canadian Competition Bureau sums this one up best:
Types of Barriers to Entry
6.8 Barriers to entry affect the timeliness, likelihood and sufficiency of entry. They can take many forms, ranging from absolute restrictions that impede entry to sunk costs and other factors that raise the cost of entry and thereby deter it.79 While, in some cases, each individual “barrier” may be insufficient to impede entry, the Bureau considers the collective influence of all barriers, which, when taken together, can effectively deter entry.
Regulatory Barriers
6.9 The types of barriers identified in section 93(d) of the Act, namely tariff and non-tariff barriers to international trade, inter-provincial barriers to trade, and regulatory control over entry, can provide incumbents with absolute cost advantages over potential entrants, presenting considerable and in some cases insurmountable impediments to entry.80
2. hitting the Alberta Government’s coffers via land lease sales.
The Department of Energy’s own website explains the fiscal impact - $1.3 billion in lost revenues.
March 30, 2007
The Department of Energy collected $2.4 billion in land sale bonuses from oil sands and petroleum and natural gas (P&NG) rights in fiscal 2006-2007. The only other year when bonuses exceeded $2 billion was 2005-2006, when the department collected $3.4 billion.
Oil sands bonuses rose to $1.326 billion from $1.280 billion in fiscal 2005-06, while P&NG sales were down to $1.054 billion from last year’s total of $2.165 billion. Overall, this is still a very strong year for land sales.
Price per hectare is often the best indicator of the value of the commodity. This year’s average was $887.53/ha for oil sands and $434.41/ha for P&NG.
The last land sale of the 2006-07 fiscal year was held on March 21, 2007.
Final results for fiscal year 2006-07 P&NG Oil Sands Total
Bonus $1.055 billion $1.326 billion $2.381 billion
Hectares 2.428 million 1.494 million 3.922 million
Avg, Price/ha $434.41 $887.53 $607.01
Yup. Stopping land sales would cost the Alberta government at least a billion in revenue. This is a major shot across the bow by Alberta’s tar sands operators.
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{ 3 comments… read them below or add one }
ch 02.26.08 at 2:42 pm
I think you’re probably right about the create of barriers to entry being a prime consideration for the companies involved, but if your explanations are correct I’m left with one question:
Both your first and second explanations seem to be contingent on the assumption that all of the (corporate oil) parties to the CEMA letter aren’t interested in purchasing anymore oilsands leases, do you actually think this is the case?
= P.S. Thanks for the props!
Aaron 02.26.08 at 9:41 pm
Nope. not everyone is signatory to the memo. Opti/Nexen, CNRL and Nexen. That’s because they are running the latest, newest forms of extraction, perhaps.
ch 02.27.08 at 10:20 am
But do you think Suncor, Petro-Canada, Shell and the other signatories are finished with acquiring more leases?