Questions for Minister Smith before he leaves us

Something is fishy in Murray Smith's Department of Energy

We received an article with that interesting intoduction. The article analyzes the relationship between the enormous cost overruns in the contruction of oil sands plants and the Oil Sands Royalty Regime - that legislation which determines how much the oil sands companies have to pay the government in royalties on oil sands crude. You can read that article on line by clicking here. It is called "Oil sands, OSR 97, and Overruns". It's not too long. We suggest you read it. It's too bad the Alberta media didn't report on this before the election.

Here are the key points in the article along with the questions it poses to Premier Klein and Energy Minister Murray Smith.

Main Points

• Massive cost overruns have occurred in the construction of oil sands plants. On just three projects alone, original cost estimates of $9.6B have soared to $16.9B which is a cost overrun of $7.3B. Why have oil sands companies, which have been in the business for years, completely lost their ability to estimate project costs?
  


• Because of the structure of the governments Oil Sands Royalty Regime legislation, there appears to be tremendous financial incentive for oil sands companies to keep their construction estimates low when they seek approval from the Department of Energy to build their plants. The Department of Energy is not supposed to approve them if costs are so high that the Alberta government will not realize substantial royalty benefits. However, there doesn't appear to be any penalty if cost overruns occur. The cost overruns are basically funded by the Alberta taxpayer by royalties they don't collect.
  


• The Auditor General in his 2003-2004 Annual Report pointed out that Department of Energy did not do its job in a couple of key areas. First, they did not properly assess whether the projects submitted for approval would benefit Alberta. When asked to produce documentation for why they approved projects, spreadsheets and supporting documentation could not be found. Second, as companies submitted their actual project expenses for review, the Department did not properly check to see if the expenses were valid. A number of common accounting tricks were not checked for.
  

The combination of a generous royalty regime, coupled with very lax enforcement of the rules by the Department of Energy, will apparently cost the Alberta treasury, that's you and me, over $1.7 billion for three projects alone because of cost overruns. To quote from the article "It seems to me that in most free enterprise jurisdictions the companies themselves pay for their planning mistakes, not the taxpayer. Not so apparently in Alberta." Martha and Henry agree.

So here are the questions for Premier Klein and Murray Smith. We sincerely hope they can shed some light on this before before Murrray Smith heads for his $450,000 a year Alberta Government job in Washington D.C.

1. Will you please provide to the Alberta taxpayer a clear picture of the lost royalties which the government has not and will not collect due to the cost overruns of the oil sands projects operating under OSR97? This clear picture should include the dollar amounts lost as well as an explanation of the calculations used to arrive at those amounts.
   


2. Will the government, with industry and public input, consider modifying OSR97 so that the incentive to lowball project estimates is removed. For example, the royalty holiday could end once projected costs were recovered rather than total costs. Another approach would be for the government – i.e. the taxpayer – to be given an equity position in these companies proportional to the amount of extra money we have to put in when cost overruns occur. When the Alberta taxpayer helps pay to build the plant, why should we not have some of the ownership? Billions of dollars of lost royalty revenue are in question.
   


3. Will the government authorize and fund the Auditor General to perform complete audits on all projects that were and are currently being implemented under OSR97. The purpose of these audits would be to determine if monies lost by the Alberta taxpayer due to the Department of Energy’s lax enforcement of the rules can be recovered from those who benefited and returned to the government treasury. Considering the magnitude of the dollars in question, it is not enough to simply ask the Department of Energy to try and do better.