Being an energy income trust is a little like being pregnant – you either are or you aren’t.

But Penn West Petroleum Ltd., whose conversion has been anticipated by eager investors about as much as the birth of a first child, isn’t quite sure yet.

The company’s board of directors has recommended converting to a trust, but has made the conversion contingent on a satisfactory income tax ruling from the Canada Revenue Agency.

Penn West, according to one report, also indicated that it may hold back more cash for exploration and development spending than is normally the case with income trust conversions. That means cash distributions to potential trust unitholders may not be as high as expected.

So is Penn West about to become one of Canada’s biggest income trusts or not? Only wily company chairman Murray Edwards knows for sure.

But if you look closely at the pockets in “Papa” Edwards’ suit, my bet is you’ll spot the cigars ready to hand out.

The shareholders are the midwives in this “blessed event.” And, like midwives everywhere, they’re not going to wait forever.

TransAlta on Right Track

Media pundits who speculate that TransAlta Corp. is taking an incalculable risk by buying Chilean greenhouse gas emission-reduction credits under the Kyoto Protocol aren’t paying attention.

They seem unaware that the European Union, whose greenhouse gas emissions- trading program is set to start in January 2005, has the largest multi-country, multi-sector emissions-trading scheme worldwide.

They’re also ignoring the fact that TransAlta has been a pioneer in the emissions- trading business – not to mention in wind-powered generation – long before the Canadian government ratified the Kyoto accord in December 2002.

Not only that, Bob Page, the electricity producer’s vice-president of sustainable development, has been closely involved in international climate change negotiations and probably has a better handle on the future of the Kyoto treaty than anyone on this increasingly warm planet.

All of which makes TransAlta’s $9-million US, 10-year deal to buy credits worth 1.75 million tonnes of emissions from hog producer Agricola Super Ltd. of Chile look more like strategic planning than a risky investment.

Time To Re-invest

Flawed it is, but the Pembina Institute’s new report claiming taxpayers in Alberta and B.C. are being shortchanged on oil and gas revenues contains a truth long known to economists.

Research by University of Calgary economist Robert Mansell and colleagues elsewhere has shown that, in most countries, an abundance of natural resources has most often not translated into long-term prosperity.

More often than not, “the large potential benefits are destroyed by excessive rates of production and other inefficiencies,” Mansell wrote for the U of C’s new Institute for Sustainable Energy, Environment and Economy (ISEEE), which he now heads.

The Pembina Institute’s report, When the Government is the Landlord, contends that governments in Western Canada and the North are under– charging companies for the development of public oil and gas resources while providing incentives to speed up extraction of the oil and gas.

The energy policy research group argues that governments are also failing to set aside revenues from these non-renewable resources for the future, and allowing the industry’s negative environmental impacts – along with huge costs to fix them – to mount.

Greg Stringham, vice- president of the Canadian Association of Petroleum Producers, is correct in pointing out the report’s flawed assumption – in comparing western provinces’ low royalties of about $5 per barrel with Norway’s much higher $14 per barrel – that the oil and gas sector in both places is similar.

Norway’s individual oil wells are typically far more productive than those in Canada. The resource in Norway is also found in concentrated pools, unlike deposits in this country that are scattered beneath the vast and already well-tapped geological basin of Western Canada.

But the Pembina report is harder to dismiss in its criticisms that Western Canadian governments are not investing enough oil and gas revenue for the inevitable future rainy days, and are also allowing the industry’s environmental liabilities to pile up.

For one thing, Alberta hasn’t invested any of its massive oil and gas windfall in the Heritage Fund since 1987.

For another, a recent Alberta Energy and Utilities Board (EUB) report says there are now more than 31,000 oil and gas wells in the province that are abandoned and unreclaimed. There are also more than 400 abandoned oilfield facilities, from small compressor stations to large natural gas-processing plants, in the same sorry state.

U of C economist Mansell praises the EUB as a regulator that has ensured Alberta “has an enviable track record of conservation and sound management of its energy resources.”

But he notes that trends since the mid-1980s are worrisome, including the lack of growth in the Heritage Fund and the sharp decline in government and industry investment in energy research and development.

Earlier this month, Alberta Energy Minister Murray Smith announced a $1- million grant to ISEEE, aimed at developing new and cleaner technologies to more efficiently recover more of the province’s energy resources.

It’s a step in the right direction. But it’s also a small step, especially with Alberta’s annual oil and gas revenues forecast to amount to more than $8 billion this year – with higher revenues still to come.

More investment in our energy future is urgently needed, by western provinces and by the federal government.

(I declare an interest here, since I have been doing some contract writing for ISEEE. But my larger interest, as an Albertan and as an energy columnist, is in seeing that the province’s natural resources are developed in the long-term interest of all Albertans.)

Royalty Roulette

One of the big differences between the oilpatch in Western Canada and places such as Norway is the substantial cost of finding, developing and producing oil and gas here.

Capital spending by Canada’s conventional petroleum industry increased to $23.8 billion in 2003, a jump of 32.5 per cent over the previous year, according to a Statistics Canada report.

Yet, because large oil and gas deposits are getting harder to find in the Western Canadian Sedimentary Basin, natural gas production last year actually declined by 3.8 per cent to just over 16 billion cubic feet.

Despite the big spending in 2003, conventional oil production in Canada also fell last year, although this was offset by a 17-per-cent increase, to 964,000 barrels per day, by production from Alberta’s oilsands.

Stats Canada also reported that operating expenses for conventional producers in the oil and gas sector rose 19 per cent last year to more than $20 billion.

Part of this increase was blamed on – guess what? – higher royalty payments to government.

Producers such as Calpine Corp., Anadarko Petroleum Corp., ChevronTexaco Corp. and EnCana Corp. are selling off or have already sold off assets in Western Canada and shifted operations to easier- to-find oil and gas in other countries.

So the dilemma for Alberta and B.C. is if they crank up royalty charges, they risk killing the goose laying the golden – or rather, oil-black – eggs.

A Really Big Show

Itching to get the big scoop on Alberta’s oilsands mining projects? The fourth annual Oil Sands Trade Show & Conference, September 8-9 in Fort McMurray, features tours of the Syncrude Canada Ltd. or Suncor Energy mine sites.

The conference includes sessions on regulatory, technical and stakeholder issues, a keynote talk on railway opportunities for the Athabasca oilsands, and updates on Canadian Natural Resources Ltd.’s Horizon project, Deer Creek Energy Ltd.’s Joslyn project, and Paramount Resources’ proposed technical solution to the controversial natural gas versus bitumen issue. Check out the program at www.petroleumshow.com

(Mark Lowey can be reached at mark@businessedge.ca)