Business Systems For Hydrocarbon Resources: Their Credibility In Retrospect And In Prospect
Authors: Mackenzie W.D.C. 
Published: March 2010

The business system used in the management of exploration and production of hydrocarbons in Canada is believed to be based on four "cornerstones". They are: the risk-reward relationship; the percentage royalty oil and gas lease; the competition for exploration position; and a public communications strategy.

Looking retrospectively at this system it appears that the traditional oil and gas lease has been rejected by most government-lessors. These leases once had a considerable degree of sanctity, but a series of unilateral government adjustments has virtually destroyed the original concept of this lease. Today, the lessee revenue from production is completely dependent on these government adjustments; thus, industry has failed to find a method that is self-adjusting and not government-adjusting. In the future, the lessee-lessor relationship must be substantially changed. Public confidence, or industry credibility, has sunk to a low level. Industry has been unable to effectively counter accusations of cartels and large-scale tax avoidance.

Although the risk-reward relationship, another cornerstone, must be retained to attract the risk investor, in the future the incentives to risk might better be built into the administration of mineral rights and removed from the taxation system. In a new system, it is suggested that, immediately after discovery, pre-1970 basic royalties be levied, and that they be reduced on an exploration-earned basis. After payout, the lessee and the Crown-lessor would participate in the production revenue and the costs. Thus, the lessee could receive an early attractive cash flow, and the Crown would get a large share of the production after payout.

If public relations strategy is revised, the program should include more effective emphasis on the principle that the more exploration competition that exists in the industry, the better will be the hopes for future supplies of hydrocarbon energy.

Introduction

In this paper, the author will advocate some changes in the business systems used in Canada for the management of production and exploration of hydrocarbons. The author believes that there will be some who will take exception to a suggestion of change. However, many who are involved in the industry today will agree that the general public acceptance, or credibility, of the industry is at an exceptionally low ebb. This industry could be in danger of being legislated out of business. Thus, the issue of change really amounts to two opinions on a much-needed remedy. There are those who hold to the view that the systems are sound and, if we persevere, We will eventually prevail; thus, people involved in political life will come to support industry contentions instead of attacking them. The other opinion, held by the author and others, is that the credibility problem has become steadily worse and some aspects of the system must be changed to regain an acceptable degree of public confidence.

The business systems used in the general management of the resource phase of the oil industry should be examined retrospectively, in order to emphasize some of the fundamentals which might be changed or modified in the future.