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November 2007

Vol. 12, No. 44 Week of November 04, 2007

Alberta tossing contracts ‘out window’

Investment bank: renegotiating oil sands agreements undermines business environment; Alberta accused of abandoning relationship

Gary Park

For Petroleum News

If all the changes contained in Alberta’s new royalty regime, none has unsettled the industry or investors more than the government’s decision to renegotiate royalty contracts with oil sands giants Syncrude Canada and Suncor Energy.

“Essentially, the government is tossing these contracts (which don’t expire until 2016) out the window, which we view as a questionable move,” said investment bank Tristone Capital.

Premier Ed Stelmach, declaring that “talks but not negotiations” were under way, gave the two companies 90 days to reach a settlement.

Failing that, he said the government would “take other measures to ensure a level playing field for all industry stakeholders.”

Tristone interpreted the comment to mean the door would be open to “another carte blanche oil sands royalty change,” or possibly a severance tax on the removal of bitumen by Syncrude and Suncor “in an attempt to bring their royalties in line with other companies.”

“We are concerned that this will result in further deterioration of confidence in the security of the business environment in Alberta,” Tristone said.

Concern about relationship

Pierre Alvarez, president of the Canadian Association of Petroleum Producers, said his member companies — given the uncertainty of the Syncrude and Suncor agreements — are concerned about the ultimate long-term relationship between the government and the industry.

He said there is feeling the government has “walked away” from a mutual respect and understanding built up over the years.

Now that an element of uncertainty has been injected into the equation, both in the head offices of Calgary and around the world, the ramifications will stretch over many years.

Alvarez said the planned 1 percent to 9 percent royalty during pre-payout on oil sands projects and the 40 percent royalty once capital costs are recovered, imposed with only 14 months’ notice, is a “very dramatic and negative step.”

He said the government has overlooked the fact that oil sands reserves are the most difficult and expensive to develop in the world.

Rogers: politicians as thieves

Others were less tactful, with commodity investment guru Jim Rogers describing the government’s decision to abandon its promised stable investment climate — resulting from years of intensive efforts to first sell the oil sands as a viable business, then attract international investment to finance multi-billion-dollar projects — as “astonishing.”

Rogers told the Globe and Mail that “all politicians revert to theft when conditions work for them.”

“I must confess I thought Alberta would be among the last sellouts, but clearly I was wrong,” he said.

Instead of generating greater production, the government is more interested in a “short-term fix,” with no concern for what happens over the long run, Rogers said.

Dennis Gartman, outspoken publisher of an investment newsletter, said the new regime could finish up slowing expansion of the oil sands and may have contributed to the latest surge in oil prices.

He said Stelmach’s plan has hiked royalties to “onerous levels … this is, in our opinion, lunacy … it shall serve to make less oil available.”

Government offers no defense

The government offered no defense of its decision to reopen the contracts with Syncrude and Suncor, which account for about half of the current 1.2 million barrels per day of oil sands production.

However, the government-appointed royalty review panel offered some hints in arguing that Albertans “need and deserve much more information on how (oil sands) costs are accounted for, and verified …”

The panel noted that a 1995 report by a National Oil Sands Task Force recommended a government take from the oil sands of 60 to 63 percent, compared with the current tax and royalty take of 47 percent.

“With a difference between original intentions and actual outcomes as big as 13-16 whole percentage points, is the decline in government take the result of policy, of implementation, or compliance, or of auditing?” it asked.

“Was it a decision not to implement mid-course corrections, or a failure to notice the drift off-course?

“Imagine the repercussions if the income tax system experienced such drift and nobody knew or nobody seemed to give a ‘tinker’s damn’” the panel asked, repeating a celebrated remark by form premier Ralph Klein, when asked whether Alberta was getting its fair and full share of royalties.

Buyout could cost billions

One of the review panel members, who would not be identified, told the Calgary Herald the only way Syncrude and Suncor will abandon their contracts is through a buyout that would cost in the tens of billions of dollars.

“If I was in their shoes, I would be doing the happy dance,” the member said. “They won the lottery.”

Marcel Coutu, chief executive officer of the Canadian Oil Sands Trust, which owns 36 percent of Syncrude, gave a tempered response to the government’s insistence on renegotiating the agreements.

While willing to discuss a “fair and equitable” renegotiation of its contract, the trust “must recognize and preserve our legal rights.”

Coutu also warned that by reducing oil sands profitability the government will “likely reduce oil sands activity,” given that lower grade oil sands deposits which form part of every project “may never be recovered due to a higher economic threshold.”

Suncor Chief Executive Officer Rick George said the changes are “substantial and could have a significant impact on industry economics,” but he said more time is needed to study the changes and “their potential impact on our business.”

On the contract renegotiation, he said his company will go for the “right solution for Suncor and the people of Alberta.”






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