Rolling out royalty review

Alberta’s new premier moves quickly to start public review of government returns from oil sands; plans to select panel of experts to hold ‘transparent’ hearings

Gary Park

For Petroleum News

Alberta’s newly installed Premier Ed Stelmach has wasted no time embarking on his first priority — a public review of the oil sands royalty structure — despite sharp divisions between the petroleum industry and those who argue the province is not collecting its fair share.

Delivering on a promise made during the leadership contest, he said the issue will be brought to the first cabinet meeting when a public-hearing structure will be approved.

Stelmach said a panel of experts, excluding cabinet ministers or members of the provincial legislature, will be appointed to travel Alberta, collecting opinions and information.

Recommendations will be directed to newly appointed Finance Minister Lyle Oberg rather than Energy Minister Mel Knight, who makes his cabinet debut at the expense of Greg Melchin, demoted by Stelmach to the seniors and community supports portfolio.

The process will be conducted in “the most open and transparent manner ... so that Albertans can trust the information,” he said.

That puts Stelmach on a different course from his predecessor Ralph Klein, who insisted that an internal government review satisfied him that Alberta was collecting a fair return on royalties.

But Stelmach said one of the concerns he heard most about during the leadership race was that the province was being short-changed on its royalties.

Royalty 1% until front-end costs paid

When the regime was introduced in 1996, oil prices had been hovering between US$12-$20 per barrel and the Alberta government felt it needed an incentive to entice spending on oil sands development.

A study by the Pembina Institute, an independent research organization, claimed earlier in December that the royalties have effectively dropped from C$3.39 per barrel in 1996 to C$2.29 in 2005.

But the Canadian Association of Petroleum Producers noted that about half of the operating oil sands projects have achieved cost payout and are now at the maximum royalty rates which are expected to generate C$2.5 billion in government revenues this year compared with C$800 million in 2005.

Greg Stringham, vice president of the association, told reporters the industry hopes the review panel will complete its work expeditiously to avoid creating a “big period of uncertainty” at a time when about C$120 billion worth of projects are in various stages of development.

Focus on refining not clear

BP and Marathon are also planning to expand and modify their US refineries to handle more heavy crude from Alberta.

Stelmach has likened that to stripping the province’s topsoil and exporting it elsewhere.

“We cannot allow long-term shipments of bitumen as Albertans lose out on higher value processing revenues and jobs,” he said.

“We will look for ways to encourage the industry to process oil sands in Alberta, including the possibility of having producers pay more if bitumen is shipped to the U.S.”

According to CAPP about 70 percent of oil sands production is upgraded in Alberta and 14 new upgrading projects are planned for Alberta. Stringham said the industry is anxious to know exactly what Stelmach means when he talks about encouraging more upgrading in the province.

Jobs loss could also be probed

A clear sign of industry unhappiness over the review process came Dec. 14 when EnCana Executive Vice President of Corporate Relations Gerry Protti told a conference call that the shipment of raw bitumen from Alberta carries strong side-benefits.

He said that almost every barrel of bitumen needs a barrel of synthetic crude as a diluent to facilitate the flow of bitumen through pipelines.

He said EnCana’s plans to ship 400,000 barrels per day of bitumen by 2015 under the ConocoPhillips joint venture will need an equal amount of synthetic crude “which, of course, comes from Alberta upgraders.”

Protti said the deal with ConocoPhillips means the development of an upstream project that would not otherwise have moved ahead as quickly.

“We’re going to use the opportunity in the royalty review to go through (the benefits) and we look forward to doing that,” he said.

Industry tax breaks under threat

With the prospect of a spring election, Stephan Dion, newly elected leader of the opposition Liberal party, said that if he becomes prime minister those incentives would be available only for companies that reduce their greenhouse gas emissions to almost zero.

Prime Minister Stephen Harper dismissed the idea, saying the recent decision to tax income trusts has already had an impact on the industry.

He said making the energy sector a target for further tax hikes would be unfair.

Dion has his sights set on the accelerated write-off, or capital-cost allowance covering machinery, which the industry argues frees up cash flow to invest in technology to enhance productivity and improve the environment.

The programs amount to an estimated C$1.4 billion in annual tax breaks.

He said a Liberal government would “revisit the oil and gas tax regime to make sure it is fair and competitive and also effective for greenhouse gas emissions and the competitiveness of the economy.”

If the industry hoped to retain the capital cost allowance under the Liberal administration it would have to demonstrate it had projects under way to slash emissions.

Pierre Alvarez, president of the Canadian Association of Petroleum Producers, told the Financial Post he is worried the industry would be singled out by a Dion government for harsh treatment when the industry would prefer to collaborate on developing environmental objectives.

—Gary Park