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January 2007

Vol. 12, No. 4 Week of January 28, 2007

Ex-Alberta-premier stokes home fires

Gary Park

For Petroleum News

Emerging from years of self-imposed exile from the political arena, the man who led Alberta through the 1970s is keeping the heat on a new provincial administration to increase oil sands royalties and require producers to upgrade more bitumen domestically.

Former Premier Peter Lougheed told a Calgary conference Jan. 16 he favors a slowing of oil sands development until new policies can be implemented.

In particular he said royalties should be used as an incentive to promote value-added upgrading in Alberta rather than opening the door to unrestricted exports of bitumen to US refineries.

“People forget that (Alberta) owns the oil, we’re not just the regulator,” Lougheed said. “We own it. If they want to develop it, then it has to be done in an orderly way.

“We should not be sending the raw bitumen down the pipe.”

He said no license should be granted for future oil sands projects that don’t include both mining and an upgrader.

Lougheed has been a life-long advocate of building Alberta’s upgrading, refining and petrochemical sectors to capture more of the value from its natural resources.

He also voiced concern that the government is receiving less in absolute terms from a royalty regime that charges a 1 percent royalty on gross revenues until capital costs are paid off, then boosts the rate to 25 percent of net revenues after operating costs.He noted that one recent assessment calculated that the royalty return on the Alberta oil sands has declined over the last decade from C$3.39 per barrel to C$2.29 while production has doubled.

“That’s just wrong in an era of high prices,” Lougheed declared, suggesting that the Alberta government has mismanaged oil sands growth and denied the people of the province a fair return.

He said the depth of his feelings on the royalty issue stems from the fact that the costs and inflationary pressures Albertans are facing in their day-to-day lives “are due to the overheating in the oil sands and the over-building ... the public, in growing degrees, are not finding (the current situation) acceptable.”

Lougheed said he supports the net profit concept, but said the huge project cost overruns mean a “significant deferral until the people of Alberta get their return on royalties.”

He also said the government should consider incentives to reduce the “excessive use” of natural gas for fuel in oil sands operations and find a better use for “this valuable and depleting resource.” In addition, he said the use of water, expected to rise to 3 million bpd over the next decade, also demands a solution.

Stelmach: royalties will be scrutinized

Newly elected Premier Ed Stelmach said the royalty regime would soon be under scrutiny when Finance Minister Lyle Oberg can appoint a team of experts to sit on a review panel.

He also insisted that the “long-term goal of both the minister and this government is to increase the value-added (aspects of the oil sands) over the next decade.”

But he urged a degree of pragmatism, suggesting that a “certain amount of bitumen will always leave this province.” If projects now on the table all proceed, Alberta is expected to produce 3.5 million barrels per day from the oil sands by 2020, of which 2.7 million bpd would be processed in the province.

Garry Mihaichuk, Husky Energy’s oil sands vice president, told the Calgary conference that it is in Alberta’s interests to promote a diversified strategy that includes exporting some raw resources.

He said his own company may establish a joint venture some time in the next year to upgrade production in the U.S., following the lead of EnCana which struck a US$15 billion deal with ConocoPhillips last year to supply up to 400,000 bpd to refineries in Illinois and Texas.

Marathon and BP are now scouting for similar deals to provide oil sands feedstock for their U.S. refineries.

Mihaichuk cautioned that any attempt to block bitumen exports could flood the Alberta upgrading market and lower returns to producers and the government.

He said Husky is trying to decide how best to manage its risk, with the objective of spreading its portfolio.






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