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January 2008

Vol. 13, No. 2 Week of January 13, 2008

Alberta face-to-face with royalty deadline

The clock is winding down on the Alberta government’s bid to renegotiate royalty contracts with oil sands pioneers Suncor Energy and Syncrude Canada, who produce a combined 1.2 million barrels per day.

It set a nominal Jan. 22 deadline to reach an agreement with the two producers, or resort to “other means.”

The 90-day negotiating period has proceeded without any party walking away from the table, although there have been hints of more progress towards a resolution with Suncor, partly because Syncrude is a consortium of seven companies, four of whom are also operators of their own projects.

At stake is the government’s determination to “level the playing field for all industry stakeholders” by rewriting royalty contracts with the two companies that were not due to expire until 2016.

Investment banker Tristone Capital has accused the government of “tossing these contracts out the window,” further eroding “confidence in the security of the business environment in Alberta.”

Industry concerned

Pierre Alvarez, president of the Canadian Association of Petroleum Producers, said the industry is concerned the province is undoing mutual respect and understanding built up over many years, ignoring the fact that the oil sands are the most difficult and expensive resource to develop in the world.

He said that giving only 14 months’ notice of its intention to impose new royalties — 1 percent to 9 percent during pre-payout on projects and 40 percent once capital costs are recovered — is a “very dramatic and negative step.”

For the government, the test is two-pronged: First, whether it can win over Suncor and Syncrude, and, secondly, what impact that will have on investment prospects in the single most important long-term element of Alberta’s oil and gas revenues.

Marcel Coutu, chief executive officer of the Canadian Oil Sands Trust, the largest stakeholder in Syncrude at 36.74 percent, has opted for the high road, saying the trust is open to discussing a “fair and equitable” renegotiation of its contract, so long as its “legal rights” were preserved.

The outcome has added significance for four other Syncrude partners — Imperial Oil 25 percent, Petro-Canada 12 percent, ConocoPhillips 9.03 percent and Nexen 7.23 percent — who are heading up their own oil sands operations.

Suncor Chief Executive Officer Rick George, who initially said the changes could have a “significant impact on industry economics,” indicated before Christmas that there is “no reason why a reasonable solution cannot be found.”

He said Suncor, in acknowledging that the oil sands resources belong to Alberta, is “very supportive” of reaching a deal.

George said his is “very optimistic” about the outcome of on-going discussions.

Beyond reiterating that any shift to a new royalty framework must “recognize and preserve our legal rights to the embedded value of our contracts,” Coutu would not comment on the status of the negotiations.

Spokesmen for the government told the Calgary Herald there is “marginally” more progress with Suncor than Syncrude, but Premier Ed Stelmach is confident agreements will be reached with both.

Accidental release of documents

Public pressure on the government to stay the course will likely intensify with the accidental release, through the Freedom of Information and Privacy process, of documents showing how Alberta has shortchanged itself on royalty revenues.

In a 2006 report to the government, Alberta Energy estimated that since royalties were capped at certain commodity price levels in the mid-1990s, Alberta has lost as much as C$2.8 billion in “uncaptured economic rent” for just natural gas in 2003 and 2004.

At that time, a division within the department urged the government to hike conventional oil and gas royalties to “restore Alberta’s fair share at high prices” — a case that has since been reinforced with both oil and natural gas soaring to all-time highs.

Hugh MacDonald, energy spokesman for the opposition Alberta Liberal party, argued that if Albertans had been given access to the information during last year’s royalty debate they would have viewed the Stelmach government’s softening of royalty changes as “unacceptable.”

He said the disclosure provides 100 percent support for the stands taken by the government-appointed royalty review panel and the provincial auditor-general, both of whom were adamant that Alberta has denied itself a proper share of royalties.

—Gary Park






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