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Providing coverage of Alaska and northern Canada's oil and gas industry
May 2007

Vol. 12, No. 20 Week of May 20, 2007

Rethinking oil sands hike

Alberta finance minister worries that royalty increases could drive investors away

Gary Park

For Petroleum News

Tt took only six months for the new Alberta government under Premier Ed Stelmach to start wavering on the call for higher oil sands royalties.

Finance Minister Lyle Oberg, one of the loudest supporters of an increase during a leadership campaign last year to replace Ralph Klein as premier, has discovered a different voice.

With a government-ordered royalty review under way, Oberg has decided that “the world is very different now” from when the six-member review panel was appointed early this year.

In particular, he has now aligned himself with the industry’s argument that federal government moves to eliminate a capital depreciation allowance and impose tougher regulations on greenhouse gas emissions will cut significantly into companies’ rates of return.

Those two measures are estimated to add as much as C$3 per barrel to operating costs.

After meeting with investors in New York and Toronto, Oberg apparently concluded that the economics of oil sands projects are not as robust as they once were.

Even with oil prices at US$55 per barrel, the projected return is a mediocre 9 percent, he said.

If Alberta were to raise royalties that might be enough to start driving investors elsewhere, Oberg conceded in a speech to business leaders in Toronto.

But he said his remarks should not be interpreted as prejudging the outcome of the royalty review and the findings he will have to deal with later this year.

CAPP endorses status quo

With the review panel moving from remote northwestern Alberta to Edmonton, the tempo has quickened.

The Canadian Association of Petroleum Producers, the industry’s chief lobby group, urged the panel to endorse the status quo, or risk losing the advances that have moved “the world’s largest petroleum resource to genuine commercial feasibility.”

In the first of two submissions to the panel, CAPP said Alberta has now entered the first decade of “sustained growth in the 80-year-old modern history of the oil sands.”

“In this brief period, the three essentials of technology, price and fiscal regime have come together” to make the oil sands profitable, CAPP said, adding that over the preceding 70 years “history shows what happens in high-cost resource development if even one of these essentials is missing.”

The submission tackled head-on the claims that Albertans are being short-changed by royalties that pay 1 percent of gross revenues until project payout, climbing to 25 percent of net revenue after that point.

CAPP noted that Alberta collected C$3.7 billion in royalties and lease sales in fiscal 2006-07, close to one-third of the province’s non-renewable resource take, with 75 percent of oil sands production (34 of 66 operating projects) now paying the 25 percent royalty.

Over the past five years, there has been a 16-fold increase from oil sands royalties and lease payments, the submission said.

CERI estimates C$885 billion from oil sands over 20 years

A new study by the Canadian Energy Research Institute, a joint industry-government group, estimates the oil sands will generate C$885 billion in economic benefits and 6.6 million person-years of employment over the next 20 years.

But CAPP said these forecasts “are not guaranteed” and “depend on the right combination of economics, technology, environmental and sustainable development, and the proper fiscal regimes.”

“The current 50-50 sharing of marginal net revenue between the government and industry, including royalty and tax, is fair and internationally competitive,” it said, arguing the current structure should be left untouched because it is “stable and provides a foundation of certainty amid other changes.”

CAPP said the oil sands region is a “strategic resource for our province and nation, not only for the security of supply it provides, but for the jobs it creates and the innovation it motivates. The need for certainty and competitiveness has never been greater.”

CAPP: costs of oil sands projects up 2 to 3 times

CAPP said that since 2000, light oil prices have grown 2 to 2.5 times, but the costs of building oil sands projects have multiplied 2 to 3 times because of a high demand for steel and engineering services.

It said Suncor Energy’s Millennium project was built in 1991 for C$33,000 per daily barrel of capacity. Projects launched in more recent years now cost C$60,000-$80,000 per daily barrel and ventures just approved for construction are facing costs of C$100,000 per daily barrel for integrated mining operations.

CAPP said that when the National Oil sands Task Force released a forecast in 1996, which became the basis of the current royalty regime, oil sands operators were driving towards operating costs of C$12 per barrel without any recovery of capital costs, whereas current operating and fuel costs are C$25-$30 per barrel.

“Such inflationary impacts are slowing growth,” it said. “Potential royalty changes … could magnify these impacts.

“Long-term prosperity can only be achieved by ensuring that the royalty framework strikes the right balance.”

Shell Canada oil sands Vice President Brian Straub urged the panel to “resist periodic changes … take a long view.”

He said his firm twice scrapped major projects before the “generic royalty regime” was introduced and encouraged Shell Canada to start its Athabasca project when oil was at a mere US$12 per barrel.

David Yager, president of HSE Integrated, an industrial safety services firm with 650 employees, said hiking royalties would ruin Alberta’s reputation for fiscal stability and damage the economy more than it would benefit the treasury.

“Every additional nickel that the Alberta government collects in royalties is a nickel that is not available for spending and investment,” he said.

Fred McDougall, a former deputy minister of lands and forests in Alberta, made a case for higher royalties, suggesting the current rates “over stimulate development to the point where cost inflation is easing up most of the benefits.”

“A royalty increase is the best way to bring things back to normal. It is an objective and neutral way to delay or eliminate weak projects,” he said.






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