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Finding the ‘sun’ in Suncor Oil sands producer settles royalty test-case with Alberta government ‘happy’ that deal benefits both sides; planning for C$20.6B expansion Gary Park For Petroleum News
Suncor Energy, the pioneer developer of Alberta oil sands, may be having trouble suppressing a smile these days.
It has reached an agreement with the Alberta government on changes to a royalty pact that was not due to expire until 2015, producing a result some analysts think is a whole lot better than it might have been, and has apparently decided the new regime offers enough certainty to proceed with a C$20.6 billion expansion of its northern Alberta operations.
The royalty deal could end up costing Suncor 20 percent more than the old pact over the period 2010-16.
But Chief Executive Officer Rick George, while emphatic that his world is not perfect and he’s not happy about paying higher royalties, was ready to concede that the settlement achieves a “happy” medium between Suncor’s shareholders and the citizens of Alberta, who own the resource.
“We approached our discussions with the government looking for certainty and we’re satisfied we have that now,” he said Jan. 29.
That certainty means the government will: not seek revenues from Suncor using measures outside the new royalty framework, such as new taxes; not take royalties in kind before 2012; and not change key definitions involving a bitumen valuation methodology that will be used in calculating Suncor’s royalties once the new regime takes effect in 2009.
Old agreement signed in 1997 Under a 1997 agreement, that was not due to expire until 2016, Suncor and rival company Syncrude Canada were to pay 1 percent of gross revenues from the bitumen mining operations until project costs were paid off, then 25 percent of net revenues after payout.
The deal Suncor has struck will take effect in 2010, eliminating the pre-payout period and charge a royalty of 25-30 percent on net profits of Suncor’s bitumen, depending on oil prices. The company’s in-situ operations were already subject to the new royalty regime.
Suncor estimates its combined mining and in-situ royalties in the 2010-2012 period, as a percentage of gross revenues, will be 8-9.5 percent at WTI prices of $70 per barrel, 8.5-10.5 percent at $80 per barrel and 9.5-11 percent at $90 per barrel.
George said comparing current royalties and what the company will pay in 2010 is not easy, but, based on a number of variables, he said the 8-9 percent paid on gross revenues last year “will be somewhat higher.”
Analyst: result ‘net positive’ William Lacey, an analyst with FirstEnergy Capital, said the result appears to be a “net positive” for Suncor because the company avoids paying the same royalties as the rest of the industry and is granted a transition period to 2016.
Greg Stringham, vice president of the Canadian Association of Petroleum Producers, whose organization has been concerned about any appearance that the government was tearing up contracts, told the Globe and Mail the terms reached with Suncor show the “government honors commitments to contracts and the sanctity of a contract is an important industry issue.”
Chris Feltin, an analyst with Tristone Capital, credited Suncor with “acting in the best interests of everybody by coming to an agreement quickly.”
Syncrude, which produces 350,000 barrels per day, is still involved in discussions, which require separate negotiations with each of its seven owners.
Energy Minister Mel Knight said he is confident about the outcome, saying there is “very productive forward motion,” but he would not be drawn into setting a deadline.
Voyageur will boost production to 550,000 bpd Feltin said the royalty deal with Suncor will affect the economics of future oil sands projects “but not to a material degree” —a view Suncor seemed to echo Jan. 30 when it announced corporate approval for a C$20.6 billion addition that will boost its output of crude to 550,000 barrels per day by 2012 from 350,000 bpd.
The Voyageur scheme involves a C$9 billion mine to extract 245,000 bpd of bitumen for processing at an C$11.6 billion upgrader into 200,000 bpd of crude — 85 percent sweet crude and diesel and 15 percent sour crude.
The costs work out to a per-flowing-barrel cost of C$100,000 and could vary from plus 14 percent to minus 10 percent.
George was largely untroubled by the construction challenges that have caused costs of other projects to skyrocket, suggesting Suncor’s long history in the oil sands gives it a “better chance of success than our competitors.”
He also said labor demands in the oil sands sector are easing because of a slowdown resulting from Alberta royalty increases and credit risks. The pressure may also be coming off other costs, although that trend is not yet widespread, he said.
Voyageur will take many steps to reduce its environmental impact.
George said using an in-situ process rather than mining technology will disturb only about 15 percent of the land affected by mining ventures; the company has reduced its water consumption per barrel of output by 50 percent over the past five years; 90 percent of the water used for steam generation will be recycled; greenhouse gas emissions per unit of production have been reduced by 50 percent from 1990 levels and the company is exploring technologies for carbon capture and storage that have the potential to lower absolute emissions; and C$800 million is being spent on ways to reduce sulfur dioxide emissions.
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