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Vol. 12, No. 39 Week of September 30, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Hikes would hurt oil sands

Wood Mackenzie: Royalty, tax increases would undermine project values

Ray Tyson

For Petroleum News

A recent study published by respected international energy consultant Wood Mackenzie reflects industry’s worst fears over government proposals to hike royalties and taxes on Alberta oil sands projects. If fully implemented, the study concludes, the increases would reduce the commercial value of current and planned oil sands projects by a hefty US$26 billion.

The move specifically would decrease the value of 28 oil sands projects in operation and under development, if Alberta’s government adopts the proposals to increase taxes and royalties from the energy sector by 20 percent, Wood Mackenzie said in its study published Sept. 25.

Derek Butter, the research firm’s head of corporate analysis, predicted that economically marginal projects or those with a start date furthest in the future, would be hardest hit by changes proposed by the Alberta Royalty Review Panel.

He said projects may not move forward, boosting the loss to industry even more. The firm said proposed projects such as Husky Energy Inc.’s Sunrise, Imperial Oil Ltd.’s Kearl Lake and Petro-Canada’s Fort Hills would take the biggest blow.

More economic rent the goal

Alberta is following in the footsteps of many other oil producing regions in its desire to extract a greater share of the economic rent from its natural resources during the current period of high commodity prices, Butter noted, adding that changes under consideration in Alberta are comparable in terms of industry loss to the nationalization of oil assets under way in Venezuela and the taxation increases implemented recently by the UK government.

Wood Mackenzie also found that Alberta’s oil sands’ attractiveness as an investment based on the level of government take would slide from 11th place to 44th in a ranking of 105 basins around the world.

“The higher than expected level of new taxation will cause concern among oil sands industry players already struggling to cope with spiraling costs,” Butter said. “This will further raise the already high, economic break-even price of these projects, significantly raising the level of risk on what are huge initial capital outlays.”

The report outlines the main recommendations: the implementation of a new Oil Sands Severance Tax, effectively a new super-royalty, at a sliding scale rate of 1 percent to 9 percent between a WTI price of C$40 and C$120 per barrel; increasing the net royalty rate after payout from the current level of 25 percent to 33 percent; and introducing a new royalty credit, based on 5 percent of the cost of upgrading facilities constructed in Alberta. The report also suggests alterations to conventional oil and gas royalties.

Impact tested on projects

Wood Mackenzie said it tested the impact of the proposed changes, which would increase the government’s take by $2 billion a year, on 15 projects already in operation, six under development and seven under potential future development.

Butter said that once recovered from the shock, industry would lobby hard “to mitigate the effects of the proposals.” In particular, he added, the imposition of the OSST, applied to revenue before the project costs have been recovered “is particularly damaging to more marginal projects.”

However, Wood Mackenzie said the proposed changes are at present only recommendations, with the provincial government indicating that a final decision would be made in the near future.

The Wood Mackenzie report is the latest study critical of a recent controversial provincial-panel report that concluded Albertans are not getting a fair share from its dominant energy industry. In a news report published by the National Post, Alberta Energy Minister Mel Knight made it clear the government has not made up its mind on what a new energy royalty regime would look like. He said he expects to hear from a half-dozen research firms as they complete their own analyses on the proposed changes.

“This process is not finished,” he said in an interview with the Post. “We are going to continue to consult in an open manner, both with industry and with Albertans. This piece of business that is going on happens to be inside Alberta, but has enormous consequences for Canada.”

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