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Suncor ruling sets off jitters Oil sands producer faces C$200 million hike in royalties for 2004; Suncor warns decision could force it to move future heavy oil upgraders out of Alberta Gary Park Petroleum News Calgary Correspondent
The Alberta government has drawn a line in the oil sands, refusing to waver on a decision that is likely to impose a C$200 million increase in Suncor Energy’s royalties this year and could see capital spending moved out of the province.
In the process, it has opened up a wider debate on how far the province can go in squeezing revenues out of the oil sands sector without driving investors away and cutting back that flow of riches.
Energy Minister Murray Smith, adamant that the government is merely reaffirming its royalty regime, turned down Suncor’s plea for a favorable royalty break on its C$625 million Firebag project.
Suncor Chief Executive Officer Rick George said “we are reassessing our choices,” including the possibility of shipping bitumen to its Ontario and Colorado refineries for upgrading to refinery-ready oil rather than building upgraders in Alberta. Company argued Firebag a satellite; government disagreed Suncor argued that Firebag is a satellite expansion of its existing mining and upgrading complex and, as such, should pay royalties of only 1 percent until the capital costs had been paid off.
The government rejected that case, deeming that Firebag is a separate entity and must pay a 25 percent royalty, starting this year rather than 2008 or 2009 as Suncor had hoped.
Based on oil prices of US$33.50 a barrel that means Suncor is faced with royalties of about C$230 million this year, compared with C$33 million in 2003.
Smith dismissed the claims of Suncor CEO George that the government had changed the rules in midstream.
“This is, in fact, a clarification of the rules. It is a reaffirmation of existing oil sands royalty regulation,” he said.
Given that no other oil sands operator had raised a concern, Smith doubted the verdict would discourage investment in 52 other projects and C$45 billion of capital spending in the planning stages.
He notes that Suncor paid only C$33 million in royalties last year on profits of C$41 billion and is on track for another C$1 billion year in 2004.
Suncor produced the world’s first commercial barrel of synthetic crude in 1967, is currently operating at 225,000 barrels per day and has a growth strategy targeting 500,000-550,000 bpd by 2010 to 2012.
Like its peers Syncrude Canada and Shell Canada and a host of other fast-emerging oil sands developers, Suncor holds one of the keys to oil security for Canada and the United States. But there is a concern among industry leaders and analysts that the Alberta government views the oil sands as its only hope of relying on non-renewable resources — which hit C$7.13 billion in fiscal 2002-03 — for nearly one-third of all revenues as conventional crude and natural gas go into decline.
Robert Mansell, a University of Calgary economist, told the Financial Post that replacing the revenue from natural gas and natural gas liquids (now 75 percent of all royalties accruing to the province) is “of huge concern to the government.”
He said revenue from the domestic upgrading and refining of bitumen, through jobs, corporate income tax, personal income tax and other side benefits, could become as important to Alberta as royalties. Change of policy for province In the past Smith has rebuffed attempts to take advantage of high oil prices and record levels of production to take a bigger royalty slice from the oil sands.
“The royalty structure has been a catalyst for all this investment,” he said earlier this year. “We don’t want to remove the benefits for these companies before that investment is paid out.” Smith also conceded on April 29 that the government might have clarified its royalty rules for Suncor and other firms earlier, but said the province will provide “compelling reasons why upgrading should be located” in Alberta, including a pending reduction in the corporate income tax rate.
Despite those assurances, oil sands decision-makers, concerned about Smith’s insistence that he has “ministerial discretion” in royalty matters, hope the Suncor dispute will be an isolated case.
Greg Stringham, vice president of the Canadian Association of Petroleum Producers, told CanWest News Service that the current bonanza of oil prices and corporate profits are no justification for accelerating royalty collection.
The stakes are immense, based on reports by the Alberta Chamber of Resources and the Petroleum Human Resources Council.
They said that each 1 million bpd of growth in oil sands output requires investment of C$30 billion if the production is upgraded into refinery-ready oil; that oil sands employment could grow by 8,000 jobs to 32,000 over the next 10 years; and that each direct job in the oil sands creates an additional three spin-off jobs.
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