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Petroleum News: Feuding over Alberta royalties: industry, energy minister warn changes could be destructive to oil sands

EXTRACT: Neil Carmata, a Petro-Canada vice president and the former head of Shell Canada’s oil sands division, said investors and companies have “got to keep telling the politicians they have got to be careful not to mess” with royalties.

THE ARTICLE

Candidates for Alberta premier’s job favor a review; industry, energy minister warn changes could be destructive to oil sands

Gary Park
For Petroleum News

The industry is emphatic — don’t meddle with what works — but there’s squabbling within the Alberta government as pressure builds to review the oil and gas royalties, with special emphasis on the oil sands.

Leading candidates vying to replace Ralph Klein as premier of the province later this year agree with a growing public sentiment that it is time to take another look at a system that yields a mere 1 percent of gross revenue until project costs have been covered, then rises to 25 percent.

It’s a regime that critics say amounts to a free ride for companies raking in billions of dollars from the resource.

Jim Dinning, seen as the front runner in the leadership race and a former Alberta finance minister, said a review of Alberta’s entire royalty system is overdue, while rivals Dave Hancock and Lyle Oberg favor a fully transparent, public examination of the regime.

As for the departing Klein, he “couldn’t give a tinker’s damn” if a review is ordered.

Melchin: taxpayers getting fair share

But Energy Minister Greg Melchin says an internal review has concluded taxpayers are getting a fair share from the oil sands and conventional oil and natural gas, with royalties and returns from land sales totaling C$15 billion in 2005.
That means there will be no changes to avoid sending a destructive message to the industry, he said.

Public hearings could be held in the future, but have been avoided until now because royalties are “financial structures” and as such are very technical, he said.

“We make promises and obligations to industry to ‘come and invest your money,’” said Melchin. “Now that they have put it in, you don’t just change the rules.”

He was not ready to make allowance for the fact that oil prices are now hovering around US$75 a barrel and are predicted by FirstEnergy Capital to average $68 in 2007, $64 in 2008 and $57 by 2010, yielding billions of additional dollars of returns for the industry.

But Melchin said the government can’t arbitrarily change the rules for the oil sands just because energy prices have soared.

For now, Melchin insists most of the internal information and external reports produced for the “basic” review of royalties will be made public once it has been provided to the government caucus.

“Everybody mentions the 1 percent and clearly 1 percent is a low royalty rate on the initial side, but these are the highest-risk projects,” Melchin said.

Some have suggested the initial royalty could be raised to 5 percent without deterring investment, but others note that would extend project payouts and delay the day when the 25 percent rate took effect.

Industry: don’t mess with royalties

The industry view is unambiguous.

Neil Carmata, a Petro-Canada vice president and the former head of Shell Canada’s oil sands division, said investors and companies have “got to keep telling the politicians they have got to be careful not to mess” with royalties.

“You’ve got to keep explaining that, with oil sands projects facing costs per barrel of daily production of C$75,000 to C$80,000, you still need that royalty rate to get over the finish line.”

Carmata warned a lot of pressure is building for royalty and capital cost clawbacks.

“If it happens, it’s going to hurt,” he said. “Every time I corner a politician I say ‘keep your hands off (revenues)’ because we need them even with oil at $70 a barrel.”

Soheil Asgarpour, an oil sands scientist with the Alberta Department of Energy, told a TD Securities conference that a number of options are being examined for royalties, but there are no plans yet to make recommendations.

He said one idea is to exclude upgraders from the royalties paid for extracting raw bitumen or producing synthetic crude.

Should project developers take that route, the capital and operating costs of upgraders could not be claimed under the royalty regime, leaving the province to collect royalties based on the value of the bitumen.

If the developer elected to include the upgrader, the royalty would be assessed based on synthetic crude, making the costs of the upgrader part of the royalty calculation.

Royalty tax credit ends Jan. 1

The only immediate change will be an end on Jan. 1, 2007, to the Alberta Royalty Tax Credit that provided C$113 million to oil companies in fiscal 2005-06 to stimulate exploration and development and has pumped billions into the industry’s pockets since it was introduced in 1974.

Eligible companies can qualify for a credit on their income tax for a percentage of the first C$2 million of royalties paid, with the amount varying as the program is adjusted to stay in line with market changes and trends. It has ranged from 75 percent to 25 percent and is currently at the lower end.

The debate is unlikely to fade at a time when the government’s own numbers show it collected 19 percent of oil and gas revenues in 2004, falling below its own threshold of 20-25 percent.

A spokeswoman for the Pembina Institute for Appropriate Development said the entire royalty structure needs more than a tweak.

She said retaining a decade-old regime for the oil sands when the sector is overheated is “irresponsible.”

 

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