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Financial Times: Alberta treads fine line on oil royalties

By Sheila McNulty in Houston and Daina Lawrence in Ottawa
Published: October 29 2007 02:00 | Last updated: October 29 2007 02:00

Canada may have just done the impossible – raising royalties on the oil industry without casting itself as greedy and unreasonable and driving companies out of the country.

Certainly no one is thrilled to be paying more than the current low royalties, but the increases unveiled late on Thursday are rising with the price in oil.

While many other oil-rich nations are provoking the ire of international oil companies with unreasonable demands, the sliding scale determined by the price of oil starting January 2009 seems mild by comparison.

“They will take more, but only at prices above $55 a barrel,” said Derek Butter, head of corporate analysis for Wood Mackenzie, the consultancy. So the companies will pay the same royalties if the price remains under $55 a barrel.

“The Alberta government has proposed a regime that, at first glance, looks significantly less onerous than feared,” said Doug Leggate of Citigroup Investment Research. “At $55 there is no change; at $60 – our long-term price assumption – the change is immaterial.”

Oil companies have been focused on Canada’s oilsands, the new hotspot for investment in this politically stable country amid the nationalist fever sweeping Venezuela, Russia and other nations.

Alberta has encouraged investment in these hard-to-exploit reserves, stuck deep in sand, with low royalties – just 1 per cent of revenues before companies make a profit and then 25 per cent once they became profitable.

Under the new regime, companies must pay 1-9 per cent before they make a profit, depending on the price of oil, and then royalties of 25-40 per cent of their profits, depending on the price of oil. The 25 per cent will be based on a $55 price of oil and the 40 per cent will be based on a $120 price of oil.

Mr Leggate said that he expected a “strong response to any change from industry”.

“We hoped for a different result,” said Pierre Alvarez, president of the Canadian Association of Petroleum Producers, who felt the changes were being imposed in too tight a time frame. “You don’t just change the rules on stuff like this overnight.”

Yet analysts believe oil companies will remain in Alberta because the reserves are huge – the world’s biggest proven oil reserve outside Saudi Arabia – and they are unlikely to find something of this scale with such a welcoming government anywhere else.

Royal Dutch Shell declined to comment pending more details. Chevron said it remained committed to developing a leadership position in oil sands.

Amy Myers Jaffe, energy expert at Rice University, said the sliding-scale approach has been used successfully for many years in the UK’s North Sea field as it gave the oil companies predictability.

Copyright The Financial Times Limited 2007

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