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Globe & Alberta's royalties to slide despite boom

Syncrude, Suncor to pay less in 2009
CALGARY — Alberta is forecasting a steep drop in royalties from the oil sands in three years — by as much as a fifth — as the two founding members of the sector start paying charges on cheaper bitumen rather than more valuable synthetic crude.
In budget documents released this week, the province predicts that royalties from synthetic crude and bitumen will drop to $1.35-billion in fiscal 2008-09 from $1.71-billion the previous year. Even as royalties fall, oil sands production is forecast to rise sharply, jumping nearly 40 per cent between now and fiscal 2009.
The smaller income on a higher volume of production is largely predicated on the two oldest companies in the oil sands sector, Syncrude Canada Ltd. and Suncor Energy Inc., beginning to pay royalties on bitumen, which sells at a deep discount to synthetic oil. As a result, the royalty bill for the two companies would fall substantially.
Prices are expected to decline as well — helping to push down royalties — but the drop in payments by the oil sands sector is the most significant factor at work, and part of a larger trend of Alberta getting a smaller part of the income from exploiting the province's energy resources. The Energy Department's business plan released this week shows that the Crown was paid 19 per cent of industry revenue between 2002 and 2004, down from the 24 per cent it received between 1999 and 2001. The most recent figures are lower than the target of 20 to 25 per cent that the government has set for itself.
Energy Minister Greg Melchin has said that the decline in part results from rising oil sands production and a system that allows the projects to pay low royalties while they recoup capital costs. Royalties then jump sharply, a scenario laid out in the budget, where the province's revenue from bitumen and synthetic crude production rises by 50 per cent from fiscal 2006 to fiscal 2008.
But in the next year, the tally drops by $360-million, largely a reflection of the expected switch by Suncor and Syncrude. Both companies were in business before the province established a fiscal regime in the mid-1990s that allowed future oil sands operators to choose between paying royalties on bitumen or synthetic crude. Although the bitumen royalties are lower, the tradeoff is that a company gives up the right to deduct the billions it might spend on an upgrader facility from the calculations of those payments to the Crown.
Shell Canada Ltd., for instance, decided in 1998 that it would pay royalties on bitumen. (Although Shell does not pay royalties on its synthetic crude production, any profit that results are subject to corporate tax.) However, the decision to pay bitumen royalties meant it was not able to apply the cost of its Scotford upgrader. The decision made seven years ago — a “shot in the dark,” said spokeswoman Janet Annesley — proved to be the right one. Bitumen prices rose, but crude oil prices rose even more, leaving Shell better off.
The policy was designed to ensure that any company wanting to exploit the oil sands would not end up being inadvertently encouraged to simply extract raw bitumen and ship it out of the province to be upgraded. But its arrival meant that Suncor and Syncrude could have been stuck with permanently higher royalties than their competitors, so they were given the right to make a changeover.
Although the two companies have yet to formally make a decision, both have entered into extensive negotiations on when and under what conditions they could make the transition. Suncor has largely hammered out its agreement, while Canadian Oil Sands Trust, the largest owner of Syncrude, says the talks with the province are still in their initial stages.
If they do make the switch, they will lose any unused credits for earlier capital spending. However, the benefits they have already received will not have to be refunded — an acknowledgment, Alberta's Energy Department says, that the province also benefited from the two companies producing synthetic oil.
Greg Stringham, vice-president at the Canadian Association of Petroleum Producers, said the public may have to adjust its expectations of how much “economic rent” can be extracted from each barrel of oil or gigajoule of natural gas, although total royalties could well continue to grow. Costs are on the rise generally, and the more profitable conventional production is giving way to the capital-intensive businesses such as the oil sands and coal-bed methane. However, Mr. Stringham added that he has some hope that major natural gas discoveries could still deliver high rates of production, and high royalties.

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