10 years to turn around: Newfoundland and Labrador oil royalties

Oil started flowing from the Newfoundland and Labrador offshore a little over a decade ago but in that short time, provincial oil royalties have propelled the provincial government unprecedented financial wealth.

The royalties are set by the provincial government under the 1985 Atlantic Accord.

The table at left comes directly from the auditor general’s annual report for the fiscal year 2007 (ending 31 March 2008). 

Note that the auditor general consistently misreports the fiscal year and this can lead to considerable confusion.

The year called 2003 in the table is actually 2002;  the auditor general labels the year by the calendar year in which it ends, not begins.  Thus, the auditor general writes FY 2002 as “2003” since the end of the year is March 31 2003 

The noticeable jump in royalties from Hibernia show the impact of skyrocketing crude oil prices coupled with the escalating percentage royalty applied to the project before payout. 

Hibernia still hasn’t paid out, that is, the initial costs haven’t been recovered, but between 2004 and 2005 – actually 2003 and 2004 - royalties doubled.

That same approach applied to each of the other two projects currently in production.  In those projects, the high price of crude oil allowed the operators to recover development costs in two to three years.

The trebling of royalties in 2006 (actually 2005) from Terra Nova and the astounding jump at White Rose in 2008 (actually 2007) are entirely due to the combined impact of the royalty regimes negotiated before calendar year 2003 and historically high crude oil prices.

In order to correct this confusing date labels and to give you another visual of the royalties, the chart at right shows the royalties by project for each fiscal year (correctly labelled).

The projected cumulative royalties for the current fiscal year will be over $2.2 billion, up from the more than $1.7 billion collected in 2007.

However, lower oil prices and lower production puts likely oil royalties for 2009 at a level only slightly higher than what Terra Nova itself contributed in 2007.

That should give a sense of the fiscal problem facing the provincial government.  As noted here before, though, that’s a problem entirely of its own making.  The provincial government has consistently boosted spending to meet the astronomically high revenues.

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The Gospel according to Chip Diller

Newfoundland and Labrador is usually one of the last places to catch a trend.  Doesn't matter if you are talking fashion or, in the latest version, government economic and fiscal policy, it seems to take a while for things to catch on here.

Late on Friday afternoon newly minted finance minister Jerome Kennedy issued a news release trumpeting a credit rating by Standard and Poor's as proof of the provincial government's "fiscal prudence and sound policies". 

Well, maybe catch up is the better word.

There isn't a government left in the developed world that is still pushing the sound fundamentals media line now almost two months after the start of the current global economic crisis.  No government is claiming some sort of credit for being able to weather a storm that, in many minds, is far from over.

Well, no government except the one here.

If you want to understand why everyone else's tune has changed, take a look at the five year trending in crude oil prices. You can find an example in the WTI futures box on the right hand column.  Click on the "5Y" symbol. 

Four years to get up to US$147 a barrel and a mere four months to tumble below US$50.  The steepest declines have come in just the past two months.

The speed of the price collapse should be a clue to analysts that the assumptions used before July to predict that oil would remain at unprecedentedly high prices for the rest of time were faulty.  The security premium, supply concerns and overheated speculation drove prices to the peak last summer but in addition to all that the superheating of the global economy, fueled by loose American regulations pushed things beyond anything that would be considered normal and rational.

In other words, the price of oil has been artificially high for a very long time. Given that markets have a way of correcting themselves at some point, it was really only a matter of time before a correction - a downturn - took the heat out of things.  The only thing that couldn't be foreseen, and that's about the only thing, was how steep a correction was coming and how it might last, but come it would as surely as it has come at every juncture in the past.

Fewer and fewer analysts are holding to the old projections, some of them dating back several months. Some of the more influential sources, such as the International Energy Agency, are forecasting high prices.  However, many are revising their short term projections markedly downward.  Deutsche Bank, among others, is projecting crude at US$40 per barrel by April 2009.  One analyst  - Robin Batchelor - who in May 2008 predicted high oil prices well into the future is now likening the current climate to one 30 years ago:

"On the upside it always overshoots and the same is true on the downside. What I’m looking at is the commodity supply and demand equation; long term there are still supply issues but on the demand side we’re facing downdraft," he points out. "The last time we had a fall of that magnitude was in 1979/80/81."

While Batchelor for one has not abandoned his high price forecasts, he has certainly altered his view dramatically. The reason is simple.  While he and others once assumed ever increasing demand, the current correction may alter the demand side of the price equation that can't be seen right at the moment. If the current downturn lasts well into 2009, as most expect, the IEA, among others, will likely go back and rethink their projections just as they revised their assumptions three years ago when they thought US$50 a barrel was the peak.

Closer to home, though, the hope in the old assumptions remain strong close to home. This week, economist Wade Locke told Memorial University's student newspaper The Muse that:

“The longterm [sic] price forecast is still in the $80- to $90-range for oil and that will not affect Hebron, White Rose Extension, or Hibernia South. Even if [oil] prices were to stay around $60, these projects would likely proceed,” he said.

Locke's comments are a useful segue to an interesting aspect of the local view from the provincial government and its supporters.  Locke certainly falls into that category and the similarity between his comments and those of the finance minister are striking.  With that quote from The Muse in mind, take a look at this one from the release on the credit rating:

"Our economy remains strong and the current economic downturn should not affect development of new oilfields including White Rose Expansion, Hibernia South and Hebron," said Minister Kennedy.

The phrasing is similar, much like the similarity in early October between Locke's and the Premier's references within days of each other to the government being able to meet and exceed its current budget targets even if oil falls to $10 a barrel.

But what's more interesting in these two comments is that neither is completely true and in the wider context of Locke's comments on a bright future based on oil wealth, they constitute a fixation on oil as the source of economic salvation not seen in this province since "1979/80/81."

Let's deal with the projects first.

The White Rose expansion is a relatively modest project.  With its development costs already recovered, oil would almost have to hit prices lower than the historic 1992 price of  US$8  per barrel to make it economically dodgy.

The Hibernia South extension is also not a pricey project measured in terms of the original Hibernia project or Hebron.  However, there is no development application yet and a decision to proceed would certainly be affected by oil prices significantly lower than the current ones.

In all likelihood, the project will go ahead given that the oil companies have at their doorstep a provincial government willing to invest hundreds of millions of very scarce tax dollars in the expansion since that ultimately lowers their cost.  Given they will have recovered their initial costs by the time the new fields come online, their profit position would improve immensely in such a scenario while it would be the junior partner who would see a relatively lower return on investment. Low oil prices - especially below the foolish fixed price trigger of the current government's oil super-royalty regime  - won't affect them as much as it would the new kid in the oil patch.

Hebron is the most costly of three projects and the one most likely to be affected by a long period of low prices. Analysts seem to agree that the current price climate makes investment in high cost ventures like offshore heavy oil, deep water projects and oils sands less attractive.  Hebron's reported financial tipping point  - US$35 per barrel - is well below that of an oil sands project but stop and look at current prices.

There's a reason why the companies insisted on a clause in the Hebron agreement which gave the partners  - and the partners alone - the right to take up to a decade to sanction the project.  Current Hebron timelines are merely works in progress, subject to revision is the financial climate changes.

The upside for Hebron is that the companies managed to secure several significant concessions from the provincial government as hedges against a drop in oil prices. Those concessions make it more likely the project will proceed.

First, they secured the decade to sanction with no penalty for deciding against proceeding. They have time to decide and there is no real cost for delaying if the numbers don't add up.

Second, they won the royalty concession that dropped the pre-payout royalty to a fixed 1% as opposed to the escalating scale of the old royalty regime.  The energy minister herself heralded this as a major feature of the new deal.

Third, they were able to tie the super-royalty to a fixed price below which no extra cash was paid to the provincial treasury.  By the government's own estimate, oil prices averaging US$50 a barrel over the life of the project produced less than half the royalties of a high oil price.  Drop below that magic fixed trigger and the provincial share drops accordingly on top of the front-end royalty concession but from the company standpoint they can guarantee low possible costs across the board.

Fourthly, they secured significant fabrication concessions in the agreement.  Most of the topsides work will be done outside the province anyway based on what appears to be a huge miscalculation by the provincial government's negotiating team. 

On top of that, however, the management arrangement  - including the provincial government as junior partner  - would enable the companies to ship virtually all the topsides work and associated engineering outside the province in order to lower the costs and complete the project on time. If oil prices stayed low enough long enough and construction costs stayed high enough, it may well be worth the companies' while to pay the modest penalties for changes in the work commitments to get the deal done, even if they had to pay the penalties at all.  A renegotiated contract arrangement with the provincial government's energy company and the government that changed the work commitments would likely never be made public under the revisions to the energy corporation act passed last spring.

The companies may well get their projects, but the return to the provincial treasury and the overall impact on the local economy may turn out to be far smaller than originally promised.

The fundamental problem in all this is the fixation on oil projects which has led the provincial government and its supporters to tie government finances to the price of a barrel of oil.  Despite all assurances to the contrary, the next several years may be see provincial government fiscal problems as unprecedented as the surpluses of the past two or three years. Unlike those surpluses, however, the problems won't be figments of an accountant's bookkeeping methods.

Beyond that, prosperity for the province as a whole, in Locke's view, appears to be driven entirely by a couple of oil projects which, it must be noted, have a fixed life span.  Neither Locke nor Kennedy - who echoed Locke's definition of prosperity - have not realized the folly of resting everything on the a very slippery commodity.  

Oddly enough, it fell to Donna Stone, president of the St. John's Board of Trade to sound a very small warning bell against this very situation.  Board of trade presidents are not known to buck the government line so her words stand out.  As Stone told the Rotary Club of St. John's:

“This still gives us some cause for concern, however. Given the volatility of oil prices, the province should look at a long-term plan that will diversify our economy and make us less dependent on this ever-changing commodity,” Stone said.

Stone is absolutely right.  Almost 20 years ago, the provincial government realized exactly that and implemented a broadly-based strategic economic plan to hedge against such dependence.  That plan has been tossed aside in the  past four years.

The consequences may prove to be dire and no amount of assurance that all is well will save us from the them.

Just remember what happened to Chip Diller.

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NL crude hits $51

Brent crude for January delivery hit US$51.84 in trading on London's commodity exchange Tuesday, the lowest settlement since January 2007.

Brent is the benchmark price for Newfoundland and Labrador light sweet crude.  Such a low close for January crude, and even allowing for a 20% currency premium - virtually guarantees that crude prices in the second half of the current fiscal year will average well below the government's assumed average of US$87 a barrel for the entire year.

In Alberta, the provincial treasurer today announced his province would lose $6.5 billion in revenue this year due to the economic downturn and lower oil and gas prices.  The 2008 Alberta budget assumed an average price for crude of $78 per barrel.

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The Can-Opener's surplus prediction

Memorial University economist Wade Locke:

"The price of oil has already averaged in excess of $110, $115 per barrel for the year so far, so even if the prices were to fall down to $10 per barrel, they would still meet their budget projections of $87 a barrel," Locke told CBC News on Monday.

"So the forecasts in the budget should still be fine. They should have a budget surplus even bigger than they what they had forecast."

Okay.

Let's see if that works out.

Given:

• The 2008 budget estimates predict oil royalties of $1.789 billion based on an assumed average price for oil of $87 per barrel.
• The 2008 budget estimates forecast a deficit on capital and current account of $414 million.
• The 2008 budget estimates forecast an additional borrowing requirement of $380 million for a combined cash requirement (borrowing) of $794 million.
• For the first six months of the fiscal year, Locke gives the average price for crude oil as $115 per barrel.
• The finance minister forecast a $544 million surplus in public statements and the budget speech, even though that figure does not appear anywhere in the budget estimates voted on by the House of Assembly.
• All other revenues and expenditures remain as projected in the estimates.
• Annual oil production is 111 million barrels.

Therefore:

• In order to attain a surplus of $544 million, provincial oil royalties would have to exceed the forecast by approximately $1.338 billion ($794 million + $544 million);  in total that would be oil royalties at $3.127 billion.
• If oil averages $115 per barrel for the entire fiscal year, the projected royalty would be $2.361525 billion.
• If oil averages $115 for half the fiscal year and $87 for the remaining six months, the total provincial royalty would be $2.05535 billion.
• Budget surplus (deficit) @ $115 for 12 months = ($766 million)
• Budget surplus (deficit) @ $115 or $87 over 12 = ($1.072 billion)

No matter how you slice it, that doesn't look like a surplus.

No matter how you slice it, that doesn't look like a larger surplus than the one supposedly forecast in the budget.

Anyone who wants to explain Locke's figuring or where the Bondable version is off is welcome to do so.  Either add your comment to his post or send it by e-mail and we'll do it for you.

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Everyone chill...for now

After a one day panic, oil prices settled back down on Tuesday.

NYMEX crude for November delivery was at US$106.81, with the spot for Brent and West Texas Intermediate at, respectively, US$101.70 and US$107.86.

Brent is the closest thing in price to Newfoundland light, sweet incidentally.

Oil prices may swing up and down over the next couple of days or even into next week, with much depending on the massive bail-out package working its way through the American federal Congress.

On the whole, though, it looks like oil will continue a generally downward trend over the next few months.

The implications of this dropping oil price will become more apparent for Newfoundland and Labrador very shortly.

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Hebron Basic Royalty: a second view

On the heels of Bond Papers' preliminary assessment of the Hebron royalty regimes, here's a look at the same issue using different oil price assumptions. please refer to the earlier post for more detail on the scenario, assumptions and caveats to be applied.

The initial assessment assumed total annual production averaging 50 million barrels per year, based on the provincial government's estimate that Hebron would produce at least 150,000 barrels per day on average. It also assumed first oil would be achieved in 2017.

As well, the initial assessment used an assumed average price for heavy crude oil at US$45 per barrel, on average for the period.

To get a more refined look, this version uses constant 2005 US dollars and takes price projections from the United States Energy Information Agency (EIA). The EIA issued its annual energy outlook in February 2007 for the year 2007 with projections to 2030.

EIA projected prices for West Texas Intermediate (WTI) delivered at Cushing Oklahoma, however, heavy oil sells at a discount compared to WTI. That discount varies over time, based on market action and has been known to run at 40% to 50% less than WTI. For the purposes of this second look, the average price per barrel for heavy crude is taken at an average of US$38 per barrel, on average over the 10 year period 2017 to 2026. That assumes a discount for heavy oil of 25%. The EIA prices ranged from US$31.88 to US$37.13.


The provincial generic royalty regime produces two years of production at 1% of gross revenue , two at 2.5%, two at 5% and four at 7.5%. The Williams basic royalty, as presented in the provincial government news release of August 22, 2007 sets the basic royalty at a constant 1% for the period before simple payout.

As can be seen, the generic royalty regime's steady progression produces significantly more royalty revenue for the provincial treasury annually than does the flat rate approach during the assumed 10 period before the project attains simple payout.

Cumulatively, the generic royalty would produce $893 million in royalty versus $190 million over the 10 year period.

There are several points to bear in mind:

1. Since there is insufficient information available publicly from the provincial government on the proposed royalty regime after simple payout, there is no way to assess whether or not there are gains after simple payout to offset the revenue foregone in the initial phase.

2. When assessing the impact of Tier 3 so-called super-royalty, it will be important to confirm whether the figure of US$50 per barrel for WTI will be expressed in any final agreement as being constant dollars (adjusted for inflation given a base year) or nominal dollars.

To illustrate the importance of this distinction, note that the EIA forecast shows WTI going above US$50 constant 2005 dollars in 2028 and then only by 17 cents. Revenue from Hebron will be actually lower than this, given the impact of the heavy oil discount.

3. Given the royalty that appears to flow in the period before simple payout, there is some doubt as to the accuracy of the $16 billion revenue figure used by the provincial government or exactly what revenues it contains in addition to royalties.

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Waiting for the "real deal": deconstructing the Hebron announcement

"That's the details...That's where the deal gets done. That's where the off-ramps are. That's where the security is for the people of Newfoundland and Labrador. ... We want to see the real deal."

Danny Williams, Leader of the Official Opposition, June 2002

At 10:00 AM on August 22, 2007, Premier Danny Williams will hold a news conference and announce a miracle.

[Update 0745 hrs 22 Aug: According to CBC Radio's David Cochrane, the news conference will take place at 11:00 AM or noon. Bond papers understands it will involve only Premier Williams. As Cochrane indicated, there is no final and binding legal agreement but rather a general statement of principles (see below). Cochrane compared the situation to Voisey's Bay (again, see below), and acknowledged that there may not be an agreement reached. Cochrane dismissed the prospect given that both sides need a deal.]

The Premier will announce a deal to develop Hebron in which he negotiated every single one of his demands successfully at no or virtually no cost.

The reality is starkly different, if for no other reason than what the Premier is likely to discuss on Wednesday is not a complete agreement but rather a memorandum of understanding [MOU], a statement of principles to guide further talks that in itself is not legally binding on either party. According to some indications, the MOU will be kept confidential.

The details of the development agreement for Hebron remain to be negotiated.

The Hebron announcement will be starkly different from the position Danny Williams took as opposition leader in 2002 on the Voisey's Bay deal, although the circumstances are virtually identical.

As a Canadian Press story put it in June 2002:

But critics on the opposition benches warned a monumental bungle is in the making because the vote [in the House of Assembly] dealt with an 18-page statement of principles, not a legally binding commercial agreement.

"It's the worst ... document I've ever seen," Conservative Leader Danny Williams said outside the legislature. "It's not even a legal document because it's not legally enforceable. We as a people are being insulted by being asked to vote on this."

The legal text, which could comprise up to 150 pages of dense terminology, will be drafted by lawyers behind closed doors later this fall.

For the past nine days, Williams insisted the final text, not statement of principles, should be debated and put to a vote in the legislature.

"That's the details," he said. "That's where the deal gets done. That's where the off-ramps are. That's where the security is for the people of Newfoundland and Labrador. ... We want to see the real deal."

Effectively, Newfoundlanders and Labradorians will be voting on a Hebron statement of principles come October 9 but without the details which, as Danny Williams himself put it five years ago, is "where security is for the people of Newfoundland and Labrador."

It would be even more ironic - if that is even possible - were the Premier to make a comment along these lines on Wednesday: "We're completely satisfied we have all of the provisions that we need, all of the stop-gap measures, all the guarantees."

To give a sense of what likely won't be known on Wednesday with any certainty, consider these points:

1. Super-royalty: There will apparently be a provision covering special royalties while oil is priced above a certain dollar amount per barrel. There has been no public discussion of how this would work and hence there is no calculation of how this regime will interact with the other royalty regime.

It is conceivable that the province's existing royalty regime has been supplanted by an entirely new one - never publicly disclosed - complete with different triggers, different calculations and therefore different potential cash values to the provincial treasury.

Wade Locke's assessment of Hebron royalties of $8.0 to $10.0 billion over the 20 year lifespan of the project may well need to be replaced by an entirely new set of calculations.

Unless details of the royalty regime are released, there will be no way for an independent analyst, such as Locke, to assess any provincial government claims about royalties.

2. Equity stake. There will be a 4.9% equity position for the provincial energy company, according to media reports. Expect the provincial government will pay a fair market price - yet to be determined - for the stake and that the energy company will also bear its share of project development cost and downstream liabilities.

Those points have been at the heart of the oil companies' position on equity. The Premier has essentially accepted them already publicly when he stated that the provincial government would pay fair market price.

The problem for the public will come in assessing the real value of the equity stake. Premier Williams gave it a net value of only $1.5 billion over the life of the project based on discussions up to April 3, 2006. It is possible that in accepting operator risk - something the province has eschewed until now, apparently - the net cash value of the equity stake will be near zero.

The Premier has never publicly indicated any other value to the province of the equity stake and establishing an oil company.

[Update: CBC's David Cochrane attributed to Premier Williams acquisition cost of $150 million to the equity position. On the face of it, this is ridiculously low. If Hebron development cost were $5.0 billion, then 4.9% of that alone would be $245 million.

Added to that cost must be the share of other downstream costs and liabilities. If getting into the oil business on a project like Hebron - estimated gross value of US$25 to US$35 billion- was that cheap, everyone would be in it. ]

3. Local benefits: One of the major issues in the 2005/06 negotiations was apparently the amount of work to be done within the province. This remains an significant issue, made more acute by outmigration since April 2006.

Any provisions of the agreement which establish local benefits as work commitments must take into consideration the local labour market and the local industrial capacity in the context of a major construction project at Long Harbour, the likelihood that the Lower Churchill will start within the next three to five years, and the possibility that one or two other major construction projects at the northeastern end of Placentia Bay would also tax the local industrial capacity.

One way of coping with the issue would be to allow work - such as the topsides - to be shipped out of the province for completion based on certain conditions being met. As well, the provincial energy company may opt to slow work on the Lower Churchill or allow that project to export components or outsource supplies to ensure that Hebron can meet its first-oil target.

Since there are a limited number of facilities in the province capable of constructing some of the larger project components, a project such as the Joint Support Ship for the Canadian navy, might take a facility such as the Marystown yard out of contention for one or the other project.

The superheated Alberta construction marketplace has already taxed some aspects of the national labour supply. Challenges would exist in finding enough skilled workers in a relatively tight time frame to complete the planned and potential major projects across Canada, including the ones listed above.

4. Conflict of interest: Bond Papers raised this issue specifically focused on Ed Martin, the chief executive of Hydro who headed the 2006 negotiating team. The conflict remains, even though this round of negotiations appears to have been headed by the Premier himself.

Fundamentally, any political demands that insist on work being done in the province have to be paid for by some party.

Given that the provincial government is almost certain to become an operator, it is now faced with the dilemma. As an operator, it would seek to lower costs and thereby maximize profit which would flow ultimately to the provincial treasury. As a provincial administration interested in maximising local work, it would seek to maximize that local work irrespective of costs.

Until now, those interests were aligned: lower costs meant higher royalties.

Beginning with this agreement - when and if the details are finalized - the provincial government faces an internal conflict of interest not seen since the Peckford administration and negotiations on Hibernia.

How that conflict is resolved will determine much of the value of the final agreement, when and if it is reached.

5. There has been no public discussion of potential research and development work related to Hebron, let alone what the requirements might be.

6. Tax concessions: One sticking point for the provincial government in 2006 was a demand by the companies for a sales tax exemption for the construction phase of the project, similar to an exemption granted to Hibernia, as well as the creation of an investment tax credit.

Tax concessions - although not characterised as such - might form a part of this agreement as a mechanism to lower operator costs on an already difficult and costly project.

7. Dates and timelines. Some 18 months have already been lost on the project. The operators disbanded the project management team in 2006.

That team now must be assembled again.

The details of the agreement with the provincial government must be negotiated.

A development application must be submitted to the offshore regulatory board. The board must review the application, adjust portions and hold public hearings before the project can be sanctioned.

Even allowing some concurrent work, it is likely that first oil from Hebron will not be achieved much before 2014.

8. Hibernia South. As much as the parties attempted to downplay it, it appears that the provincial government's rejection of Hibernia South development was linked to collapse of the Hebron talks.

Some aspect of this MOU may include a side agreement to expedite development of Hibernia South, with the province essentially abandoning any demands for additional royalties and developments from the 300 million barrels of oil in the Hibernia extension. Hebron - the subject of the current discussions - is estimated to contain slightly more than 500 million barrels of heavy, sour crude oil.

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So how much is fair, exactly?

When it comes to oil and gas royalties, there's a debate in Alberta.

There's no debate in Newfoundland and Labrador. Mostly there's a pile of misinformation, most of it flowing from the provincial government.

Well, for those who like to think to thoughts, to dare to be different and - oh, horrors - consider that the Powers-That-Be might just not be right about everything, here's another perspective, via the Globe.

Note particularly, the chart on the left comparing various jurisdictions.

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Investing non-renewable revenues

A retired St. John's financial consultant is recommending the provincial government follow the example of other jurisdictions, including Alaska and Norway, and invest revenues from oil and gas development in Newfoundland and Labrador.

Bastedo figures Newfoundlanders and Labradorians would receive dividends between Cdn$3,000 and $3,300 once its own fund is worth $25 billion-$30 billion.

Established in 1976, the Alaska fund receives at least 25 per cent of the state's oil royalties and other income, such as mineral lease payments.

Six years later, the fund started paying dividend cheques to native Alaskans and those who had lived in the state for more than 21 years. Those dividends are based on a formula and the amount varies annually.

The lowest payments were US$331 in 1984, while the highest was US$1,964 in 2000.

The Norwegian fund, which is invested only in international markets, reported first quarter earnings of over US$300 billion in 2007.

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Oil companies oppose Alberta royalty hikes

From Oilweek:

In a written submission to a provincial royalty review panel, the Canadian Association of Petroleum Producers says oilsands projects have a lot of major obstacles to overcome before producing even a barrel of crude. This includes multi-billion dollar up-front cash layouts, long lead times and swirling cost pressures for both material and labour.

"Looking at royalties per barrel in the early years of a project is like looking at a child from age three to six and then saying, 'they will never amount to anything important over their lifetime,' " CAPP said in its submission.

The oilpatch lobby group said oilsands developments are among the most expensive energy projects in the world to build.

Years of unprecedented high commodity prices and a string of record profits from Canada‘s big energy companies has triggered an undercurrent in Alberta that the oilpatch is not paying the province enough.

Under the current structure, companies pay just one per cent of gross revenues until all construction costs are recouped.

The rate then climbs to 25 per cent of net royalties.

The complete CAPP presentation can be found at capp.ca. It describes the oilsands resource, the existing royalty regime and some details of how the oilsands have been performing financially:

There is also a general public perception that royalties have not kept pace with increased commodity prices. But, as noted above, oil sands royalties and lease payments have increased 16 fold in the past five years — from $250 million to $4 billion — to become a major contributor to the provincial surplus.

As of December 2006, 34 of 66 projects covered by the Generic Regime are now in post-payout phases and more are reaching payout quickly. But just looking at the number of projects does not show that just 10 projects make up 88 per cent of the oil sands production. Th is means that about 75 per cent of oil sands projects by volume are paying the 25 per cent post-payout royalty.

In many cases, these projects have achieved full royalty payments ahead of schedule, precisely because the regime is instantly responsive to commodity prices. As prices have risen, so too have gross revenues, thus increasing both the amount of the gross royalty and increasing the fl ow of funds to pay down capital costs and move the project to post-payout royalty payments. In a high-commodity-price environment, projects pay out faster — and then pay higher royalties sooner. If prices decline, royalties automatically adjust to support project economics.

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