Petro-Canada Seeks Compromise Solution to Royalty Recommendations
CALGARY, ALBERTA--(Marketwire - Oct. 3, 2007) - In the spirit of trying to reach a compromise solution to the debate on royalties, Petro-Canada sent a letter to the Government of Alberta yesterday commenting on the Royalty Report's analysis and recommending key aspects of a workable royalty scheme. The Company acknowledges that Albertans should rightly expect royalty income to the province to increase as oil and gas prices rise. But, those royalty increases must be balanced against investment and job creation in the industry to maintain the prosperity that all Albertans want to enjoy.
The recommendations of the Royalty Report will not achieve that balance. The recommendations, if implemented, would seriously impair investment in the province. The analysis on which the Report's recommendations are based is flawed in several respects.
- Contrary to the assertion in the Report, royalty income to the province has in fact kept pace with increasing oil and gas prices over the last few years. In addition, lease sale income amounting to $3.5 billion in 2006 alone was ignored in the Report's calculation of government take.
- The competitiveness of Alberta's oil and gas industry is not judged upon royalty rates, as indicated in the Report, but on investment returns. Those returns are impacted by the higher costs, smaller finds and lower well rates in Western Canada's mature basin. On this basis, Canada ranks as the least attractive of the comparator group of royalty regimes.
- The Report's conclusion that 82% of natural gas wells will pay lower royalty rates is misleading. Almost all wells will pay higher royalties at current prices. Higher royalty rates would only add to the more than 30% decline in drilling activity and corresponding job losses already experienced this year.
- Oil sands projects are capital intensive and complicated to execute. The addition of a non-deductible severance tax for oil sands projects is equivalent to adding a base royalty rate of 2% to 15%, which would make new in situ projects (80% of Alberta's oil sands resources are only recoverable using in situ technologies) uneconomical. Oil prices would need to be more than $100 per barrel for in situ investments to make sense.
Alberta's resources are too valuable not to develop. If the investment environment is not protected through a reasonable royalty structure, many projects will be cancelled or deferred until the economic climate becomes more viable. Rather than benefiting Albertans, the recommendations could end up decreasing economic activity in the province and lowering overall income to Alberta.
"We are re-investing a good portion of the money we make back into Alberta projects - more than $2 billion this year," said Ron Brenneman, President and Chief Executive Officer. "This investment creates jobs and spin-off benefits in major centres, like Calgary and Edmonton, but also in rural communities around the province. We want to continue to invest here, so it's important that we find a solution that works for everyone."
Petro-Canada recommends that any new royalty scheme consider the following key points:
- royalty rates should increase only at oil and gas prices above today's levels;
- the unique aspects of Alberta's mature basin, particularly for conventional gas, and the resulting returns to investors need to be taken into account;
- the net-profit royalty structure in oil sands projects should be retained; and,
- royalty changes should be phased-in, so investors and producers have time to adjust.
With this approach, a balance can be struck that will increase the upside share to Albertans, while preserving the province's competitive advantage.
More details on our point of view are attached in the letter (http://www.petro-canada.ca/en/media/54.aspx) sent to the Government of Alberta yesterday.
Petro-Canada is one of Canada's largest oil and gas companies, operating in both the upstream and the downstream sectors of the industry in Canada and internationally. The Company creates value by responsibly developing energy resources and providing world class petroleum products and services. Petro-Canada is proud to be a National Partner to the Vancouver 2010 Olympic and Paralympic Winter Games. The Company's common shares trade on the Toronto Stock Exchange under the symbol PCA and on the New York Stock Exchange under the symbol PCZ. For more information please visit http://www.petro-canada.ca/.
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