Connacher Commits to Oil Sands Development
Connacher Oil and Gas notes that on October 25, 2007 the Government of Alberta announced revisions to the royalty program for oil sands production that are to become effective on January 1, 2009. The Government did not grandfather existing oil sands operations and introduced a price sensitive sliding scale royalty for bitumen production which, at all price levels for West Texas Intermediate ("WTI") above US$55.00 per barrel, results in higher royalties for bitumen production than under the present regime, whether before or after payout. While Connacher would have preferred to see the existing royalty regime remain in place, given that it was in part the basis for our original capital investment decisions to enter oil sands exploration, development and exploitation programs, the emergence of much higher prices for crude oil appears to be the driving force for the change. Our conclusion is that Connacher is better off under the newly proposed regime than it would have been under the recommendations of the Royalty Review Panel, at least in the pre-payout period. Furthermore, with the rapid increase in crude oil prices and assuming that differentials remain reasonably stable for bitumen, our ultimate netbacks after royalties and operating costs would be sufficient to generate a respectable, attractive and competitive rate of return for our oil sands business.
The new policy will not impair our decision to proceed with continuing evaluation of our oil sands acreage or with our Algar ("Pod Two") project, subject to regulatory approval and completion of satisfactory financing arrangements.
We do note that the Government of Alberta intends to retain the ring fence concept, details of which will be more clearly defined. Connacher heartily endorses this approach, as it will assist companies that have longer-term reinvestment intentions. We also note that there is a plan to establish a bitumen valuation methodology, which we also welcome and in which process we intend to participate, if only to ensure there is not a perverse application of royalty rates, emanating from the level of West Texas Intermediate ("WTI"), to bitumen production during periods of high differentials which can arise due to seasonal and cyclical factors in the marketplace. Our efforts will be to ensure this is not an application of improperly high royalties at a time of lower actual realizations for bitumen production. Connacher continues to believe reliance on market-driven forces is a more realistic basis for determining fair value, rather than relying upon values assigned by administrative fiat.
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