Higher Alberta Levies Threaten Oil Sands Pipeline Plans

OTTAWA Oct. 17, 2007 (Dow Jones Newswire)

Raising Alberta's oil and gas royalty rates could threaten at least C$15 billion in proposed oil sands pipelines, as producers delay or cancel projects to develop the resource, a report said late Tuesday.

Calgary-based brokerage First Energy Capital added that higher royalties also would speed up the decline in conventional oil production, as well as stymieing efforts to develop carbon sequestration in the province.

Last month, a government-appointed panel recommended increasing Alberta's annual take from oil and gas revenues by a fifth or C$2 billion, which sparked a barrage of criticism from energy executives and analysts.

The C$15 billion investment is planned for 2011-2015, on expectations that oil sands output will triple by the end of that time. The majority of the new pipelines or expansions would transport raw bitumen or upgraded synthetic crude oil to refining hubs in the U.S. Midwest. Although, Enbridge Inc. (ENB), ExxonMobil Corp. (XOM) and Altex Energy are looking at pipelines to the Gulf Coast. About C$6 billion of this future investment is earmarked for Alberta.

Report author Steven Paget said producers would also face higher shipping costs since pipelines are most efficient when used at maximum capacity.

"Declining production results in higher costs for each barrel of oil or each cubic foot of natural gas that is shipped," Paget said. "If royalty changes serve to increase declines, shipping costs will increase."

In addition, upgraded heavy crude has been trading at a steeper discount to the Mexican Maya grade in recent years, more than tripling since 2003. Paget warns that this could be permanent if a lack of new pipelines prevent Canadian crude from accessing the U.S. Gulf Coast.

Efforts to reduce greenhouse gas emissions from the industry could also suffer. Conventional oil producers have started injecting carbon dioxide into reservoirs to increase oil recovery but investment here could be cut short, Paget said.

"Carbon sequestration, already facing economic challenges, may never get started, at least in Alberta," he added, noting a recent plan by TransCanada Corp. (TRP) to study a C$4 billion sequestration and electricity generation plant in neighboring Saskatchewan.

Alberta Premier Ed Stelmach is expected to announce his decision on the royalty proposals next week.

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