Alberta's Royalty Increase May Chill Oil Boom

CALGARY Oct. 25, 2007 (From The Wall Street Journal via Dow Jones Newswire)

Alberta will increase its royalties from energy companies in the western Canadian province's oil sands, a move that the industry warns could slow development of an increasingly important source of crude.

Alberta Premier Ed Stelmach said he decided to raise the total government take -- including all federal and provincial taxes and royalties -- from 47% of revenue to between 56% and 66%, depending on the price of oil. He said he wanted to be "reasonable, not greedy" while making sure that energy investment continues but that residents are fairly reimbursed for the public resources.

The change comes as the oil industry is counting on more barrels of Canadian crude to fill up U.S. refineries, and ultimately American gasoline tanks. A little more than 1.1 million barrels of oil a day are produced from the oil sands, about 1.3% of global production. Output had been expected to rise to three million barrels by 2015, and the industry is spending billions of dollars reconfiguring refineries to handle more Canadian crude.

Despite record oil prices, the government's increased share of overall revenue could stall development of the vast oil sands, the industry has argued. "Anytime you have a fluid fiscal regime, it has a chilling effect on investment," said Vince White, vice president of investor relations for Devon Energy Corp.

Shares of several companies with oil-sands exposure fell in after-hours trading.

The industry tried to hold off higher royalties by pointing out that the oil sands already face severe cost inflation and labor shortages and require significant investment in unproven technology. "These are some of the most expensive and complicated projects in the world to execute," said Ron Brenneman, Petro-Canada's president and chief executive officer, in a conference call earlier this month.

A Canadian oil-industry group estimates that a project to produce 100,000 barrels a day will soon cost more than $9 billion to build, more than three times as much as a similarly sized project in 2001.

The new royalties take effect on Jan. 1, 2009.

Officials from companies involved in developing the oil sands said it was too soon to comment on the new royalties, which differed significantly from a panel recommendation last month. But before the announcement, companies had warned they might rethink future investments. Canadian Natural Resources Ltd., Canada's second-biggest oil and gas producer, threatened to cancel more than seven billion Canadian dollars (US$7.25 billion) in oil-sands development plans.

Alberta isn't alone in its quest for a bigger slice of oil profits and a bigger stake in existing projects. Kazakhstan's government is seeking to grab a larger slice of the giant Kashagan field. Earlier this month, Ecuador, which is trying to become the 13th member of the Organization of Petroleum Exporting Countries, said it would raise the state's take of oil revenue to 99% when prices soared. OPEC member Nigeria this week said it may seek to rewrite contracts executed when oil prices were lower.

Hyun Young Lee contributed to this article.

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