Canadian oils sands could be costlier, reports say

Changes being proposed to the taxing structure around the huge oil sands projects in Alberta, Canada could cut the value of those projects by $26 billion, says investment bank Wood Mackenzie. And investment bank Tristone Capital says the Alberta govnernment’s efforts to get a bigger slice from the oil sands pie could backfire, leading producers to cut back on projects and lower tax revenue.

Will the big wheels keep rolling at oil sands mining sites? Bloomberg photo.

“Alberta is following in the footsteps of many other oil producing regions in its desire to extract a greater share of the economic rent from its natural resources, during the current period of high commodity prices.” said Derek Butter, Head of Corporate Analysis for Wood Mackenzie.
“However, the higher than expected level of new taxation will cause concern among oil sands industry players already struggling to cope with spiraling costs. This will further raise the already high, economic break-even price of these projects, significantly raising the level of risk on what are huge initial capital outlays.”

George Gosbee, CEO of Tristone Capital put it more bluntly to reporters this week, saying the increased tax rates would actually lead to lower tax revenues for Canada as production would fall.

“The $2 billion (Canadian) increase per year in the government’s take is an absolute fallacy,” Gosbee said.

The production costs are higher in the oil sands than other major producing regions, Gosbee said, and the rates of return on projects there lower.

“The data the panel used in its report was either flawed, inaccurate or dated,” Gosbee said, referring to the Alberta Royalty Review group that proposed the changes.

The biggest Canadian oil and gas explorer, EnCana Corp., said last week it would cut capital spending in the province by $1 billion, or up to 40 percent, if the changes to the tax structure were adopted.
Canadian officials are considering a new Oil Sands Severance Tax (OSST) at a sliding scale of 1 to 9 percent between a WTI price of Cdn$40 and Cdn$120 per barrel; increasing the net royalty rate after payout from the current level of 25 percent to 33 percent; and introducing a new royalty-credit, based on 5 percent of the cost of upgrading facilities constructed in Alberta.
Put another way the changes could limit the internal rate of return for a project from 16.2 percent under some scenarios to 10.45 percent under the highest cost scenario, assuming a long term oil price of $50 per barrel.
Butter said the level of the Alberta government’s take ” … is relatively low compared to other jurisdictions, the high up-front and ongoing operating costs significantly impact the project economics.”