January 30, 2008 / 12:04 AM / 9 years ago

Alberta and Suncor reach deal on oil sands royalties

4 Min Read

<p>Alberta Premier Ed Stelmach pictured in Calgary, Alberta, October 25, 2007. Suncor Energy Inc will pay up to 20 percent more in royalties on oil sands output under a new deal that frees the Alberta government from a contract that would have left terms unchanged for another eight years, the two sides said on Tuesday.Todd Korol</p>

CALGARY, Alberta (Reuters) - Suncor Energy Inc will pay up to 20 percent more in royalties on oil sands output under a new deal that frees the Alberta government from a contract that would have left terms unchanged for another eight years, the two sides said on Tuesday.

Under the agreement, which has been in the works since Alberta hiked royalties in October for all the players in its main industry, Suncor will pay the higher rates for its oil sands mining operations starting in 2010.

Then in 2016, it will pay the same rates as other oil sands producers, which begin for them next year.

In return, Alberta agreed not to impose any new taxes on the operation outside the new royalty framework or change key financial aspects of Suncor's oil sands project, such as allowed costs.

It also pledged not to take oil in lieu of cash payments from Suncor's oil sands project before 2012.

However, the government of Premier Ed Stelmach did not give the operator of the country's second-largest oil sands operation monetary compensation for breaking the contract.

Syncrude Canada Ltd -- the only other oil sands operator with a contract for royalty terms that was due to expire at the end of 2015 -- has yet to strike a deal with the province and talks are still going on, Alberta Energy Minister Mel Knight said.

Suncor Chief Executive Rick George acknowledged that his company's costs will rise, but said he was pleased to have certainty on the issue.

"Suncor sees itself as a long-term developer of resource in this province and takes that long-term approach," George told reporters.

"What we think we've struck here is a good balance between the resource owner -- the citizens of Alberta -- and our company and our shareholders."

He said it is difficult to estimate how much more his company will pay under the new structure. Last year, it paid 8 percent to 9 percent of gross revenues in royalties.

The new deal means larger payments, but much is also dependent on oil prices, George said.

Suncor's non-mining oil sands operations were not covered by a royalty contract, so are not affected by the new deal.

Knight said he would not comment on the talks with Syncrude, the biggest oil sands producer and one which is run by a joint venture of major oil companies. He also declined to say when discussions might come to an end.

Under a 1997 agreement designed to spur development of the oil sands, Suncor and Syncrude were subject to royalties that were 1 percent of gross revenue until project costs were recouped, then 25 percent of net revenue following payout.

Stelmach announced last year he would hike royalties in Canada's biggest oil and gas producing province by as much as $1.4 billion by 2010. The move drew the scorn of the energy companies, which warned they would take much of their spending elsewhere.

Knight said his department is still studying the "unintended consequences" of the royalty move, especially on some natural gas production, and will announce how he will deal with that in the coming weeks.

The agreement with Suncor was announced after markets closed. The company's shares were up 63 cents at $91.10 on the Toronto Stock Exchange.

Additional reporting by Scott Haggett; Editing by Rob Wilson

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