Review of Alberta Oil Sands Royalty

The Alberta government has announced that it plans to review Alberta’s Oil Sands Royalty regime to determine if the current regime applies the most appropriate royalty rate to oil sands production. Canadian Oil Sands cannot determine or speculate as to the potential impact of any changes to the royalty rate on its operations until the government provides information on its review findings. The Syncrude operation shifted to the higher royalty rate of 25% of net revenues from the minimum 1% of gross revenues in the second quarter of 2006.

Alberta’s current Oil Sands Royalty regime was instituted in 1997 and calculates royalties as 1% of gross revenues until a project reaches payout, after which point the rate rises to 25% of revenues less Syncrude operating, non-production and capital costs. The rates are tied to crude oil prices, such that higher prices accelerate recovery of costs and payout, after which, the higher rate is a cash sharing formula impacted by the project’s profitability.

The Trust believes the current regime strikes the right balance between the owners of the resource – the people of Alberta – and those risking capital to develop it. We hope that any review of oil sands royalty rates would seek to maintain a fair and stable fiscal regime that also recognizes the value of processing oil sands in the province. The success of Alberta’s oil sands is largely due to the historically stable and predictable fiscal regime that has been in place since 1997, which has encouraged investment by recognizing the unique challenges of the oil sands business. Oil sands projects are capital intensive and risky, requiring billions of dollars of upfront investment and very long lead times before they are capable of generating revenue and eventually a profit. Once these projects have recovered their costs, however, the regime provides Albertans with the opportunity to participate with a 25% share in the industry’s profits.

The Syncrude project is already providing this higher return to Albertans. Robust crude oil prices have increased revenues from the base plant and accelerated the payout period of the new Stage 3 expansion; as a result the Syncrude project began paying the higher royalty rate at roughly the same time as the expansion was completed. Based on Canadian Oil Sands’ assumptions in its January 29, 2007 Guidance Document, Syncrude is expected to pay Crown royalties of $675 million in 2007.