The lowest royalities in the world are just not good enough! Let them know at the vote!

ALBERTA ENERGY
Office of the Minister
Responsible for Alberta Energy and Utilities Board
August 19, 2004
07776-06 PIC ODD
John Clark
14815 - 123 Avenue Edmonton, Alberta T5L 2Y7

Dear Mr. Clark:
I have received your letter dated July 18, 2004, and follow-up message through Alberta Connects dated July 22, 2004, regarding oil royalties and production in Alberta.

Alberta's royalty regimes (including oil sands, conventional light and heavy oil, and natural gas) are designed to maximize the benefits of the resource for all Albertans, while reflecting the realities of producing the resource. However, it is important to note that royalty systems vary widely according to the nature of the resource and other considerations such as taxation exemptions, state ownership, and so forth. For example, jurisdictions with offshore resources such as Norway and Alaska face a fundamentally different set of cost and production conditions from onshore jurisdictions such as Alberta. In other words, the average Alaskan oil well that produces 600-700 barrels per day (bpd) will operate under a very different royalty regime compared to the average Alberta oil well that produces less than 30 bpd.

Due to these variations, straight-across comparisons of royalty rates, such as you attempt in your letter, are not very helpful. Instead, many factors must be carefully considered when comparing different royalty regimes. In 2001, a study conducted by Van Meurs & Associates concluded that Alberta's royalty system ranks in the toughest third of over 300 systems examined worldwide. If you wish to purchase a copy of that study, you can reach them through their Web- site at: http:,/,/wv-x;-.vanmeurs.org. For a more local perspective, on my department's Web site, you can find a copy of Oil and Gas Fiscal Regimes of the lYlestern Canadian Provinces and Territories at http://www.energy.gov.ab.ca/com/
Room/Public+Reference/Publications/Publications.htm.
Alberta's oil sands are a resource of incredible magnitude. The 174 billion barrels of Alberta's estimated oil sands reserves is exceeded only by Saudi Arabia's national reserves. However, the magnitude of capital investment required to develop this resource is also immense. Our oil sands royalty regime has been very successful in attracting the necessary investment required. As of July 2004, the department of Economic Development reports there are 69 major oil sands, oil and natural gas projects in Alberta, valued at $2 million or greater, that are planned, underway, or have recently been completed with a total value worth nearly $62 billion.

404 Legislature Building,
Edmonton, Alberta, Canada T5K 2B6
Telephone 780/427-3740,
Fax 780/422-0195
www.energy.gov.ab.ca

However, oil sands production also involves some of the most capital-intensive projects in the world, requiring hundreds of millions or even billions of dollars of capital investment before a single barrel of oil or bitumen is extracted. As I indicated in my July 6, 2004, letter, these unique circumstances led us to introduce a generic royalty regime for oil sands, based on recommendations from a joint industry /government national task force. As a result, the revenue-less-cost calculation was introduced to formulate oil sands royalties.

The previously-provided information regarding the number of companies in pre- and post-payout status as well as the payments received in the 2003 production year is as specific as possible. The Department of Energy cannot divulge company-specific information on royalty payments for the current fiscal year. Such information is kept confidential (as are personal and corporate income tax information). Province-wide projections for royalty revenues based on forecast production and price of oil and natural gas is publicly available in the annual Budget and is updated quarterly. The First QuarLer Update will be issued within the month and will be available, along with all budget documents on-line at: w-ww.finance.gov.ab.ca.

The information provided electronically to you by my department on July 22, 2004, clearly shows that Albertans are receiving considerable benefits now (over $7.8 billion in royalties and rights fees in 2003/04), benefits that will be even more substantial in the years and decades to come. After all, as you have pointed out, it is part of our responsibility to plan for the long-term benefit of this province.

With regard to your questions on electricity generation and exports, as I have previously indicated, Alberta' Independent System Operator (ISO) is responsible for the operation and planning of Alberta's power system, including interconnections with British Columbia and Saskatchewan. Information regarding generators operating in that market and prices is available through the ISO's Web site at: http://www.aeso.ca/. Alberta does not have a dedicated `export grid'. Alberta producers can export power into other markets at times when Alberta customers do not need that power.

Yours truly,

Murray Smith, MLA