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Tuesday, October 16, 2007

Oil Sands Project Cost Double and CAPP Accuses the Royalty Review Panel of Using "Incorrect Costs!"

I have done a quick read of the CAPP Technical Review Executive Summary of the “Our Fair Share” Royalty Review Report. CAPP is a very professional and respected organization with expertise available in it and to it to do such a Technical Review of the “Our Fair Share” report. I, on the other hand, am just a layman, and have not yet read the full report. However, I do find some representations in the Executive Summary curious.

I don’t know on what basis they say “Flawed Data” and that “The Panel did not take into consideration all of the data made available to them through the review process.” How could they know that, even if it were true? How do they know what was available to the Review Panel and what was not considered? We need a bit more evidence of this allegation, and it may be provided I the body o f the Review. I will definitely be looking for it.

The Panel based their recommendations on “severely understated industry costs.” The accusation is they (the Panel) used as range of between $4 – 6 Billion for a typical oil sands project. CAPP claims, and rightfully so, that such projects are ending up costing between $10 – 11 Billion. However CAPP omits the fact that all of those costs are totally recoverable by the industry during the 1% royalty rate until full project recoupment. In fact this 1% royalty rate until all project productions costs are recovered means less rigour is put on management to review and reconsider a project when costs are doubling as would be the case in a normal business model.

At record oil prices many projects have fully recovered these excessive project cost overruns in as little as 4 years. In any event, it is Albertans who are actually paying for these extreme project cost overages by virtue of our deferred royalties. So why is industry taking issue with this a saying the Panel is making a mistake of using “incorrect costs?”

I am inclined to have such projects that will do not meet presented budget targets in the original EUB process for approval go back to the EUB to show why their original project budget was so inaccurate. It is Albertans, after all, who are paying for these additional costs because of the 1% royalty rate until all such project costs are recovered. Albertans get no say in how much a company decides to pay or overpay in the end, once the proponents have an EUB project approval. That makes little sense.

Why don’t we require such projects to do a study and hold a further hearing to satisfy the EUB on what the cumulative impacts and secondary consequences are from such cost overruns? What do they do to the availability and increased costs of trades, supplies, equipment and materials? What impact will such excessive project overruns have on the costs of other necessary projects like schools, roads and hospitals who have to compete on price with energy companies?

Perhaps a project that is so inaccurately budgeted should have to justify the additional costs and perhaps even have to adjust the timing of the project so they don’t skew the labour and construction costs for other sectors. The astonishing cost escalation of the 23rd Street Overpass in Edmonton to some $250M in less than a year is a case in point on how this behaviour affects other sectors. Property taxes will also have to go up in Edmonton to pay for this inflated overpass project costs. This is because of the increases caused by competition with energy projects for everything from labour, to supplies, equipment and materials.

So the energy projects can blithely pay whatever they wish so long as oil prices stay high and Albertans eventually pay such additional project costs by our deferred royalty regime. The taxpayer gets it in the ear again by increased taxes or borrowing costs for much needed public infrastructure or the local government end up deferring those other very necessary projects hoping prices will come down.

And in the face of this the Technical Review accuses the Panel of using “Incorrect Costs?” Ironic isn’t it!