SU » Topics » Oil Sands Crown Royalties and Cash Income Taxes

This excerpt taken from the SU 6-K filed Apr 26, 2007.

Oil Sands Crown Royalties and Cash Income Taxes

For a description of the Alberta Crown royalty regimes in effect for Suncor Oil Sands operations, see page 29 of our 2006 Annual Report.

In the first quarter of 2007, we recorded a pretax royalty estimate of $157 million ($110 million after tax) compared to $285 million ($182 million after tax) for the first quarter of 2006. We estimate 2007 annualized Crown royalties to be approximately $665 million ($465 million after tax) based on three months of actual results and the balance of the year estimated on 2007 forward crude pricing of US$63.14 per barrel as at March 31, 2007; current forecasts of production, capital and operating costs for the remainder of 2007; and a Cdn$/US$ exchange rate of $0.87. Accordingly, actual results may differ, and these differences may be material. Alberta Crown royalties payable in 2007 are highly sensitive to, among other factors, changes in crude oil and natural gas pricing, foreign exchange rates, the valuation of bitumen, and total capital and operating costs for each project.

The following table sets forth our estimates of royalties in the years 2008 through 2012, and certain assumptions on which we have based our estimates.

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This excerpt taken from the SU 6-K filed Aug 3, 2006.

Oil Sands Crown Royalties and Cash Income Taxes

For a description of the Alberta Crown royalty regimes in effect for Suncor Oil Sands operations, see Note 10 to the interim financial statements or page 27 of our 2005 Annual Report.

In the second quarter of 2006 we recorded a pretax royalty estimate of $278 million ($184 million after tax) compared to $94 million ($57 million after tax) for the second quarter of 2005. We estimate 2006 annualized oil sand royalties to be approximately $1.0 billion ($675 million after tax), compared to $500 million ($305 million after tax) in 2005 based on six months of actual results including the final $385 million in business interruption insurance proceeds, basing the balance of the year estimate on 2006 forward crude oil pricing of US$75.21 as at June 30, 2006, current forecasts of production, capital and operating costs for the remainder of 2006, a Canadian/US foreign exchange rate of $0.90, and no further receipts of property loss insurance proceeds other than those recorded to date. Accordingly, actual royalties may be materially different. Royalties payable in 2006 are highly sensitive to, among other factors, changes in crude oil and natural gas pricing, timing of the receipt of property damage insurance proceeds, foreign exchange rates and total capital and operating costs for each project. The following table sets forth our estimates of royalties in the years 2006 through 2012, and certain assumptions upon which we have based our estimates.

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This excerpt taken from the SU 6-K filed May 4, 2006.

Oil Sands Crown Royalties and Cash Income Taxes

 

For a description of the Alberta Crown royalty regimes in effect for Suncor Oil Sands operations, see page 27 of our Annual Report.

 

For the first three months of 2006 we recorded a pretax royalty estimate of $285 million ($182 million after tax) compared to $87 million ($53 million after tax) for the first three months of 2005. We estimate 2006 annualized Crown Royalties to be approximately $950 million ($608 million after tax) based on three months of actual results including the final $385 million in business interruption insurance proceeds, basing the balance of the year estimate on 2006 forward crude oil pricing of US$69.02 as at March 31, 2006,

current forecasts of production, capital and operating costs for the remainder of 2006, a Canadian/US foreign exchange rate of $0.88, and no further receipts of property loss insurance proceeds other than those recorded to date. Accordingly, actual results will differ, and these differences may be material. Royalties payable in 2006 are highly sensitive to, among other factors, changes in crude oil and natural gas pricing, timing of the receipt of property damage insurance proceeds, foreign exchange rates and total capital and operating costs for each project. The following table sets forth our estimates of royalties and cash tax expense in the years 2006 through 2012, and certain assumptions on which we have based our estimates.

 

This excerpt taken from the SU 6-K filed Oct 28, 2005.

Oil Sands Crown Royalties and Cash Income Taxes

 

Crown royalties in effect for Oil Sands operations require payments to the Government of Alberta, based on annual gross revenues less related transportation costs (R), less allowable costs (C), including the deduction of certain capital expenditures (the 25% R-C royalty) for each project, subject to a minimum payment of 1% of R. In April 2004, the Alberta government confirmed it would modify our royalty treatment because it does not recognize the Firebag in-situ facility as an expansion to our existing Oil Sands Project. Accordingly, for Alberta Crown royalty purposes, our oil sands operations are considered two separate projects: base oil sands mining and associated upgrading operations with royalties based on upgraded product values and the current Firebag in-situ project with royalties based on bitumen values. Alberta Oil Sands Crown royalties may be subject to change as policies arising from the Government’s position are finalized and audits of 2004 and prior years are completed. Changes to the estimated amounts previously recorded will be reflected in our financial statements on a prospective basis and may be significant.

 

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Oil Sands third quarter pretax Alberta Crown royalty estimate of $136 million ($88 million after tax) was based on:

 

                  average 2005 crude oil pricing of approximately US$58.85 WTI per barrel (based on an average price of US$55.40 WTI per barrel for the first nine months of 2005, as well as 2005 forward crude oil pricing at September 30, 2005 of US$69.60 per barrel for the remainder of the year);

 

                  current forecasts of capital and operating costs for the remainder of 2005;

 

                  an average annual Cdn$/US$ exchange rate of $0.83;

 

                  business interruption insurance proceeds of $213 million recorded in the third quarter and $410 million for the first nine months of the year, which are considered to be R for the purposes of the calculation of Alberta Crown royalties.

 

Using these assumptions, we estimate 2005 annualized pretax royalties to be approximately $546 million ($349 million after tax), compared to $407 million ($260 million after tax) in 2004. The increase from our estimate in the second quarter of $500 million is due mainly to higher commodity price assumptions and the receipt of additional BI insurance proceeds.

 

Alberta Crown royalties payable in 2005 and subsequent years continue to be highly sensitive to, among other factors, changes in crude oil and natural gas pricing, foreign exchange rates, and total capital and operating costs for each project. In addition, 2004 was a transition year for Oil Sands as the remaining amount of prior years’ allowable costs carried forward of approximately $600 million were claimed in 2004 to reduce our 2004 Alberta Crown royalty obligation. No such carry forward of allowable costs exists for 2005 and subsequent years.

 

Assuming anticipated levels of operating expenses and capital expenditures for each project remain relatively constant, variability in expected Oil Sands Crown royalty expense is primarily a function of changes in expected annual Oil Sands revenue. Absent the impact of the January 4, 2005 fire, we expect Alberta Oil Sands Crown royalty expense for the period 2005 to 2007 would range from approximately 12% to 14% of total Oil Sands revenue based on WTI prices of US$40 to US$50 per barrel respectively. For subsequent years, this percentage range may decline as anticipated new in-situ production attracts royalties based on bitumen values. This royalty percentage range is based on the following assumptions: a natural gas price of US$6.25 per thousand cubic feet (mcf) at Henry Hub; a light/heavy oil differential to the U.S. Gulf Coast of US$9 per barrel, and a Cdn$/US$ exchange rate of $0.80.

 

Alberta Oil Sands Crown royalty expense in 2005 and 2006 may be significantly impacted by the amount and timing of the recognition of business interruption insurance proceeds. Accordingly, the range of annualized royalty expense as a percentage of revenues may differ from that stated above, and these differences may be material.

 

Based on our current long-term planning assumptions, the 25% R-C royalty would continue to apply to our existing Oil Sands base operations in future years and the 1% minimum royalty would apply to our Firebag Project until the next decade.

 

During the third quarter of 2005, we reached an agreement with the Government of Alberta on the terms and conditions of the company’s option to transition in 2009 to the generic bitumen-based royalty. The option to move to a bitumen based royalty effective January 1, 2009 was initially granted by the government in 1997 but was subject to the finalization of these terms and conditions. Should we elect to transfer to the bitumen-based royalty, future upgrading operations would not be included in the calculation of royalty expense. We would pay a royalty based on 25% of bitumen revenues, minus the amended definition of allowable costs, which will exclude upgrading costs. We have until late 2008 to decide if we will move to the generic bitumen-based royalty. This agreement does not impact the Alberta government’s position on the current royalty treatment of Firebag, or our related statement of claim filed against the Crown.

 

The timing of when the Oil Sands operations will be fully cash taxable is highly dependent on crude oil commodity prices and capital invested. At WTI prices between US$34 per barrel and US$50 per barrel, an average annual Cdn$/US$ foreign exchange rate of $0.80, future investment plans and certain other assumptions, we do not believe we will be fully cash taxable until the next decade. At sustained forward prices, based on the assumptions stated above, we anticipate that Oil Sands and Natural Gas operations will be partially cash taxable commencing in 2009 at WTI prices of US$34 per barrel, and in 2007 at WTI prices of US$40 per barrel to US$50 per barrel, until the next decade, at which point they are expected to become fully cash taxable. However, in any particular year, our Oil Sands and Natural Gas operations may be subject to some cash income tax due to the sensitivity to crude oil and natural gas commodity price volatility and the timing of recognition of capital expenditures for tax purposes.

 

The information in the preceding paragraphs under “Oil Sands Crown Royalties and Cash Income Taxes” incorporates operating and capital cost assumptions included in our current budget and long-range plan, and is not an estimate, forecast or prediction of actual future events or circumstances.

 

 

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This excerpt taken from the SU 6-K filed Jul 27, 2005.

Oil Sands Crown Royalties and Cash Income Taxes

 

Crown royalties in effect for Oil Sands operations require payments to the Government of Alberta, based on annual gross revenues less related transportation costs (R) less allowable costs (C), including the deduction of certain capital expenditures (the 25% R-C royalty) for each project, subject to a minimum payment of 1% of R. In April 2004, the Alberta government confirmed it would modify our royalty treatment because it does not recognize the Firebag in-situ facility as an expansion to our existing Oil Sands project. Accordingly, for Alberta Crown royalty purposes, our oil sands operations are considered two separate projects: base oil sands mining and associated upgrading operations with royalties based on upgraded product values and the current Firebag in-situ project with royalties based on bitumen values. Alberta Oil Sands Crown royalties may be subject to change as policies arising from the Government’s position are finalized and audits of 2004 and prior years are completed.

 

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Changes to the estimated amounts previously recorded will be reflected in our financial statements on a prospective basis and may be significant.

 

Oil Sands second quarter pretax Alberta Crown royalty estimate of $94 million ($57 million after tax) was based on:

 

      average 2005 crude oil pricing of approximately US$55.00 WTI per barrel (based on an average price of US$51.50 WTI per barrel for the first six months of 2005, as well as 2005 forward crude oil pricing at June 30, 2005 of US$58.50 per barrel for the remainder of the year);

 

      current forecasts of capital and operating costs for the remainder of 2005;

 

      an average annual Cdn$/US$ exchange rate of $0.81;

 

      business interruption insurance proceeds of $124 million recorded in the second quarter and $197 million for the first half of the year, which are considered to be R for the purposes of the calculation of Alberta Crown royalties.

 

Using these assumptions, we estimate 2005 annualized pretax royalties to be approximately $500 million ($305 million after tax), compared to $407 million ($260 million after tax) in 2004. The increase from our $450 million estimate in the first quarter is due mainly to higher commodity price assumptions and the receipt of additional BI insurance proceeds.

 

Alberta Crown royalties payable in 2005 and subsequent years continue to be highly sensitive to, among other factors, changes in crude oil and natural gas pricing, foreign exchange rates, and total capital and operating costs for each Project. In addition, 2004 was a transition year for Oil Sands as the remaining amount of prior years’ allowable costs carried forward of approximately $600 million were claimed in 2004 to reduce our 2004 Alberta Crown royalty obligation. No such carry forward of allowable costs exists for 2005 and subsequent years.

 

Assuming anticipated levels of operating expenses and capital expenditures for each project remain relatively constant, variability in expected Oil Sands Crown royalty expense is primarily a function of changes in expected annual Oil Sands revenue. Absent the impact of the January 4, 2005 fire, we expect that Alberta Oil Sands Crown royalty expense for the period 2005 to 2007 would range from approximately 12% to 14% of total Oil Sands Revenue based on WTI prices of US$40 to US$50 per barrel respectively. For subsequent years, this percentage range may decline as anticipated new in-situ production attracts royalties based on bitumen values. This royalty percentage range is based on the following assumptions: a natural gas price of US$6.25 per thousand cubic feet (mcf) at Henry Hub; a light/heavy oil differential to the U.S. Gulf Coast of US$9 per barrel, and a Cdn$/US$ exchange rate of $0.80.

 

Alberta Oil Sands Crown royalty expense in 2005 and 2006 may be significantly impacted by the amount and timing of the recognition of the business interruption insurance proceeds. Accordingly, the range of annualized royalty expense as a percentage of revenues may differ from that stated above, and these differences may be material.

 

Based on our current long-term planning assumptions, the 25% R-C royalty would continue to apply to our existing Oil Sands base operations in future years and the 1% minimum royalty would apply to our Firebag Project until the next decade. We continue to discuss with the government the terms of our option to transition our base operations to the generic bitumen-based royalty regime in 2009. After 2009, the royalty on our base operations would be based on bitumen value if we exercise our option to transition to the Province of Alberta’s generic regime for oil sands royalties. In the event that we exercise this option, future upgrading operations would not be included for Oil Sands Crown royalty purposes.

 

The timing of when the Oil Sands operations will be fully cash taxable is highly dependent on crude oil commodity prices and capital invested. At WTI prices between US$34 per barrel and US$50 per barrel, an average annual Cdn$/US$ foreign exchange rate of $0.80, future investment plans and certain other assumptions, we do not believe we will be fully cash taxable until the next decade. At sustained forward prices, based on the assumptions stated above, we anticipate that Oil Sands and Natural Gas operations will be partially cash taxable commencing in 2009 at WTI prices of US$34 per barrel, and in 2007 at WTI prices of US$40 per barrel to US$50 per barrel, until the next decade, at which point they are expected to become fully cash taxable. However, in any particular year, our Oil Sands and Natural Gas operations may be subject to some cash income tax due to the sensitivity to crude oil and natural gas commodity price volatility and the timing of recognition of capital expenditures for tax purposes.

 

The information in the preceding paragraphs under “Oil Sands Crown Royalties and Cash Income Taxes” incorporates operating and capital cost assumptions included in our current budget and long-range plan, and is not an estimate, forecast or prediction of actual future events or circumstances.

 

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This excerpt taken from the SU 6-K filed Apr 29, 2005.

Oil Sands Crown Royalties and Cash Income Taxes

 

Crown royalties in effect for Oil Sands operations require payments to the Government of Alberta, based on annual gross revenues less related transportation costs (R) less allowable costs (C), including the deduction of certain capital expenditures (the 25% R-C royalty) for each project, subject to a minimum payment of 1% of R. In April 2004, the Alberta government confirmed it would modify our royalty treatment because it does not recognize our Firebag in-situ facility as an expansion to our existing Oil Sands project. Accordingly, for Alberta Crown royalty purposes, our oil sands operations are considered two separate projects: base oil sands mining and associated upgrading operations with royalties based on upgraded product values and the current Firebag in-situ project with royalties based on bitumen values. Alberta Oil Sands Crown royalties may be subject to change as policies arising from the Government’s position are finalized and audits of 2004 and prior years are completed. Changes to the estimated amounts previously recorded will be reflected in our financial statements on a prospective basis and may be significant.

 

Oil Sands first quarter pretax Alberta Crown royalty estimate of $87 million ($53 million after tax) was based on:

 

                  average 2005 crude oil pricing of approximately US$54.95 WTI per barrel (based on a average price of US$49.85 WTI per barrel for the first three months of 2005, as well as 2005 forward crude oil pricing at March 31, 2005 of US$56.65 per barrel for the remainder of the year).

 

•     current forecasts of capital and operating costs for the remainder of 2005.

 

•     an average annual Cdn$/US$ exchange rate of $0.82.

 

•     the receipt of $73 million of business interruption insurance proceeds on April 22, 2005. Business interruption proceeds are considered to be R for the purposes of the calculation of Alberta Crown royalties. However, they are only included in the estimate when unconditionally settled.

 

Using these assumptions, we estimate 2005 annualized pretax royalties to be approximately $450 million ($280 million after tax), compared to $407 million ($260 million after tax) in 2004.

 

Alberta Crown royalties payable in 2005 and subsequent years continue to be highly sensitive to, among other factors, changes in crude oil and natural gas pricing, foreign exchange rates, and total capital and operating costs for each Project. In addition, 2004 was a transition year for Oil Sands as the remaining amount of prior years’ allowable costs carried forward of approximately $600 million were claimed in 2004 to reduce our 2004 Alberta Crown royalty obligation. No such carry forward of allowed costs exists for 2005 and subsequent years.

 

Assuming anticipated levels of operating expenses and capital expenditures for each project remain relatively constant, variability in expected Oil Sands Crown royalty expense is primarily a function of changes in expected annual Oil Sands revenue. Absent the impact of the January 4, 2005 fire, we expect that Alberta Oil Sands Crown royalty expense for the period 2005 to 2007 would range from approximately 12% to 14% of total Oil Sands Revenue based on WTI prices of US$40 per barrel to US$50 per barrel respectively. For subsequent years, this percentage range may decline as anticipated new in-situ production attracts royalties based on bitumen values. This royalty percentage range is based on the following assumptions: a natural gas price of US$6.25 per thousand cubic feet (mcf) at Henry Hub; a light/heavy oil differential to the U.S. Gulf Coast of US$9 per barrel, and a Cdn$/US$ exchange rate of $0.80.

 

Alberta Oil Sands Crown royalty expense in 2005 and 2006 may be significantly impacted by the amount and timing of the recognition of the business interruption insurance proceeds. Accordingly, the range of annualized royalty expense as a percentage of revenues may differ from that stated above, and these differences may be material.

 

Based on our current long-term planning assumptions, the 25% R-C royalty would continue to apply to our existing Oil Sands base operations in future years and the 1% minimum royalty would apply to our Firebag Project until the next decade. We continue to discuss the terms of our option to transition to the generic bitumen-based royalty regime in 2009. After 2009, the royalty would be based on bitumen value if we exercise our option to transition to the Province of Alberta’s generic regime for oil sands royalties. In the event that we exercise this option, future upgrading operations would not be included for Oil Sands Crown royalty purposes.

 

The timing of when the Oil Sands operations will be fully cash taxable is highly dependent on crude oil commodity prices and capital invested. At WTI prices between US$34 per barrel and US$50 per barrel, an average annual Cdn$/US$ foreign exchange rate of $0.80, future investment plans and certain other assumptions, we do not believe we will be fully cash taxable until the next

 

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decade. However, in any particular year, our Oil Sands and Natural Gas operations may be subject to some cash income tax due to the sensitivity to crude oil and natural gas commodity price volatility and the timing of recognition of capital expenditures for tax purposes. At sustained forward prices, based on the assumptions stated above, we anticipate that Oil Sands and Natural Gas operations will be partially cash taxable commencing in 2009 at WTI prices of US$34 per barrel, and in 2007 at WTI prices of US$40 per barrel to US$50 per barrel, until the next decade, at which point they are expected to become fully cash taxable.

 

The information in the preceding paragraphs under “Oil Sands Crown Royalties and Cash Income Taxes” incorporates operating and capital cost assumptions included in our current budget and long-range plan, and is not an estimate, forecast or prediction of actual future events or circumstances.

 

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