Trudeau, Lougheed Sign Agreement

A five year agreement an oil and gas prices and revenue sharing marking an end to the bitter dispute between the federal government and Alberta was signed Tuesday in Ottawa by Prime Minister TRUDEAU and Premier PETER LOUGHEED.

Industry reaction has so far been cautious. Spokesmen have called the pact "encouraging" but are waiting to assess the fine print of the agreement before endorsing the negotiated agreement.

Lougheed at a press conference Tuesday said the pact was a triumph for federalism and predicted the province will give the go ahead to the two proposed oil sands megaprojects within a few weeks. Meanwhile provincial energy minister MERV LEITCH said Alberta's cutbacks to protest the federal government's national energy program will be lifted "as soon as possible."

The agreement sets a series of price increases for old oil starting with a $2.50 a barrel increase on October 1, 1981 and "generous" near world prices for new oil, effective January 1, 1982, which will see an estimated wellhead price of $49.22 per barrel by July 1, 1982. New oil is defined as oil from pools initially discovered after December 31, 1980. It includes new conventional oil found in Alberta, synthetic oil, including existing production from the SUNCOR and SYNCRUDE plants, and new oil from Canada lands.

The new oil prices also include "incremental oil" recovered from pools under enhanced recovery other than waterflood schemes which began operation after December 31, 1980 and crude bitumen from experimental and nonintergrated oil sands projects operating after December 31, 1980.

As well, the federal government agreed to drop its tax on natural gas exports, however, a natural gas and gas liquids tax will continue to be applied to exports of propane and butane. The federal government also said because the old oil price structure will lead to excess profits, it will levy a special tax an incremental revenues from such oil. The tax will be 50% of production revenues, after deduction of Crown royalties associated with the higher prices.

The wellhead pricing schedule for old oil, new oil and natural gas from 1981 to December 31, 1986 when the agreement expires are contained in the following table:

The overall field price for conventional old oil will increase October 1, 1981 from $18.75 per barrel by $2.50 a barrel, by $2.25 a barrel on January 1, 1982, $2.25 per barrel on July 1, 1982 and by $4 per barrel thereafter every six month until the end of 1986.

The proviso under the whole agreement however is that old oil prices will not reach more than 75% of the world price, and prices for new oil will not go above 100% of the world price.

The agreement the price for any quality of conventional old oil must not exceed the new oil reference price for same quality oil. The quality of reference oil for the New Oil Reference Price will be 38 degrees API and 0.5% sulphur for oil other than synthetic oil, delivered at Montreal, and 32 degrees API and zero percentage sulphur for synthetic oil delivered at Montreal.

During the term of the agreement, natural gas destined for domestic markets east of Alberta will be priced at the Alberta border. The Alberta border price in effect on September 1, 1981 will be increased by 25 cents per MCF on February 1, 1982 and thereafter by another 25 cents every six months (or 50 cents a year) until 1986.

Alberta has also agreed to pay market development incentive payments to the federal government in line with the NEP'S goal of expanding gas markets in the eastern provinces These payments, beginning January 31, 1982 will be used by the federal government to help expansions of gas distribution systems in the east and sales promotion programs, but not to subsidize price cuts for natural gas.

Regarding the Petroleum and Gas Revenue Tax (PGRT), the federal government says it intends to set the PGRT rate at 16% effective January 1, 1982, however, there will also be a new 25% resource allowance deduction on oil and gas revenues subject to the PGRT.

According to the agreement, those firms with an interest in production who are denied the deduction for Crown royalties and provincial minerals tax will receive the entire 25% benefit, but those firm, with an interest in production whose tax liability is unaffected by the nondeductibility of Crown royalties or provincial minerals tax will not receive a resource allowance.

The rate of PGRT on the Alsands and Cold Lake projects will be reduced from 16% to 10% until the particular project achieves payout.

The federal government will also introduce an Incremental Oil Revenue Tax effective January 1, 1982 at a rate of 50% on incremental old oil revenues after deduction of Crown royalties. Incremental revenue is defined as the difference between the actual revenue received through an interest in production and the revenue which would have been received under the NEP price schedule. The incremental revenue will be excluded from income taxation, however the PGRT will be applied for incremental revenue.

The two governments also agreed, in order to make sure that the combined taxation and royalty burdens of both governments do not result in shut-in marginal oil production that discussions will be held, with other provinces as well, to determine if special measures are required for low producing wells.

Changes to the federal Income Tax Act were also announced including phasing out of earned depletion on Canada Lands: 33% in 1982, 20% in 1983, 10% in 1984 and zero thereafter.

The Alberta government also agreed during the tern of pact to not adjust or modify its current royalty and freehold tax system to generate more revenue for the Alberta government.

For Alsands and Cold Lake projects, the Alberta government will levy a gross production royalty phased in at a rate of 2% every 18 months, to a maximum level of 10% until payout of preproduction costs. Following payout, the royalty will be 30% of net operating profits minus capital costs in the year or the 1.0% gross royalty, whichever is greater.

Moreover, the Alberta government has agreed to provide a grant that will not be taxed by either government to Canadianowned or Canadian controlled companies to encourage small Canadian companies to participate in oil sands development. The grant will be commensurate with the size of the investment, with certain conditions attached.

Regarding the administration of the PETROLEUM INCENTIVES PROGRAM set up under the NEP, the federal government says it is willing to negotiate with any province to have their province takeover administration of the program.

Alberta will takeover administration of the PIP program within Alberta's borders. There will be no upper limit an Alberta's expenditures under the PIP program, and the provincial government can change or amend its own rules with respect to administration of the program.

However, the federal government will retain authority to change PIP rules which Alberta must administer in the following categories: the PIP incentive rate schedules, the COR rating, the definition of eligible applicants, and the definition of eligible costs.

The PIP program will be amended to exclude expenditures on integrated oil sands projects as qualifying for incentive grants.

At their press conference Tuesday, the leaders of both parties estimated the deal is worth an approximate $212.8 billion in revenues to Ottawa, Alberta and the petroleum industry over the next five years.

An estimate of the revenue share compared to the NEP proposal indicated the federal government will receive $14 billion more than in the NEP schedule, the industry will receive $10 billion more and Alberta will receive $8 billion more.

According to Lalonde, in percentage terms compared to the NEP, Ottawa's share will rise from 24% to 29%, Alberta's share will rise to 34% from 33%, and industry's share will drop from 43% to 33% aver the life of the agreement.

Lougheed said because of the pact industry will receive about 25% more cash flow due to the two-tier newand old pricing scheme, which represents an improvement in cash flow of at least $2 billion for each year of the agreement.

Copies of the agreement are available from the Premier's office in Calgary at 6207 Avenue S.W. on the Mezzanine floor of the J.J. Bowlen Building.