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Large machinery at the oil sands north of Fort McMurray, Alta. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)
Large machinery at the oil sands north of Fort McMurray, Alta. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)

Producers prepare for oil sands battle Add to ...

Alberta's bid to transform a fifth of its oil sands region into parks and recreation areas has set the stage for a costly and drawn-out compensation battle with more than a dozen energy companies whose leases the province wants to cancel.

A draft land protection plan released this week pits the province against some of its wealthiest corporate citizens, including major producers like Cenovus Energy Inc., Canadian Natural Resources Ltd., BP PLC and Imperial Oil Ltd. Each stands to see part of its land seized back as the province attempts to keep some of the oil sands green.

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In doing so, it has set up a battle between ecological and financial values, since the earth it wants to shield from development contains billions of barrels of lucrative oily bitumen. That has raised difficult questions about who should be paid for giving up land and resources - and how much. And the stakes behind those questions are potentially sizable, given legal precedents that show companies must be compensated for the value of the resources they are asked to give up - which, in this case, is a large trove of oil.

"These things are always difficult," said Robert Desbarats, an energy lawyer with Osler Hoskin & Harcourt LLP. "The government will say, 'We'll just give you your money back.' Companies will say, 'No, we should get the fair market value, and that's a lot more than we paid for it.' " Most of the land the province is seeking is not under active development. In fact, some was not expected to reach production for decades. But it still contains oil, and even companies that admit their land is marginal say they won't give it up for cheap - at least not without a fight. And compensation questions are so thorny they have helped to sink or curtail several high-profile conservation efforts by the province in past years, and history shows that wrangling over money can take many years to sort out.

The stakes are particularly high for Alberta, which is now grappling with multibillion-dollar deficits - and has yet to publicly estimate the cost of the protection effort, which it wants to formalize in 90 days after consulting with industry and the public.

Mel Knight, the Minister for Sustainable Resource Development, has said the province will look at giving companies back the money they paid for land rights and refunding their development costs, with interest.

The government has calculated scenarios with creating the protected areas that are both "significant" and very little sums of money, said Lloyd Snelgrove, Alberta's Finance and Enterprise Minister. He declined to provide further details. "We're a long ways away from starting to say what the compensation costs will be," he said in an interview on Wednesday. "Let's get the plan right first."

A series of legal precedents suggests the amount could be substantial. In 2005, the province agreed to compensate owners of natural gas for the value of the resource they lost when it ordered gas wells shut in - ironically, to better allow for oil sands production. The Supreme Court has also ruled, in a landmark 1985 case, that owners of resource rights must be compensated for the value of resources expropriated by governments, not simply given back the money they paid to acquire it.

With crude currently trading over $100 (U.S.) a barrel, potential compensation sums could be vast for a resource the size of the oil sands.

But settling on a value can be tremendously complicated. Much of the area Alberta wants to conserve is in the very early stages of development and little explored; indeed, few companies have any reserve calculations at all on the land. That means it's tough to determine how much oil it holds. And even if it holds billions of barrels - as one company, Sunshine Oilsands Ltd., has said - it's unclear how much of that can be technically and economically extracted. That makes determining it's worth incredibly difficult.

Worse, if land is to be protected, companies can't do more drilling to pin down its crude content.

"Trying to determine a value often involves working with very limited information," said Bruce Melville, a B.C. lawyer who specializes in expropriation.

In part for these reasons, previous land use efforts in Alberta, including a "special places" push a decade ago and an earlier "integrated resource planning process," have struggled to accomplish their goals, and have often had to abandon attempts to protect commercially important areas.

The issue is more complex this time, in part because several new pieces of Alberta legislation, passed this year, seek to limit the rights of companies to seek compensation.

And some believe that since Alberta is largely moving to protect less-developed areas, it should ease the pain of sorting things out. The proposed conservation areas cover land leased to some of Canada's largest oil and gas companies, but these holdings are minor compared to the rest of their operations, said Russell Brown, a law professor at the University of Alberta who specializes in compensation and land use.

"There are big players who are affected, but almost none of them are materially impacted," he said. "What surprised me about ... the plan is how little disruption this is actually going to cause."

Still, even those companies with marginal land said they intend to get paid back for what they're losing. Take Sveinung Svarte, the chief executive officer of Athabasca Oil Sands Corp., who said he would be "really surprised" if the land the province wants to take from his company is a good source of bitumen.

"That doesn't mean we won't want compensation," he said.

THE OIL SANDS

-About 1.3 million barrels of crude are produced every day in the oil sands, a number that is expected to more than double within the decade.

-The oil sands are the second-largest petroleum reserve in the world, second only to Saudi Arabia.

-Companies are expected to spend more than $14-billion in Alberta's oil sands this year.

-The Athabasca River is the main source of water for oil sands mining activities.

-The region is a breeding ground and staging areas for birds during migration and overwintering periods. The area is home to some species, such as the woodland caribou, that are at risk.

Companies affected by the proposal

Athabasca Oil Sands Corp. - about 1.5 per cent of total land holdings affected. Land was considered marginal.

Cenovus Energy Inc. - about 50,000 hectares in the southern part of the company's Borealis lease. The affected area is about 7 per cent of corporate oil sands holdings, and not in near-term development plans. But Alan Reid, the company's vice-president for regulatory affairs, said: "We're always concerned when we see an area that we consider might be prospective for resources that would have some kind of development constraints on it."

Devon Energy Corp. - no details yet on how much acreage, although company believes impact to be "minimal." Devon is worried, however, that oil sands land expropriation could lay the groundwork for similar moves elsewhere. "The concern is around what precedent does it set for the rest of the province?" said spokeswoman Nadine Barber.

Southern Pacific Resource Corp. - about 2,340 hectares affected in the company's Anzac block. Those are among the least prospective areas of the block. "The draft plan would allow for maximum resource recovery while protecting sensitive areas from surface disturbances," chief executive officer Byron Lutes said in a statement. However, the company said "adequate compensation for these lost leases remains a concern."

Sunshine Oilsands Ltd. - land affected is roughly eight townships, or roughly 75,000 hectares. Land contains an estimated 7.6 billion barrels of bitumen, although it's unclear how much is recoverable.

Alberta Oilsands Inc.

Antelope Land Services Ltd.

Bancroft Oil and Gas Ltd.

BP PLC

Canadian Natural Resources Ltd.

Cavalier Land Ltd.

ConocoPhillips

Harvest Operations Corp.

Imperial Oil Resources Ltd.

Koch Exploration Canada G/P Ltd.

Lende Investments Ltd.

MEG Energy Corp.

Pan Pacific Oils Ltd.

Perpetual Energy Operating Corp.

Ranger Land Services

Rocky Layman Energy Inc.

Scott Land & Lease Ltd.

Standard Land Co.

Statoil Canada Ltd.

Stone Petroleums Ltd.

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20%

Share of Alberta's oil sands reserves that is close enough to the surface to be mined.

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80%

Oil sands reserves that are more than 70 metres below the surface, and are extracted using wells and sources of heat such as steam.

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Below is in graphic overline

Alberta says its plan to designate new conservation regions in the oil sands is intended to balance economic growth against environmental health.

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Sources: Staff, Alberta, Energy Information Agency

 
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