Financial Statements and Notes - Canadian Oil Sands

d) Natural gas price contracts
Purchased energy costs represent a significant component of Canadian Oil Sands’ operating cost.
To assist in protecting cash flows associated with changes in natural gas prices, Canadian Oil Sands
entered into a forward purchase of 20,000 gigajoules (GJ) per day of natural gas at an average AECO
price of $3.44 per gigajoule in January 2002. This represented approximately 60 per cent of its share
of Syncrude’s consumption. The contracts began April 2002 and extended to March 2003. During
2003, natural gas hedging gains of $5.7 million were recorded as a reduction to operating expenses
(2002 – $5.2 million).
e) Credit risk
Crude oil sales revenue credit risk is managed by limiting the exposure to customers with a credit
rating below investment grade to a maximum of 25 per cent of Canadian Oil Sands consolidated
accounts receivable. The maximum exposure to any one customer is limited based on the credit rating
of that customer. Risk is further mitigated as sales revenue receivables are due and settled in the
month following the sale. The use of financial instruments involves a degree of credit risk which
Canadian Oil Sands manages through its credit policies and by selecting counterparties of high credit
quality. Canadian Oil Sands does not expect any counterparty to fail to meet its obligations.
18. CROWN ROYALTIES
The Alberta Crown Agreement created a Joint Venture (the Alberta Joint Venture) between the Province
of Alberta as lessor and the Syncrude participants as lessees. Its purpose was to annually establish,
using a deemed net profit concept, the basis on which Syncrude’s annual production is to be shared
by the lessor and each of the lessees.
Beginning in 2002, the Alberta Crown royalty agreement was replaced with Alberta’s generic Oil Sands
Royalty. Under this regime, the Crown royalty is calculated as the greater of one per cent of gross
revenue or 25 per cent of net revenue before hedging, after deducting applicable operating and capital
costs. In each of 2003 and 2002, the Crown royalty was calculated at one per cent of gross revenue.
As Syncrude is in a significant capital program, Canadian Oil Sands expects to pay only the minimum
one per cent royalty for the next few years. As at December 31, 2003, carry forward deductions for
royalty purposes were approximately $1.2 billion, $0.4 billion net to Canadian Oil Sands.
19. FUTURE RECLAMATION AND SITE RESTORATION COSTS
Canadian Oil Sands and each of the other owners of Syncrude are liable for their share of ongoing
environment obligations for the ultimate reclamation of the Syncrude Joint Venture on abandonment.
Canadian Oil Sands has agreed to deposit $0.1322 per barrel of SSB produced attributable to its
21.74 per cent Working Interest to mining reclamation trusts established for the purpose of funding
the operating subsidiaries’ share of environmental and reclamation obligations. Funding for the
remaining 13.75 per cent Working Interests owned by Canadian Oil Sands has been accrued and
deposited on production since the Working Interests were acquired, however, mining reclamation
trust accounts for the 13.75 per cent Working Interest did not exist prior to the acquisition by Canadian
Oil Sands. Including interest earned on contributions, the reclamation trusts have accumulated
$16.6 million to December 31, 2003 (2002 – $12.9 million).
Canadian Oil Sands Trust Annual Report 2003