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In what the Globe and Mail described as a pointed
message to the local government, Laut said that munici-
pal taxes have become the fastest rising cost for Canadian
Natural, and that they must drop.
Taxes may sting particularly hard for Canadian
Natural, which has experienced a drawn-out legal back
and forth with the Regional Municipality of Wood Buffalo
over the assessed cost of the first phase of the Horizon
oilsands mine.
According to cost engineer Salvador Hernandez,
managing director of Verus Capital Assessments, all
oilsands producers have the opportunity to significant-
ly reduce the amount they pay in municipal taxes and
avoid lengthy court processes without any changes to
the system itself.
Hernandez says that adjusting the approach to mu-
nicipal tax reporting can provide hundreds of millions
in savings over the life of an oilsands project. But right
now, most companies either aren’t speaking the same
A better approach to
municipal payments
could move the needle
on project economics
By Deborah Jaremko
hen Canadian Natural Resources president
Steve Laut chastised a Fort McMurray Chamber
of Commerce audience earlier this year for the
rising cost of doing business in the oilsands—
notably predicting a “death spiral” in the absence of cost
reduction—service companies weren’t the only group to
get the stick.
JUNE 2015 | OILSANDSREVIEW.COM 23
COST CONTROL

when you start segregating the costs be-
tween assessable and non-assessable. And
then when construction finishes, you start
post-construction and you start commis-
sioning and training the operators and the
facility, that is also non-assessable. So the
big question is what construction includes.”
Hernandez says that Alberta has not
achieved the consistency desired when as-
sessing major industrial properties.
“This situation begs questions that ef-
fectively challenge the legislation, the indi-
viduals performing the assessment at the
municipalities and the teams inside the
company filing for property taxes.”
Hernandez adds that there is a know-
ledge gap in Alberta as most accountants
are trained in mass appraisal fundamentals
while the CCRG considers deeper considera-
tions for industrial projects.
cent of project costs. This would have oc-
curred if the CCRG adopted market value
principles instead of considering property
value on a cost-replacement basis. However,
these changes did not pan out, leaving the
previous legislation largely intact.
Hernandez says non-assessables
encompass several areas of project develop-
ment including cancellation charges, com-
missioning, pre-production and start-up,
mobile equipment, consumable materials,
spare equipment and design changes as well
as transportation and travel costs.
“The concept is divided into three main
components: pre-construction, construction
and post-construction. Anything that hap-
pens pre-construction, all of that is non-
assessable,” Hernandez explains.
“The fine line or the big question is
when construction begins, because that is
language as their assessors or they aren’t
starting the process until it’s too late.
It all comes down to which components
of a project are assessable for taxation and
which are not, all of which is dictated by the
Alberta Construction Cost Reporting Guide
(CCRG) 2005.
Larry Riep sat on the working committee
that developed the current version of CCRG.
Currently the chief assessor with Lacombe
County, Riep says that the CCRG offers sig-
nificant savings for industrial companies—if
they can prove they deserve them.
“It’s a reduction in the cost of the plant,
considered excluded construction costs,”
Riep explains.
“A typical large facility like the ones you
have in Fort McMurray could be looking at
somewhere between 20-30 percent of non-
assessable excluded costs. So on a billion-
dollar plant, there could be $300 million of
costs that would be excluded from the as-
sessment. If they are able to take advantage
of the CCRG that is about how much may be
removed from the assessment.”
Riep says that in the late 1990s, the
province changed the value standard of
most improvements from replacement cost
to market value. Changes were proposed to
Alberta’s municipal taxation legislation that
would have excluded costs to below 10 per
“On a billion-dollar plant, there could
be $300 million of costs that would
be excluded from the assessment.”
Early
funding
Advanced
commitment
Property tax
mitigation
program
optimal start
Appropriation
for expenditure
Assessor
meetings
CCRG data
driven
Municipal
notice
Final cost
rendition
Property
tax filing
Tax bills
EBITDA
Sustaining
projects
Business
planning
Concept
selection
Definition
optimization
Execution
Operations
handover
Life of
the asset
OPERATIONAL EXPENDITURECAPITAL EXPENDITURE
ALIGNING WITH ALBERTA'S INDUSTRIAL PROPERTY TAX PROGRAM
According to Verus Capital Assessments, this is the optimum timeline
for managing municipal property taxes for industrial projects in Alberta.
— Larry Riep, chief assessor, Lacombe County
Source: Verus Capital Assessments
24 OILSANDS REVIEW | JUNE 2015
COST CONTROL

Better management of property taxes
isn’t just meaningful for industrial project
owners like oilsands producers. Riep says it
also has benefits for Alberta municipalities.
“Where it becomes a value to us is if it
is documented properly, it is way easier to
find and you don’t spend a bunch of time
arguing. It can save on appeals,” he says.
“Some [companies] are very proactive
in working with you right from the very
beginning.”
Riep points to a current construction
project in Lacombe County with a capital
value of approximately $1 billion.
“We started working with them two
years ago,” he says. “At the beginning you
go through and you set out the ground rules
so that more than anything else they know
what they have to look for and what they
have to record and what documentation is
required to be provided to earn the benefit
they may be entitled to from the CCRG.”
Consider overtime as an example. Under
the CCRG, the premium portion of overtime
payments are considered as excluded costs.
But if a project owner hires a contractor
and is invoiced for an amount that does
not identify overtime, the owner may have
difficulty providing the documentation re-
quired to receive the deduction they are en-
titled too.
“If they don’t start tracking that the
required information at the beginning,
it may become very difficult for them to
obtain this information at the end of the
process,” Riep says. “It is important for
companies to indicate to sub-contractors
at the onset that these sorts of cost are
required to be tracked.”
Hernandez says that the goal is a more
streamlined system.
“That will have a significant impact on
Alberta because that will generate more
jobs and bring more companies and will
have a better return on investment for every
project that they do,” he says.
“There’s also the intangible good neigh-
bour kind of environment that you can cre-
ate. You have a neighbour that is going to be
with you for as long as you have that facility
and he is not going to be happy if you have
spent many years in court.”
The solution:
identification and tracking
BROUGHT TO YOU BY:
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JUNE 2015 | OILSANDSREVIEW.COM 25
COST CONTROL

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