The Syncrude Royalty Amending Agreement requires that bitumen be valued by a formula that references the value of bitumen based on a Canadian heavy oil reference price adjusted to reflect quality and location differences between Syncrude's bitumen and the Canadian reference price bitumen. In addition, the agreement provides that a minimum bitumen value, or "floor price", may be imposed in circumstances where Canadian heavy oil prices are temporarily suppressed relative to North American heavy oil prices.
Canadian Oil Sands' share of the royalties recognized for the period from January 1, 2009 to March 31, 2013 reflect management's best estimate of both reasonable quality and transportation deductions and adjustments to reflect the "floor price". However, the Syncrude owners and the Alberta government are disputing the basis for the quality, transportation and "floor price" adjustments. Under alternate assumptions, Canadian Oil Sands' share of Crown royalties for this period could be as much as $60 million (on an after-tax basis) more than the amounts recognized.
The Syncrude owners and the Alberta government continue to discuss these matters, but if such discussions do not result in an agreed upon solution, either party may seek judicial determination of the matter. The cumulative impact, if any, of such discussions or judicial determination, as applicable, would be recognized and impact both net income and cash flow from operations accordingly.
Development Expenses
Development expenses, previously referred to as non-production expenses, totalled $26 million and $24 million in the first quarters of 2013 and 2012, respectively. Development expenses consist primarily of expenditures relating to capital programs, which are expensed, such as pre-feasibility engineering, technical and support services, research, evaluation drilling and regulatory and stakeholder consultation expenditures. Development expenses can vary from period to period depending on the number of projects underway and the development stage of the projects.
Depreciation and Depletion Expense
Depreciation and depletion expense increased to $122 million in the first quarter of 2013 from $95 million in the comparative 2012 quarter, reflecting:
-- changes made to the estimated useful lives of certain assets; and-- new depreciation charges for assets related to the Syncrude Emissions Reduction (SER) project, which was determined to be substantially complete and available for use in the fourth quarter of 2012.
Net Finance Expense
Three Months Ended March 31($ millions) 2013 2012----------------------------------------------------------------------------Interest costs on long-term debt(1) $ 26 $ 21 Less capitalized interest on long-term debt (23) (20)----------------------------------------------------------------------------Interest expense on long-term debt $ 3 $ 1Interest expense on employee future benefits 4 5Accretion of asset retirement obligation 6 6----------------------------------------------------------------------------Net finance expense $ 13 $ 12--------------------------------------------------------------------------------------------------------------------------------------------------------(1) Interest costs on long-term debt are net of interest income of $5 million and $2 million for the three months ended March 31, 2013 and March 31, 2012, respectively.
