Page 67 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.71, # 1, 2014, pp. 53-79

and tax purposes in the year of occurrence and there for affects total royalty revenue of the

government for that same year. Whereas, with LOC security, only a transaction cost of the

security is deducted as a current year expense which has immaterial impact on current year

royalty revenues of the government. No matter which form of security is chosen an Approval

Holder is required to disclose its financial securities in their entirety. The paper gives a detailed

analysis of such differences and derives possible ways and motives of royalty revenue

disruptions later in this section (Financial Securities).

Letter of Credits (LOC)

The majority of all securities in oil sands are provided through irrevocable letters of credit.

LOCs are financial instruments that allow the Director to collect cash from the bank writing the

instrument in case if the Approval Holder fails to meet its reclamation deadlines. There are

advantages and disadvantages of LOC for Approval Holders.

Table 5 Advantages and Disadvantages LOCs provided by Approval Holders.

Advantages to Approval Holders Disadvantages to Approval Holders

Inexpensive: – It costs a few percent of the full Cost of LOC, not the face amount of LOC is tax
amount stated in LOCs to create the financial and royalty deductible. Thus, more taxes paid
instrument. every year by Approval Holders.
Source: imputed calculation by author and approved by Alberta Environment 2013

As we could see from Table 5 letters of credit simply cost less to Approval Holders.

For example: $10 million LOC during Year1 would cost the Approval Holder $200K if

the bank charges two percent on the face amount of LOC. This is an advantage to the Approval

Holder. Because, it is not required to physically set aside an entire ($10 million) amount for the

LOC. Thus, only $200K is paid to the bank to create the instrument.

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