Alberta's government is pressing ahead with plans to accept oil sands bitumen in place of royalty payments, as it looks to encourage the lucrative upgrading industry to stay within the province.

The provincial energy department is calling for submissions from companies interested in processing the sludgy oil sands bitumen into higher value synthetic crude oil and products or petrochemicals, according to a statement released Monday on the Alberta Energy website.

"The Alberta Government has assigned high priority to enhancing its economic returns from its oil sands resources," the statement said. "The Alberta Government is entitled to take its royalty share of bitumen production in lieu of cash payments...and intends to increase the value derived from bitumen royalty."

Submissions are due by October 17.

The move is part of last year's overhaul of the provincial oil and gas royalty system, when Alberta hiked its share of energy revenues by C$1.4 billion to take advantage of soaring oil and gas prices. At the time, the government indicated it could accept bitumen as part of royalty payments, which it would then sell to upgrading facilities in the province. The new royalty system kicks in next year.

Alberta is concerned that companies are increasingly choosing to process bitumen in the U.S., sending potential revenue and jobs south of the border. A number of oil sands producers, such as EnCana Corp. (ECA) and Husky Energy Inc. (HSE.T), have teamed up with U.S.-based refiners, preferring the lower cost option of retooling existing refineries. These concerns are likely exacerbated by TransCanada Corp.'s (TRP) proposed oil sands pipeline to the refining hub on the U.S. Gulf Coast.

Several oil sands developers intend to build upgraders in the province, but the vast, costly facilities are often the first to be put on hold when cost pressures bite. Among others, oil sands newcomer StatoilHydro ASA (STO) has pushed back the start of its upgrader by two years to 2016, while Canadian Natural Resources Ltd. (CNQ) has repeatedly announced delays and cost increases.

Royal Dutch Shell PLC (RDSA) is also considering scrapping plans to build a C$27 billion upgrader near Edmonton in favor of shipping the bitumen to be processed at its U.S. refineries.

Copyright (c) 2008 Dow Jones & Company, Inc.