The opposition to the Alberta Royalty Review Panel’s proposal to revise the province’s oil and natural gas royalty regime is growing in solidarity, with another producer announcing its intention to reduce spending next year in the province’s oil patch.

The outcry began last month when the review panel recommended that Alberta raise royalties on new and existing oil and gas projects (see Daily GPI, Sept. 20). Last Friday Canada’s largest gas producer, EnCana Corp., threatened to reduce its 2008 capital investment in Alberta by 30-40% or US$1 billion if the recommendations were adopted (see Daily GPI, Oct. 1).

On Tuesday Calgary-based Crescent Point Energy Trust followed suit, announcing that it will direct all of its 2008 capital budget to exploration and production activities in neighboring Saskatchewan. Crescent Point, which was created in 2003 through the reorganization of junior oil and gas producers Crescent Point Energy Ltd. and Tappit Resources Ltd., said it had concluded that the panel’s report is “flawed” and “its recommendations will negatively impact future oil and gas investment” in Alberta.

“Because of the uncertainty created by the report, Crescent Point has decided to direct all of its C$150 million 2008 preliminary capital development budget to the Province of Saskatchewan,” said CEO Scott Saxberg. “Increased royalty rates in Alberta would decrease the rates of return on projects in the province, making investments in other jurisdictions more attractive.”

The report, said Saxberg, did not consider “all of the factors, including costs and risk, that make up the full cycle of economics of drilling for conventional oil and natural gas in the maturing Western Canadian Sedimentary Basin. The recommendations of the report, if implemented as proposed, would make the full cycle economics of exploring and developing conventional oil and natural gas in Alberta unattractive in many cases.”

The Canadian Association of Oilwell Drilling Contractors (CAODC) noted that the province has a “significant resource in unconventional natural gas,” but “no one is drilling this gas today because, even before the proposed royalty increase it is uneconomic at today’s natural gas prices.”

Energy consultants and analysts also have lined up against the panel’s proposed changes.

Tristone Capital analysts said there were “attributes” in some of the recommendations, but overall, the panel’s conclusions “steer away from underlying principles,” and “failed to assess how Alberta’s royalty system compares with other regimes based on a comprehensive inter-jurisdictional competitive analysis, incorporating industry decision-making criteria such as rate of return, net present value and profitability ratio analysis.”

An independent analysis by Tristone “found the data used to be misleading, with some evaluation processes generating unsubstantiated conclusions, but above all, the recommendations in the report fail to account for key rate of return analyses.”

Under the proposal, Tristone estimates that government resource-related revenue will fall by C$2 billion by 2010, “as the disincentives created by the royalty regime will see Alberta lag in competitiveness relative to other jurisdictions and capital will flow out of the province.”

FirstEnergy analysts noted that Alberta royalties on conventional oil and natural gas are up 128% over the past seven years, “keeping pace with revenues, which are up 133%. During this time, the developers have continued to responsibly reinvest in resource development, adding 6.7 billion boe for the owners. The consequences of any change to the royalty regime would be decreased investment in the province.”

The Alberta government said it intends to listen to all sides before it responds to the royalty panel’s recommendations.

“The decision on the royalty report will affect Alberta and our energy sector for decades to come,” said Alberta Premier Ed Stelmach. “While the formal consultation is over, we have not stopped listening.” The province also plans to keep the communication channels open with the energy industry as part of the review process. Deputy Premier Ron Stevens is the lead liaison with the energy industry.

Those interested in commenting may visit www.alberta.ca.

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