EnCana Corp. threatened Friday to slash its 2008 capital investment in Alberta by 30-40%, or US$1 billion, if all of the recommendations contained in the Alberta Royalty Review Panel Report are adopted. Most of the cutbacks would affect the producer's natural gas activity.
Responding to recommendations issued last month by the provincial task force (see NGI, Sept. 24), Canada's largest gas independent said the royalty changes, if adopted in full, would negatively impact future investments and operations in Alberta and have a "widespread impact" on economic activity across the province. EnCana's comments followed arguments made in recent days by several of Canada's producers, including Canadian Natural Resources Ltd., TransCanada Corp. and Canadian Oil Sands Trust (see related story).
EnCana said the revamped royalty regime would force it to reduce next year's capital investment in Alberta well below the currently planned US$2.5-3 billion. Most of the reductions would be in its gas business "where the proposed royalty scheme makes those activities uneconomic or uncompetitive in its portfolio." The company said it would reallocate capital to investments outside Alberta in other parts of Canada and in the United States.
EnCana's gas exploration in Alberta is concentrated in the Bighorn play in the west-central part of the province. It also has coalbed methane and shallow gas operations in southern Alberta. In addition, EnCana is exploiting three key crude oil resource plays at Foster Creek, Christina Lake and Pelican Lake in northeast Alberta.
"If the Royalty Panel's recommendations are adopted in full, many of Alberta's new and emerging resource plays will simply not be economically viable," said CEO Randy Eresman. "These new plays would have formed the foundation for the future of Alberta's natural gas production. Even without that future gas production growth, under the recommended changes EnCana's royalties on Crown lands would effectively double, assuming current gas prices.
"We will have no choice but to slow down our Alberta-based activity and move investments to other areas in Canada and the U.S. that are more economically attractive. As a further consequence, Alberta natural gas production will continue to fall."
Eresman said, "We do not want this to happen. This does not need to happen. The consequences would be far reaching. We are open to changes to Alberta's royalties -- changes that reflect the economic realities of volatile commodity prices, higher costs and the appropriate risks and rewards of long-term capital investments. A royalty system can be developed that achieves Alberta's objectives without so severely damaging the province's future."
According to EnCana, the proposed changes would have immediate and long-term impacts on working Albertans.
"The magnitude of the expected capital reductions is the tip of the iceberg," it stated. "In the short term, these changes would mean extensive job losses across the industry. There will be fewer wells drilled, completed, pipelined, operated and serviced. There will be fewer hotel bookings, vehicle purchases, landowner lease payments, restaurant meals and lower property taxes in the areas where EnCana operates, and that is just about every corner of Alberta, from the smallest towns to the biggest cities. More importantly and over the long term, well paying, permanent jobs will not materialize across Alberta."
Eresman said the company "would greatly regret seeing these job opportunities evaporate. We are Albertans. We care about the people of Alberta and we hope we won't have to make these choices."
However, the CEO said that whether the changes are enacted or not, EnCana would thrive.
"As North America's largest natural gas producer, we have built an extensive and diverse portfolio of investment opportunities with the flexibility to strategically deploy capital," he said. "With a land base of approximately 27 million net acres onshore North America, our depth of inventory means that EnCana will continue to thrive. We will allocate capital across our portfolio in a disciplined and efficient manner. Most importantly, we have developed the expertise and technology required to unlock maximum value from our resource base. Our current projects and emerging opportunities in British Columbia, Saskatchewan, Colorado, Wyoming and Texas offer continued growth potential and strong returns for our shareholders."
Alberta "faces a great future, but only if we solve the economic challenges together, in a spirit of cooperation and collaboration," said Eresman. "We are confident that innovative, creative and pragmatic solutions can be found. That is our Alberta history. That is our Alberta tradition. We have found those solutions in the past and we believe we can do it again. We look forward to the opportunity."
Pierre Alvarez, president of the Canadian Association of Petroleum Producers, said his group wanted to be sure the federal government's panel understood the realities facing the oilpatch.
"We are committed to staying focused on the facts and working constructively with government throughout this process," said Alvarez. "Every Albertan wants their government to have all of the facts, the best possible analysis and all sides of the story in making this important decision."
However, Alvarez said the report promises a future that the oil and gas industry sees as unrealistic. It calls for significantly higher royalties and taxes, but suggests there will be no overall impact on industry investment, activity and growth. "The basic assumption is that the size of the 'pie' will not change. "Past experience, in this country and around the world, just doesn't support the panel's view."
Alvarez said the debate "is often painted as industry versus government or the public. The truth is that we are all in this together. One in six Albertans work for or alongside the industry. Industry revenues are reinvested in the economy, generating further prosperity and growth. We all know this issue is too important not to get right."
The difficulties in making money in Canada's gas fields make it a particularly trying time to revise the royalty regime in Alberta, which is Canada's most prolific gas province, said Ziff Energy Group CEO Paul Ziff. He noted that in Canada, "natural gas prices are very low, and remain in serious doldrums. The price discount of natural gas from its heating equivalent value to crude oil has steadily eroded gas value and has become worse over the past five years. The gas price is not following the oil price up; consequently, new Western Canada gas-directed activity has dropped sharply, which will lead to a larger drop in gas production next year, due to the high decline rate for Western Canada gas production."
Western Canadian operators also have faced a significant rise in service costs over the past 30 months, Ziff noted. His company's research "clearly indicates that Alberta gas economics for new gas activity are at a significant disadvantage compared to most U.S. gas basins. As a result, gas drillers have sharply reduced their once robust activity levels, resulting in many thousands of layoffs in the service industry across Alberta."
Energy consultant Wood Mackenzie's Derek Butter, head of corporate analysis, added that increasing annual provincial royalties by C$2 billion a year could reduce the commercial value of current and planned oilsands projects by US$26 billion at a long-term Brent price of US$50/bbl.
"Alberta is following in the footsteps of many other oil producing regions in its desire to extract a greater share of the economic rent from its natural resources during the current period of high commodity prices," said Butter. "However, the higher than expected level of new taxation will cause concern among oilsands industry players already struggling to cope with spiraling costs. This will further raise the already high, economic break-even price of these projects, significantly raising the level of risk on what are huge initial capital outlays."
Speaking in Fort McMurray, AB, on Friday, Alberta Premier Ed Stelmach said he expected and wanted feedback on the proposed changes to the royalty regime.
"This is going to require a very thoughtful pragmatic approach to a number of issues that Alberta is facing in this period of unprecedented growth," said Stelmach. "The demand for our resources will continue and will continue. With respect to the royalty review I made it very clear that we'll be taking time to review all of the recommendations. We're going to analyze them fully to make sure the assumptions, the recommendations made by the panel are correct."
Stelmach said his government would listen to industry's concerns and the general public before a final decision is made.
"The panel's recommendations were immediately made public...none of this back door stuff," he said. "All Albertans picked it up as soon as we received it...But at the end of the day, I made this very clear to everyone that those resources are not owned by any one company; they're not owned by the government. They're owned by all Albertans." He added, "I must be guided by that."
The government will provide a formal response to the panel's report by the middle of this month. To review information about the review, visit www.albertaroyaltyreview.ca/index.html.
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