Representatives of some of Canada's largest investor groups met privately with Alberta officials on Friday to voice concerns about the proposed changes to the province's oil and natural gas royalty regime. Meanwhile, ConocoPhillips joined the growing number of dissenters and said it may cut its Canadian investments next year.
Polls indicate that Albertans favor the recommended changes to the province's oil and gas taxing scheme (see related stories), which was issued in a report last month by the six-member Alberta Royalty Review Panel (see NGI, Sept. 24). However, almost across the board, Alberta-invested producers have condemned the proposals, and some have threatened to significantly reduce oil and gas investments in the coming year if they are enacted.
EnCana Corp. said Sept. 28 it would cut US$1 billion from its capital budget for Alberta in 2008 (see NGI, Oct. 1), and in the past few days, Petro-Canada Inc. and the former CEO of Talisman Energy Inc. also indicated their companies also would reduce spending.
Conoco, which has partnered with EnCana in an oilsands venture, stated in a letter to provincial authorities that if the measures are implemented they "will at best slow and at worst eliminate investment. Accordingly, we believe Albertans will not realize the incremental C$2 billion of royalties sought by the report as they will end up with a larger piece of an increasingly smaller pie." Conoco also said the natural gas side of the business already is suffering from a major slowdown. If the recommended changes are made, the producer said about 37,500 direct field workers would be impacted.
Albertans "should rightly expect royalty income to the province to increase as oil and gas prices rise," Petro-Canada stated in a letter. "But those royalty increases must be balanced against investment and job creation in the industry to maintain the prosperity that all Albertans want to enjoy." The royalty revisions "will not achieve that balance," and if implemented, "would seriously impair investment in the province."
The province's oil and gas industry competitiveness "is not judged upon royalty rates...but on investment returns," Petro-Canada noted. "Those returns are impacted by the higher costs, smaller finds and lower well rates in Western Canada's mature basin."
The report's conclusion that 82% of natural gas wells will pay lower royalty rates without the revisions is misleading, said Petro-Canada. "Almost all wells will pay higher royalties at current prices." Higher royalty rates, it said, would only add to the more than 30% decline in drilling activity and corresponding job losses already experienced this year.
"We are reinvesting a good portion of the money we make back into Alberta projects -- more than C$2 billion this year," said Petro-Canada CEO Ron Brenneman. "This investment creates jobs and spin-off benefits in major centers, like Calgary and Edmonton, but also in rural communities around the province. We want to continue to invest here, so it's important that we find a solution that works for everyone."
Jim Buckee, who was CEO of gas-directed Talisman for 14 years until his retirement this year, said the debate overlooked important points. He also said Talisman likely would cut its investments in Alberta by around C$500 million next year if the panel's recommendations are approved.
"World oil prices may be at $80 per barrel...but we need to distinguish between oil and natural gas," Buckee said in an open letter to Alberta Premier Ed Stelmach. "The vast majority of conventional drilling in Alberta is for natural gas and the price of domestic gas is around $5 per gigajoule, or $30/boe. The government takes its share from revenues, not from profits, which effectively lowers Alberta natural gas prices by an additional 20%.
In the Western Canada Sedimentary Basin, said Buckee, "new gas is being found in smaller quantities or in deep, technically difficult plays. Industry finding and development costs are running around $20/boe and operating costs are near $10/boe. Producing natural gas at a cost of $30 in a $30 price environment doesn't leave much pie to share. This may seem tough to fathom in a world where the industry is reporting record profits; however, these profits come largely from the oil side or from natural gas discoveries made when costs were much lower. The decisions being made now affect the investments required to make future natural gas discoveries. You can't get royalties from wells that are not drilled."
At current gas prices, he said, "I believe it will be difficult for anyone to grow their natural gas production in Alberta. and if you implement these proposals we will see a significant loss of investment, jobs, taxes and the loss of world-class technical expertise. If the natural gas price were to be $10 to $12 per gigajoule, there would be something to talk about. At current prices, there are only degrees of pain."
Calgary-based Crescent Point Energy Trust also stated 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.
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. An announcement is expected within a couple of weeks.
"The decision on the royalty report will affect Alberta and our energy sector for decades to come," said 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.
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