Canadian Natural Resources Ltd. (CNR) threatened to reduce its total natural gas drilling in Alberta by 65% next year if the province's royalty proposals are adopted.

CNR's warning follows similar statements earlier this month by some of Alberta's biggest producers, including EnCana Corp., ConocoPhillips, Petro-Canada and Talisman Energy Inc. (see NGI, Oct. 8). On Friday, the Mullen Group Income Fund, a Calgary-based oilfield services provider, said it would begin temporary layoffs of up to 100 employees "due to uncertainty relating to oil and natural gas drilling activity in western Canada."

CNR said it would reduce its conventional gas drilling in Alberta by 65%, cut its shallow gas drilling by 73%, and slice its coalbed methane drilling in half. CNR's operations are spread across Canada and in other parts of the world, but most of its gas drilling is in Alberta.

"If the panel's proposals are adopted, many oil and natural gas activities in Alberta would be rendered uneconomic," the Alberta-based producer said. Canadian Natural said it would have no choice but to reduce activity and this would impact its contractors, resulting in an estimated 16,000 fewer indirect jobs for Albertans in addition to 3,900 direct jobs.

CNR has about 4,000 full-time employees. It also employs on a contractor and part-time basis another 18,000. Most of the employment cuts would be to the contractor and part-time jobs.

In 2006, CNR said its royalty, tax and Crown land payments to the Alberta government totaled almost C$900 million. At higher commodity prices, "we see the opportunity for increased royalties...to make further investments in these programs."

The panel's proposals "pose the risk of turning the oil and natural gas industry in Alberta into a 'shrinking' or 'blowdown' model." CNR stated. "The cumulative impact of these developments means that the oil and natural gas industry participants will not earn a rate of return commensurate with the risks in the Alberta basin. Investment in the Alberta oil and natural gas industry will be sharply reduced going forward."

The number of gas wells that CNR can economically drill in Alberta "in either today's pricing environment or even in a higher pricing environment will be dramatically reduced under the panel's proposals. This will result in the Province of Alberta receiving a larger share of an ever shrinking production base as reduced drilling and development will not offset natural production declines."

In addition to the cutbacks in gas production, CNR said it would reevaluate and "likely" cancel its long-term in-situ development projects planned for Kirby, Birch Mountain and Gregoire Lake. "This will result in over 3 billion barrels of resource not being developed and approximately 235,000 b/d of new production not coming on stream over for the next 15 years. Associated capital costs in excess of C$7 billion will not be spent."

If no economic projects are identified, CNR said it would use its free cash flow to reduce its debt and return cash to shareholders.

Murray Mullen, CEO of the Mullen Group Income Fund, said the number of drilling rigs working in Alberta "continues to decline, which is having a direct impact on several of our oilfield service business units. Natural gas drilling activity has been in decline for the past year due to natural gas prices, which is quite typical for a cyclical industry. However, many of our oil and gas customers have made it clear that they intend on reducing their capital investments in Alberta" if the royalty proposal is enacted. Mullen said his company had seen demand for services decline since the Sept. 18 announcement.

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