Canadian Natural Resources Ltd. is blaming Alberta's new royalty regime for its decision to slash capital spending by one-third in 2008, which ultimately may result in a double-digit drop in forecasted natural gas production.

The Calgary-based producer last week said it would spend C$1.7 billion on oil and gas exploration and production next year, well below its projected spending this year, which was more than C$2.5 billion. Seventy-eight percent, or C$648 million, of the C$827 million reduction from 2007 followed the decision by Alberta to increase oil and gas taxes, the company said. The new royalty regime is scheduled to take effect in 2009 (see NGI, Oct. 29).

The overall budget for North American natural gas is set at C$617 million, down from C$991 million this year. The company plans to drill a total of 314 net wells in North America next year, down 31% from its previous forecast.

"Canadian Natural has always taken the approach that focusing on economic returns is more important than growth at any cost," said Vice Chairman John Langille. "2008 is likely reflective of this more than any other year in our history. On the natural gas side of the business, we are faced with eroded economics due to low commodity prices and a new royalty regime in Alberta that reduces the returns on certain types of drilling."

Gas drilling in Alberta is targeted to be reduced by 44% because of the "anticipated future impact" of the royalty changes. In Alberta, where 195 net wells are planned next year, 36% of the wells targeted to be drilled "will be low-rate shallow natural gas and coalbed methane wells." Outside of Alberta, gas drilling actually will increase 8% "due mainly to a large development program in the Hatton region of Saskatchewan." In British Columbia and Saskatchewan, Canadian Natural plans to drill 119 net wells.

The shift in gas spending "between categories and provinces reflects both changing economics," the company said. "The new Alberta royalty regime dramatically reduces drilling economics of certain play types at current and higher price forecasts in future years by extending the project payout period due to a front-end loaded royalty structure. As such, further cuts in both conventional and high productive rate deep natural gas wells are expected in future years as they would not benefit from first year production under the current regime in Alberta."

Langille said the reduction in spending "will result in a decrease in natural gas production throughout 2008 due to normal production declines not being offset by new resource production. The new royalty regime...will take the vast majority of any increases in natural gas prices for most of our natural gas wells. As such, the ability to increase natural gas drilling activity with increasing gas prices is severely impacted."

"The disparity between low natural gas prices and high crude oil prices affords us the opportunity" to optimize production at the company's conventional crude oil and oilsands projects, said COO Steve Laut. "New pad drilling will be reduced in 2008 as will new production volumes." Canadian Natural has four major oil projects under way with targeted productive capacity of between 176,000 and 180,000 bbl/d. "As such, 2008 becomes a year of emphasis on execution and optimization. The largest of these projects is, of course, the Horizon Project Phase 1, which is targeted for first oil in 3Q2008."

Canadian Natural estimated that it will generate between C$4.6 billion and C$5.1 billion in cash from operations (C$8.50-9.40/share) based on a forecast average price of US$73/bbl for West Texas Intermediate crude, a gas price of US$7/MMBtu on the New York Mercantile Exchange and the Canadian and U.S. dollars being at parity.

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