Canada provides about a quarter of Devon Energy Corp.’s oil and natural gas production, and with most of it in the Alberta province — where the royalty regime is being revised — the company is taking a long look at whether to revise its portfolio plans in 2008, the CEO said last week.
“Any change is a concern,” CEO J. Larry Nichols said of Alberta’s royalty regime changes, which were announced last month (see NGI, Oct. 29). He told energy analysts during a conference call that the “new [tax] structure is somewhat complex…but there still is likely to be some economic impact…Expected returns will be impacted because of a host of things.”
On a “positive note,” he said, the Canadian government earlier this month reduced the corporate income tax, which is expected to have a positive impact on businesses’ rate of return in the country. However, Nichols said Devon will take into account the Alberta provincial government’s stance on royalties and how all of the changes will affect Devon’s returns across Canada.
“Devon has a very large and diverse portfolio, which allows us to reallocate capital within Canada and across all divisions,” Nichols said. “We can choose those areas that generate the most favorable returns.”
However, once the overall portfolio is reviewed in light of the recent federal and provincial changes, Devon may shift course in 2008.
“We have a very deep portfolio,” said Stephen Hadden, executive vice president of exploration and production. “If you look at our onshore business in North America, we had strong 12% growth [in 3Q2007]. We would probably redeploy in areas like we have in the Barnett [Shale], when we upped the number of wells there. We have good opportunities in the Carthage area [of East Texas] and some others in East Texas; those are examples” of where the company could redeploy. “The U.S. onshore is a good opportunity for us.”
Hadden noted that Devon has a “very viable” heavy oil operation in Canada, which nearly doubled in the past year. The move there toward heavy oil would allow the company to consider redeploying “in Canada away from the lower returns in the conventional gas business to good, solid returns” in the oil business. “We will optimize in Canada first, then look across our portfolio and look for possible ways to grow.”
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