EnCana Corp. threatened Friday to slash its 2008 capital investment in Alberta by 30-40%, or US$1 billion if the recommendations contained in the Alberta Royalty Review Panel Report are adopted. Most of the reductions would be in its natural gas activity.

Responding to recommendations issued earlier this month (see Daily GPI, Sept. 20), the Calgary-based 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.

If the proposed recommendations are adopted, EnCana plans to cut next year’s capital investment in the province well below its 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 would reallocate capital to investments outside 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.”

He said Alberta “faces a great future, but only if we solve the economic challenges together, in a spirit of cooperation and collaboration. 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.”

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