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Canada: Alberta shrugs off royalty increase warnings

THE ALBERTA government has passed legislation to overhaul its oil and gas royalty regime from 1 January, rejecting last-minute industry pleas for delays or concessions. Against claims that Alberta is losing ground as the country's traditional petroleum stronghold, the province's energy minister, Mel Knight, said: "The new framework will give Alberta the tools to create opportunities for investment and job creation." He argued that the "recent volatility of commodity prices shows how our new sliding-scale royalty rates for our non-renewable resources are well-suited to the changing times".

The regime raises conventional oil royalties from 25% when the price of crude is C$55 ($46) a barrel, to 40% at C$120/b or higher; sets a maximum of 9% royalty for oil-sands output at prices of C$120/b or higher, until project costs are paid off; and increases natural gas royalties to 5-50%, up from 5-35%, raising rate caps to C$16.79 a gigajoule (GJ) from C$3.70/GJ. The objective is to increase government revenues by C$1.4bn a year, starting in 2010. Knight said the framework ensures the province's take will rise along with commodity prices, while offering a "competitive advantage when prices are low."

But his optimism is not shared by the oil industry. The Canadian Association of Petroleum Producers, the industry's chief lobby group, forecasts an 8% drop in well completions across the country in 2009, mostly in Alberta, where both oil and gas exploration are in retreat, said vice-president Greg Stringham.

He said there is a declining trend in Alberta government land sales, one of the strongest barometers of industry exploration plans. Stringham said oil wells producing more than 100 b/d will face higher royalties and lower-productivity wells will also pay higher royalties when prices are above C$50/b. Based on the government's sliding scale, higher royalties will affect wells producing 100,000 cubic feet a day (cf/d) once prices rise above C$9/GJ, while wells producing more than 0.65m cf/d will pay a higher rate when prices pass C$5/GJ.

Steve Laut, president of Canadian Natural Resources, the country's second-largest gas producer after EnCana with output of 1.5bn cf/d, claimed in November that Alberta offers the "worst economic environment in North America for gas development or drilling ... probably the worst in the world". He said his company, the first to indicate its capital spending plans for 2009, will drill in British Columbia's (BC) shale-gas plays and cut back Alberta in 2009.

Talisman Energy's chief executive, John Manzoni, said the bulk of his company's spending next year will go to shale prospects in BC and Pennsylvania. "We're aggressively high-grading our capital spending to do only those projects with the highest returns," he said.

Several analysts joined the chorus of criticism. FirstEnergy Capital's Robert Fitzmartyn said there is "strong evidence that investment is leaving" Alberta, referring to a 26% drop in new well permits this year. He added that the Petroleum Services Association of Canada (PSAC) estimates there will be an 11% decline in Alberta drilling in 2009 and that well permits in BC and Saskatchewan will rise by 29% and 9% respectively, despite the squeeze on debt and equity markets. "There is no question that Alberta has positioned itself to be an uncompetitive jurisdiction," he said.

Tristone Capital expects Alberta production to average 13bn cf/d this year, two to three years ahead of its earlier timetable, and "all data points to a shrinking pie". Instead of pressing ahead with the royalty increase, the Alberta government should be offering fiscal incentives to stimulate production, says Tristone analyst Chris Theal.

BMO Capital Market analyst Mark Leggett rated the drilling outlook for Alberta as "abysmal", because the government imposed higher royalties on top of already high operating costs, compounding the challenge of a break-even price he estimated at C$9/'000 cf, compared with $4/'000 cf in US shale-gas plays.

PSAC president Roger Soucy said: "The more economic barriers [the government] places in front of the industry, the less activity it will have." Because of the global financial meltdown "it is unrealistic to have the kind of front-end take in royalties that the new Alberta system calls for. Why the government is waiting so long to respond is a question I don't know," he said. Soucy added that incentives are needed for producers to pursue field activity in Alberta, where the province's traditional edge in Canada and North America is "withering and needs a rejuvenation of enthusiasm and policy".

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