Sample reactions from industry

Here are just a few samples of how oil and gas companies, industry organizations and analysts are reacting to the prospect of paying higher royalties in Alberta:

Canadian Natural Resources, Canada’s second largest gas producer, says it may scrap C$7 billion worth of work on three oil sands projects, stop two major expansions of its Horizon oil sands mining project and reduce gas drilling by 65 percent in 2008.

In the grimmest warning yet, Canadian Natural President Steve Laut said that although there is room for higher royalties when commodity prices climb, the proposed changes will drive investment out of Alberta, very quickly tipping the Western Canada Sedimentary basin “into blowdown mode where you’ll just produce all the reserves you have today and not reinvest,” meaning the government’s royalty revenues will be lower than they are today.

“Not only do you lose royalty revenue, but you lose a tremendous amount of jobs for Albertans and a lot of tax revenue,” Laut said. “Who is going to take the real brunt? It’s going to be the pipefitters, the welders, the pipe shops, the guys who work on the rigs, the truck drivers, the entrepreneurs.”

Tristone Capital, an energy brokerage and investment bank, estimates the royalty hikes could cost Alberta C$5 billion to C$10 billion in annual investment.

“It would be catastrophic to the development of our resource,” said Tristone President George Gosbee, who is also vice chair of Alberta Investment Management Corp, which manages C$73 billion of Alberta public funds and pensions.

He said the estimated C$2 billion a year increase in government royalties and taxes is an “absolute fallacy.”

Instead he predicted activity would fall, lowering royalties and taxes, while Alberta supply would drop by 500,000 barrels of oil equivalent per day.

Gosbee said the analysis and recommendations made by the government appointed panel “are very misleading to the citizens of Alberta,” and should be rejected.

Canadian Association of Oilwell Drilling Contractors President Don Herring said implementing the recommendations will make drilling for natural gas too costly.

“The state of the natural gas industry over the last few years is already showing seriously declining activity,” he said. “The wheels are starting to fall off.”

In 2006, an average 373 drilling rigs worked in Alberta, providing 9,400 rig jobs; at the end of May only 61 rigs were active, employing 1,525 rig hands, reflecting the slump in gas prices, Herring said.

He said the drilling sector is not prepared to cut wages and drive away experienced crews.

Scott Land & Lease President Greg Scott said government land sales revenues could soon be hit by the proposed royalty changes.

He said the latest sale attracted an average price of C$241 per hectare, compared with the year-to-date average of C$398, but conceded it is too early to tell “if a trend has started.”

Scott Land & Lease is the biggest land and lease buyer in Western Canada.

FirstEnergy Capital said exploration by junior producers, already struggling with high costs and low commodity prices, could collapse if the royalty hikes are implemented.

Analysts Robert Fitzmartyn and Cody Kwong said they “envision little to zero exploration activity as projects cease to be economic within a risked context.”

Describing the juniors as the “entrepreneurs” of the oil patch, they said those heavily weighted to gas have already been hit by heavy declines in cash flow.

TD Bank Financial Group’s chief economist, Don Drummond, doubts the panel’s recommendations will be fully implemented.

He expects “some compromises along the line” which will trim company margins, but leave the industry “quite profitable.”

The TD report said pressure on governments to take action on the environmental front poses an even greater long-term uncertainty for the oil and gas sector which “leaves a larger footprint on the land, water and air” than any other industry.

—Gary Park