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Vol. 12, No. 40 Week of October 07, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Royalty increase blasted

EnCana threatens to cut Alberta spending; Petro-Canada echoes concern

Ray Tyson

For Petroleum News

It didn’t take long for the pot to boil over on recommendations to raise Alberta’s royalties for oil, natural gas and oil sands development, with one major Canadian company already threatening to slash capital spending by $1 billion in the region and another warning that an unfair royalty regime would “seriously impair” industry investment in the western province.

“If the investment environment is not protected through a reasonable royalty structure, many projects will be cancelled or deferred until the economic climate becomes more viable,” Petro-Canada asserted in an Oct. 3 statement.

EnCana Corp., among Canada’s largest and most successful upstream players, led the charge on Sept. 28 with an announced plan to reduce 2008 capital spending in Alberta by $1 billion, if Alberta’s provincial government fully adopts royalty increases recommended by a government advisory group.

A $1 billion reduction in capital spending represents 30 percent to 40 percent of the $2.5 billion to $3 billion EnCana had planned for Alberta-based activity next year.

“If adopted in full, the royalty changes will negatively impact EnCana’s future investments and operations in Alberta and will have a widespread impact on economic activity across the province,” EnCana said in a Sept. 28 statement.

Trust says it would bail

Meanwhile, Crescent Point Energy Trust, one of Canada’s largest oil and gas income trusts, warned it would abandon Alberta if the government fully adopts the advisory panel’s recommendations. In fact, Crescent Point is said to have already decided to spend its entire $150 million capital development budget in Saskatchewan next year because of the uncertainty created in Alberta.

Much of the royalty fury was generated by energy consultant Wood Mackenzie, which concluded that recommendations to increase royalties and taxes on Alberta oil sands projects would reduce the commercial value of current and planned projects by US$26 billion. The firm noted that if fully implemented, the increases specifically would lower the value of 28 oil sands projects in operation and under development in Alberta.

For EnCana, most of the reductions in capital spending would be to the company’s natural gas activity, in areas where the proposed royalty scheme “makes those activities uneconomic or uncompetitive in its portfolio,” EnCana said, noting that it would reallocate capital to investments outside Alberta.

EnCana produces about half its natural gas in Alberta, a volume of about 1.7 billion cubic feet a day. The Alberta royalty report said Alberta’s take from oil activity should rise by 20 percent, or about C$2 billion, a year.

“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,” said Randy Eresman, EnCana’s president and chief executive officer. “As a further consequence, Alberta natural gas production will continue to fall.”

He said EnCana is open to changes to Alberta’s royalty regime — “changes that reflect the economic realities of volatile commodity prices, higher costs and the appropriate risks and rewards of long-term capital investments.” He added: “A royalty system can be developed that achieves Alberta’s objectives without so severely damaging the province’s future.”

However, Eresman warned that the magnitude of the expected capital reductions “is the tip of the iceberg.”

EnCana forecasts job losses

“There will be fewer wells drilled, completed, pipelined, operated and serviced,” he said, adding that the proposed changes “would mean extensive job losses across the industry.”

EnCana holds title to about 27 million net acres onshore in North America, with current projects and emerging opportunities in British Columbia, Saskatchewan, Colorado, Wyoming and Texas. The company has an enterprise value of about US$50 billion.

Petro-Canada said it would support royalty increases only if they are balanced against investment and job creation, noting that royalty income to the province has kept pace with increasing oil and gas prices over the last few years. Moreover, the company said lease sale income amounting to $3.5 billion in 2006 alone was not addressed in calculating the government’s take.

In a speech to 200 business leaders in Calgary on Oct. 2, Pierre Alvarez, president of the Canadian Association of Petroleum Producers, criticized the panel’s recommendations and said the group “missed the realities facing the oil and gas industry in (Alberta), and painted a picture of an industry taking more than its fair share.”

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