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Vol. 12, No. 41 Week of October 14, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Alberta leader wants calm

Stelmach: formal royalty, tax talks ‘over,’ but ministers meet privately with investors

Gary Park

For Petroleum News

Alberta Premier Ed Stelmach has urged all sides to “just calm down” as a parade of industry heavyweights has issued dire warnings about the consequences of implementing a proposed wholesale change in the province’s royalty and tax system and challenged the fundamentals underlying the recommendations of a review panel.

Faced with talk of drastic cuts in spending that could climb to C$10 billion a year, of money being diverted to neighboring provinces or out of Canada altogether and of a possible C$26 billion loss in the commercial value of oil sands projects, Stelmach is in a tighter corner than any premier in Alberta’s 102-year history.

For now he likely draws his greatest comfort from a Leger Marketing poll for the Calgary Herald and Edmonton Journal that suggests 88 percent of Albertans support the premier’s view that they are not getting their “fair share” from royalties; 67 percent want the government to adopt a royalty review panel’s findings in their entirety and 54 percent don’t believe companies will withdraw or reduce investment in Alberta.

In the thick of what is likely to determine the fate of the fledgling Stelmach government and 36 years of Conservative party rule in Alberta, the premier says he “won’t be intimidated,” telling those who think he will weaken they are in for a surprise.

“The decision on the royalty report will affect Alberta and our energy sector for decades to come,” he said. “While the formal consultation is over, we have not stopped listening.

Stelmach said he understands the need for stability and certainty for the industry and the importance of ensuring competitive fiscal and regulatory regimes.

Equally, he said Albertans expect to receive long-term benefits from their energy resources.

When the government issues its formal response to the review panel’s proposals this month, these perspectives will be balanced, Stelmach promised.

Industry urging caution

The industry’s leading lobby group is urging the premier to move with caution rather than haste.

Pierre Alvarez, president of the Canadian Association of Petroleum Producers, said “rushing to meet artificial deadlines” resulted in Canada agreeing to Kyoto greenhouse gas emissions targets “without anyone understanding what the implications were going to be.”

Hopeful the government is ready to conduct a detailed fact-finding exercise, he said “nobody wants to make a mistake … the costs of failure are simply too high.”

Stelmach, while insisting the process will not drag on forever, has set in motion a review that raises questions about whether the government can take a definitive stand in October.

Deputy Premier Ron Stevens has been named the cabinet’s point-man to open up communication between the government and industry and Energy Minister Mel Knight is heading a technical analysis of the independent panel’s report, which will be considered along with public and industry feedback.

The government said it wants to “ensure there is a shared understanding and clarity on the panel’s recommendations and government’s review process.”

Achieving such lofty goals in such a short time is widely viewed as unrealistic.

Conoco would cancel C$500M

ConocoPhillips has reflected that mood by calling for a commission of government and oil experts to carefully weigh the various proposals, including an average 20 percent hike in royalties.

Kevin Meyers, president of ConocoPhillips’ Canadian unit, said in a letter to Stelmach and members of the provincial legislature that unless changes are made his company will cancel about C$500 million in spending next year for both natural gas exploration and oil sands projects.

He also predicted C$8 billion worth of oil sands spending planned for the next three years by his company will be postponed.

“It’s not bluffing; it’s not posturing; it’s not threatening; … it’s informing the government and our shareholders of the potential impact,” he told the Calgary Herald.

Meyers said ConocoPhillips is not saying it will give up on its projects, but he described the proposal to hike taxes on oil sands profits to 33 percent from 25 percent as “insidious” and said it would result in a sharp setback.

Ignoring warnings ruinous

Stelmach would have difficulty complying with ConocoPhillips’ proposal without conveying a message that he is, in fact, buckling under industry pressure.

At the same time, ignoring the warnings of ConocoPhillips and the other leading producers such as Imperial Oil, EnCana, Talisman Energy and Petro-Canada could be ruinous to the Alberta economy.

The seriousness of the matter was captured at a private meeting Oct. 5 of Stevens, Knight and representatives of leading Canadian and U.S. oil and gas investors, who control upwards of C$1 trillion and called for a watered down tax and royalty package.

Michael Tims, chairman of investment dealer Peters & Co., which organized the session, told reporters the investment leaders did not rule out change.

“People are saying that some change is possible,” but emphasized that the room for change is less than suggested in the review panel’s report.

What troubles supporters of the higher royalties is that the government is even holding private talks with the industry, although the government said a list of the people who met with Stevens and Knight will eventually be published.



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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