The development capital program of $355 million is the largest in Pengrowth's history and represents an increase in expenditures of approximately 30% compared with estimated 2007 full year development capital expenditures of $275 million. In addition, Pengrowth plans to spend $20 million to continue its evaluation of its oilsands asset at Lindbergh and $12 million in building and information technology (IT) capital.
The development program is focused on maximizing unitholder returns through the allocation of capital on select high return projects, the active pursuit of improved reserve recovery, continued improvements in ongoing operations, investment in land and seismic and the continued CO2 pilot at Judy Creek. The majority of projects selected for development in 2008 have an anticipated internal rate of return greater than 20 percent with a small number of additional projects selected due to their high strategic importance for the trust in years to come.
"Pengrowth's high-quality, diversified asset base is one of the strongest in the energy trust sector and includes significant development opportunities," says James S. Kinnear, Chairman, President and Chief Executive Officer. "The increased budget reflects our commitment to provide unitholders with above average returns and sustained value creation. In 2007, our focus was on completing a full integration of the assets associated with the Carson Creek, Esprit Trust and Conoco Phillips properties acquisitions in late 2006 and early 2007. The 2008 development capital budget now includes a number of projects on the acquired properties, which were identified by our team members. This underscores not only our ability to complete strategic acquisitions but as well, realize additional value on behalf of unitholders."
Based on forward strip pricing in mid-November 2007, Pengrowth expects its ratio of distributions paid over cash flow from operating activities (before changes in non-cash working capital), or as it is more commonly termed "payout ratio", to be in the range of 75% to 80% for 2008. This estimate assumes distributions remain at their current level in 2008.
Pengrowth's board of directors and management considered a number of factors when setting the 2008 budget including expectations of future commodity prices, distributions, capital expenditure requirements and the availability of debt and equity capital. These factors will continue to be examined and as such we retain a degree of flexibility to re-evaluate and adjust the program accordingly.
Pengrowth's 2008 drilling and completions program is estimated at approximately $281 million which includes the drilling of an estimated 566 gross wells (238 net wells) with 60 percent of capital targeted towards crude oil and liquids projects and 40% targeted towards natural gas projects.
Ongoing maintenance capital spending is expected to be approximately $30 million on operated facilities and $14 million on non-operated facilities.
Pengrowth has also allocated approximately $25 million in 2008 for land and seismic expenditures in anticipation of growing our undeveloped land position in core areas and to improve our knowledge of new and existing pools through the use of 3D seismic.
In 2008, Pengrowth has budgeted an expenditure of $20 million for the oilsands pilot project at Lindbergh, one of Pengrowth's longer-term resource plays. Activities in 2008 will include drilling additional core wells, further reservoir studies and facility construction and refurbishment. The project timing will largely be driven by regulatory requirements and approvals and pilot project start-up is anticipated in 2009. Production:
Daily production levels for 2008 are expected to average between 80,000 boe per day and 82,000 boe per day (before royalties) with a balanced production profile comprised of approximately 50 percent natural gas and 50 percent crude oil and natural gas liquids. The 2008 estimated production level is lower than our forecast production in 2007 of 86,000 to 87,000 boe per day largely due to the disposition of non-core assets in 2007. These assets had associated production of approximately 8,900 boe per day and were disposed of throughout the year. The 2008 production estimate makes no adjustment for potential additions through acquisition and as well, no significant dispositions have been forecast.
Operating costs are expected to decrease slightly for the full year 2008; however per unit operating costs are estimated to increase to approximately $13.20 per boe, a four percent increase from our 2007 full year estimate. The expected increase in per unit costs results from the relatively high percentage of fixed costs combined with the lower estimated production levels. In addition, operating costs at our light oil properties tend to be higher which are somewhat offset by higher netbacks and a longer reserve life.
Production efficiencies and costs were an important focus area for Pengrowth across our operations in 2007. We intend to continue this focus in 2008 and will look to manage costs prudently and seek out additional efficiencies where possible by optimizing processing activities, reducing power consumption, standardizing maintenance procedures, improving procurement practices and increasing well and facility uptime.
General and Administrative:
General and administrative (G&A) expenses per boe are expected to remain stable in 2008 when compared to 2007. On a per boe basis, G&A is anticipated to be approximately $2.20 per boe for full year 2008, which includes non-cash G&A and anticipated management fees of approximately $0.40 per boe.
Impact of the Alberta Royalty Changes
On October 25, 2007, Alberta's provincial government unveiled its plan to update the province's royalty structure beginning in 2009. The new regime will introduce new royalties for conventional oil, natural gas and bitumen effective January 1, 2009 that are linked to price and production levels and will apply to both new and existing conventional oil and gas activities and oil sands projects.
Under the new royalty regime, the royalty formula for conventional oil will operate on a sliding rate formula containing separate elements that account for oil price and well production and specialty royalty programs will be eliminated along with "old' and "new" tiers. Royalty rates for conventional oil will range up to 50 percent, with rate caps once the price of conventional oil reaches Cdn $ 120 per barrel. A significant portion of Pengrowth's production and reserves are derived from mature fields such as at Judy Creek where the enhanced oil recovery techniques are employed. Currently, enhanced oil recovery receives an incentive in the form of a reduced royalty. Early indications from the Government of Alberta are that these incentives are to be maintained.
Under the new regime, natural gas royalties will be set by a sliding rate formula sensitive to price and well production and vintages will be eliminated along with certain specialty royalty programs though a form of deep gas royalty holiday will be retained and lower royalty rates will be applied over a wider price range for wells with less productivity. Royalty rates for natural gas will range from five percent to 50 percent with rate caps once the price of natural gas reaches $16.59 per GJ (gigajoule). A shallow rights reversion program will also be implemented that will result in the reversion to the Crown in Alberta of mineral rights to undeveloped geological formations above developed zones. Royalties for natural gas liquids will be set at 40 percent for pentanes and 30 percent for butanes and propane.
The implementation of the proposed changes to the royalty regime in Alberta is subject to certain risks and uncertainties. The significant changes to the royalty regime require new legislation, changes to existing legislation and regulations and development of proprietary software to support the calculation and collection of royalties. Additionally, certain proposed changes contemplate further public and or industry consultation. There may be modifications introduced to the proposed royalty structure prior to implementation.
Approximately 79% of Pengrowth's 2007 total royalties are paid to the Crown in Alberta. Approximately, 21% of Pengrowth's 2007 royalties are either paid to freehold landowners or to other Provinces, which are not impacted by the royalty changes. It is anticipated that the new royalty regime will result in a seven to 19% increase in the royalties paid by Pengrowth as compared to the current royalty structure. This increase is expected to result in a one to 4% decline in the net asset value of Pengrowth's proved and proved plus probable reserves, respectively discounted at 10%, using current commodity price assumptions of GLJ Petroleum Consultants Ltd., independent qualified reserve evaluators, with no resulting impact on the quantity of Pengrowth's reserves, as compared to the current royalty structure. The higher end of the range reflects the impact of the royalty on the new higher rate wells. The lower end of the range reflects the impact on the existing wells, which tend to produce at a lower rate. The changes to the royalty regime may impact Pengrowth's future allocation of capital among petroleum and natural gas projects within and outside of Alberta.
Despite any potential impacts that may be associated with the royalty changes, Pengrowth continues to effectively focus on operating its business and executing its capital program. Pengrowth is in the favorable position of having an extremely solid base of assets with a 10 year reserve life index on a proved plus probable basis. These high-quality assets provide the trust with ongoing development opportunities that remain economic even under the royalty regime proposed by the Province.
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