Alberta Govt Gives Royalty Break To Deep Oil, Gas Dvlpmnt

OTTAWA, April 11, 2008 (Dow Jones Newswires)

The Alberta government announced two new royalty programs Thursday to encourage the development of deep oil and gas wells, responding to criticism about the "unintended consequences" of its new royalty regime.

The programs will provide royalty breaks to the high-cost, high productivity wells that were hit hard by the royalty rate increases announced in October.

"One of the goals of the new royalty framework was to help provide a greater degree of economic certainty for both industry and the government" over royalty revenues, Energy Minister Mel Knight told reporters in Calgary.

Addressing the unintended consequences will encourage energy companies to develop these hard-to-access wells, instead of just focusing on "low-hanging fruits," helping generate the royalties anticipated by the new plan, he said.

The royalty plan comes into effect in 2009.

Thursday's announcement comes nearly half a year after the government presented its new plan, hiking its share of the province's massive oil and gas resources by C$1.4 billion over projected 2010 revenue. While softer than recommendations from a royalty review panel earlier in the year, the government upheld proposed hikes for natural gas, unleashing a wave of criticism from an industry already battered by low prices and soaring costs.

In response, several major natural gas producers, including EnCana Corp. and Canadian Natural Resources Ltd., pulled millions from their 2008 Alberta spending plans, channeling them across provincial borders to Saskatchewan and British Columbia. However, Knight rejected the idea that Alberta's government was responding to industry pressure, saying "there isn't any bowing to anybody with respect to this issue."

Neither EnCana nor Canadian Natural could be reached for comment.

The programs will provide C$200 million a year for the first five years of the new royalty plan to natural gas wells deeper than 2,500 meters, while oil wells deeper than 2,000 meters will get C$37 million a year, also over five years.

The government estimates they will generate around $500 million in additional royalties from both oil and gas over the next decade. As a result, the total royalty increase "will meet or exceed" the previously announced C$1.4 billion, Knight said. He declined to answer questions for a more exact figure, saying fluctuating commodity prices and production rates would change the eventual total.

The news comes as energy prices continue to scale new heights, with crude oil marking a new record of $112.21 a barrel Wednesday on the New York Mercantile Exchange. Meanwhile, natural gas, which has lagged behind crude's blistering rally, jumped to a 27-month high of $10.314 per million British thermal units Thursday.

With the changes, Alberta's government has addressed two of the industry's highest priorities, said Greg Stringham, vice president of markets and fiscal policy at the Canadian Association of Petroleum Producers, a Calgary-based lobby group.

"It's a very brief press release, and we'll need to look at this more's too soon to tell" if the government has met other major concerns, said Stringham.

But the changes appear broadly positive, since the royalty breaks aren't dependent on drilling success, said Stephen Calderwood, a Calgary-based analyst at Raymond James.

"It keeps the exploration activity going - you get credit for drilling, even if it's a dry well," he said.

Depending on the well's depth, the royalty breaks could offset a good portion of drilling costs, he added, which could persuade companies exploring in the Canadian Foothills such as Talisman Energy Inc., Husky Energy Inc. and Petro-Canada.

Smaller producers, however, will have to hope that natural gas prices remain high.

"For (the junior) sector, it's disappointing," as the changes will mostly benefit bigger producers, said Gary Leach, executive director of the Small Explorers and Producers Association of Canada.

The high cost of drilling at those depths precludes smaller producers, and there are no changes for medium depth wells that juniors might tackle, Leach added.

OTTAWA, April 11, 2008 (Dow Jones Newswires)