The oil patch has lost its best friend.
The energy industry was outraged Thursday after Alberta Premier Ed Stelmach announced he would adopt about three-quarters of the recommended increases to royalties that oil and natural gas firms believe could severely hurt the business.
The Premier did not go as far as he was urged to, but it was still too far for the industry.
“It's quite amazing what's just happened to the industry and difficult to understand the rationale,” said John Dielwart, chief executive officer of ARC Energy Trust, who said his initial reaction was “shock.”
Starting in 2009, royalties on oil, natural gas and oil sands production will climb significantly, especially if prices rise, the government said yesterday afternoon. It estimated the province will collect an additional $1.4-billion in revenue in 2010, three-quarters of the $1.86-billion envisaged by an independent panel that published controversial recommendations last month.
Mr. Stelmach described the increases as “substantial” but said that industry will have time to adjust, adding that any immediate job losses would be caused by low oil and gas prices and not higher royalties. He said the new rules are a “framework for a new century.”
“I'm confident industry will be able to work through the changes,” said Mr. Stelmach, who became Premier in December.
Dealing with the royalty proposals made by the panel is by far the biggest decision he has had to make. He wouldn't say whether he would call an election this fall to seek a mandate from Albertans to implement the major changes.
Mr. Dielwart said Mr. Stelmach's view of the effect on jobs and the economy is “naive.”
“[Mr. Stelmach's] comments show that he just doesn't get it,” Mr. Dielwart said. “[The government] basically rejected the industry arguments that the panel's recommendations were flawed.”
After the royalty report was released in mid-September, industry said it would slash billions of dollars in spending immediately if the recommendations were adopted in full, causing thousands of job losses.
Higher royalties will affect all areas of the energy business, from natural gas drilling in the Alberta Foothills to the oil sands. Cutbacks that had been threatened likely will occur, industry players said.
“We don't see a lot that we are happy with,” said Gary Leach, executive director of the Small Explorers and Producers Association of Canada.
The government made some concessions on natural gas and the oil sands, but Mr. Leach said the spending cuts threatened by the industry is likely cash “that will stay off the table.”
The government's royalty increases are more aggressive than Mr. Stelmach hinted at in a television speech on Wednesday night in Alberta, in which he said Albertans would get their “fair share” but offered industry “the stability and predictability business needs and time to adjust to the changes.”
It was also worse than the industry had expected.
“It's obviously really bad, we're just trying to figure out how bad it is,” said Stephen Calderwood, an analyst at Raymond James. “Valuations in the market are going to be down, especially for oil sands companies, as the changes are very negative compared to the impression the industry was left with following the last month of consultations.”
Gas producers would also be hit hard, Mr. Calderwood said.
Mr. Calderwood singled out the delay in royalty increases until 2009 as a particularly egregious element of the review, calling it an “insult to the intelligence” of companies such as Nexen and Canadian Natural Resources Ltd. that are in the middle of constructing major oil sands projects.
“It's not as if they can mothball those now. The timing for those firms could not be worse.”
Pierre Alvarez, president of the Canadian Association of Petroleum Producers, said he had “tremendous concern.”
“Financial markets are going to respond negatively,” Mr. Alvarez said, adding that the government didn't listen to industry's questioning of the costs to produce oil and gas in Alberta.
Mr. Alvarez said spending cuts will come. “You will see an impact. It's not going to be positive. ”
Synenco Energy, a junior oil sands player that has launched a strategic review for its project and is trying to find a buyer, said the changes won't “have severe impacts on today's investment decisions. However, after that it may make it more difficult to raise new capital for the oil sands sector,” said spokesman Scott Ranson.
Regarding specific changes, in the oil sands, the current royalty is 1 per cent on gross revenue before a project recovers its capital costs, which then rises to 25 per cent of revenue minus operating and other costs.
The royalty report recommendations wanted the 25-per-cent figure to rise to 33 per cent and to impose a separate new tax.
The government rejected the tax and adopted a sliding royalty scale, which starts increasing at $55 (U.S.) a barrel. At current prices, oil sands royalties would be about 5 per cent before payout and 33 per cent thereafter. The maximum rate would be 40 per cent.
A major unanswered question is the state of Syncrude Canada Ltd. and Suncor Energy Inc., the oldest oil sands miners, with special one-on-one deals with government that extend until 2016.
Government said over the next three months it will work on a deal to move Syncrude and Suncor over to the new rates.
