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Alberta's royalty U-turn seen as boon to oil patch

Alberta's royalty rollback has prompted major producers to contemplate boosting investment in a province that just months ago watched as money flowed elsewhere.

Observers say the Alberta government, which announced on Thursday it is scaling back royalties and studying how to reduce red tape, has narrowed the gap with its competitors, British Columbia and Saskatchewan.

"I would say there will be at least 10 per cent more capital coming into the province," said Chris Seasons, president of Devon Canada Corp., one of Canada's five biggest natural gas producers.

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Shares in Alberta-based energy companies were little moved by the much-anticipated changes, which undid much of a controversial royalty hike imposed in 2009 on everything but oil sands production.

But significant cuts to the top royalty rates for oil and gas, as well as a low 5-per-cent royalty on the first year of production of a non-oil sands well, already has companies like Devon taking another look at the province.

"We see our portfolio of Alberta gas as being as competitive as anything we've got across North America. So that's a win," said Mr. Seasons, who also serves as vice-chairman of the Canadian Association of Petroleum Producers.

But if the royalty changes have brought optimism bubbling to the surface, it is in part because the changes contained no surprises. The Alberta government had already created the 5-per-cent initial rate as a temporary incentive; it will now become permanent as of Jan. 1, 2011. Had it expired, the consequences could have been severe.

"Do I think that what they did is going to spur a bunch more activity that wasn't already on the books? I don't know," said Shane Fildes, global group head for energy at BMO Capital Markets.

"But if they had come out and said, 'No we had the royalty right the first time,' there would have been a big pullback."

An analysis by Calgary-based Peters & Co. Ltd. found that the decreased upper royalty rates - which will fall to 36 per cent from 50 per cent on natural gas, and to 40 per cent from 50 per cent on non-oil sands crude - will affect only 12 of 27 gas plays in Alberta.

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The winners will be technology-dependent plays such as shale gas. But over all, Peters found that commodity prices need to more than double from current levels for the pared-down rate to have even a modest 10-per-cent impact.

Industry also faces uncertainty about what the royalty will actually look like. The full royalty "curve," which dictates how much companies must pay at a given commodity price on a given well, will not be released by government until the end of May.

Murray Edwards, the vice-chairman Canadian Natural Resources Ltd. and an outspoken critic of the 2009 royalty hike, said the lower royalties put Alberta "in a reasonable range," but called for government to maintain vigilance.

"They are still modestly higher than B.C. and Saskatchewan, and so we have to make sure that we stay competitive," Mr. Edwards said.

"We went from drilling 1,000 gas wells to 90 gas wells between 2006 and 2009, so that shows you the falloff in activity," Mr. Edwards said. Thursday's changes will "help us maintain and increase our base level activity somewhat. But more importantly, as we get a stabilization or upward bias in price, it will encourage investment that wouldn't otherwise have happened."

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About the Author
Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

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