Royalty Regime - Stelmach says "F-U Alberta NG E&P"
Alberta holds fast on royalty regime
NORVAL SCOTT, DAVID EBNER AND JACQUIE McNISH
19:59 EST Thursday, Oct 16, 2008
CALGARY, VANCOUVER, TORONTO — The Alberta government will not delay the introduction of its new oil and natural gas royalty regime, even as dramatic decreases in commodity prices and tight credit markets threaten to derail future projects.
The energy industry has long argued that the new royalty scheme, set to begin Jan. 1, 2009, will make both conventional oil and gas exploration and oil sands development less economically feasible and will reduce activity levels.
That argument has taken on a greater urgency as the current financial crisis lays waste to oil prices, which have fallen by over half since they hit $147 (U.S.) a barrel in early July. That precipitous fall – also reflected in the gas market – has helped to gut Canadian oil and gas company valuations, leaving the sector ripe for consolidation or even foreign takeover.
“There's been a lot of angst about the royalty structure and framework … but the implementation will proceed,” provincial Energy Minister Mel Knight said at an industry conference in Calgary.
He added, however, that the government's door “is never shut. We continue to work with our industry partners to ensure the [royalties] do not have a negative impact on the economy or the province of Alberta.”
Mr. Knight said that Alberta would reveal a new energy strategy in mid-November. The strategy will “protect jobs in Alberta and the infrastructure that [companies] have built in Alberta,” he said, without going into details.
Oil companies are struggling with the current climate, which has made securing credit to complete projects more expensive, while at the same time reducing cash flow. With a number of companies saying they will delay projects and spend less, investors are bailing out of the sector.
The collapse in oil company stocks has been so severe that, for the first time in years, a number of large Canadian energy companies have seen their stock prices fall below the value of their unexploited oil and gas assets, making them bargains to acquirers. As a result, once-untouchable firms such as Suncor Energy Inc. and Canadian Natural Resources Ltd. – whose valuations have fallen by 50 per cent in just a couple of weeks to their lowest levels since 2005 – appear potentially vulnerable to takeover bids.
“The challenge for the oil industry today is that it is now cheaper to drill for oil on Bay Street than it is in Alberta,” said John Brussa, senior partner at Burnet Duckworth & Palmer LLP.
Current prices of natural gas, coupled with Alberta's high cost environment and new royalty regime, have made it difficult for companies to develop new gas projects in the province, said Canadian Natural Resourced Ltd. vice-president Murray Edwards.
The forthcoming royalty changes mean “Alberta is the least attractive regime for conventional natural gas in North America right now,” he said on the sidelines of a Calgary conference.
The poor investment environment has raised questions about whether Calgary oil sands firms and their shareholders would accept a takeover bid, as it's unclear whether bids of even twice the current share price of a company would succeed.
“Share values have come off so that they are less than the fair valuation of some companies,” said Dave Collyer, president of the Canadian Association of Petroleum Producers. “If I was sitting on a board, I would not be recommending that decisions should be made now, whether it's on a big project or on the future of the company.”
The most motivated buyers are international giants such as Exxon Mobil Corp. and a variety of Chinese oil players, who are awash in cash and actively looking to expand their oil reserves. Of publicly traded firms, Exxon Mobil has by far the biggest hoard, with $39-billion in cash at June 30.
Of other international firms, several had significant cash on hand, but likely not enough to make gigantic moves.
© Copyright The Globe and Mail
Quote
