Encana issues royalty warning

Even as it records record breaking profits EnCana warns that the Alberta government better not ask for more of the cream. The cries are predictable but even if some specific areas such as gas may attract less investment the gas is still there and prices are likely to go up in time. A slowdown in investment in Alberta might not be all that bad but with US demand for Canadian oil and gas it is unlikely to slow down that much. Perhaps it would be a good idea to have a bit of breathing space while those increased royalties give Alberta the money to invest in much needed infrastructure that is lagging behind growth. It will be interesting to see if Stelmach will yield to corporate pressure or to what degree.


OIL AND GAS

EnCana issues royalty warning
Threatens to cut $1-billion in spending if report's recommendations are adopted in full
DAVID EBNER AND KATHERINE HARDING

September 29, 2007

CALGARY, EDMONTON -- EnCana Corp., Canada's largest energy company, waded into the debate over Alberta's royalties system yesterday, warning that it would slash $1-billion from planned 2008 spending of $3-billion in the province if recommendations to increase the government's take from the industry are adopted in full.

Randy Eresman, EnCana's chief executive officer, said the royalty changes as proposed would reduce the number of wells drilled in Alberta, with wide-ranging consequences, from fewer hotel bookings to less new car purchases, warning in general of "extensive job losses."

Talisman Energy Inc. and Nexen Inc., two other industry heavyweights, echoed EnCana's concerns in subsequent interviews.

It was the strongest industry assault yet on a landmark report issued earlier this month by an independent panel that concluded Alberta has been missing out on billions of dollars in energy money.


"My message to everyone is let's just calm down," Premier Ed Stelmach told reporters after learning of EnCana's statement. He repeated that the province aims to strike a balance between fair royalties and encouraging industrial development. "We're analyzing all the recommendations."

The Alberta legislature is rife with rumours that Mr. Stelmach may call a snap election later this fall after his government decides what to do about royalties. He has long said, however, that he would prefer to wait until spring at the earliest to take Albertans to the polls.

EnCana, North America's largest natural gas producer and a growing oil sands operator, said it is in favour of a balanced conclusion on royalties. This was a contrast with what industry almost uniformly said earlier this year when energy companies during the public review of the issue insisted there was no need for changes.

"We are open to changes to Alberta's royalties," Mr. Eresman said in the statement. He did not give interviews yesterday.

EnCana, which booked the biggest profit in Canadian corporate history last year, said most of its potential cutbacks would be in natural gas. It refused to say what it means for its oil sands developments.

"I don't want to get into specifics, because they're very complex," EnCana spokesman Alan Boras said.

The review panel's report indicated that, under its recommendations, about 80 per cent of more than 100,000 natural gas wells in Alberta would pay less royalties, based on 2006 prices. EnCana said the changes would hurt future development, arguing that many new opportunities "will simply not be economically viable." Mr. Eresman said he would move capital spending to other places the company works, areas that include British Columbia, Wyoming, Colorado and Texas.

Talisman Energy, which produces about 80 per cent of its natural gas in Alberta, has already said it is cutting back on spending because of low gas prices and also said it would look at moving capital to other regions of the world if the new rules are adopted.

"We're likely to cut our capital [in Alberta] by more, but we're still working it out," Jim Buckee, who stepped down as Talisman's CEO this month, said in an interview, adding that higher royalties don't work at current gas prices. "Maybe if the gas price is in double figures, then there's some room, but there's no room now."

Nexen is still assessing the impact of the proposed changes on its projects.

"At this point, we obviously share the same concerns as EnCana," said Carla Yuill, a Nexen spokeswoman.

Most of the attention over the royalties report has been on the oil sands but, based on the recommendations, additional dollars would initially come from conventional oil and gas production, which still attracts more capital spending than the oil sands. While industry players are conceding the oil sands can absorb higher royalties, much of the worry centres on conventional production, indicated by EnCana saying most of its cuts would come in gas.