Alberta Royalty Increase Seen Hurting Small Producers (Update1)

Alberta's plan to increase oil and natural-gas royalties beginning in 2009 will hurt energy companies that don't have oil-sands assets or international projects, Calgary brokerage FirstEnergy Capital Corp. said.

Under the province's plan, the royalty rate on a well producing 100 barrels of oil a day will rise to 44 percent from 29 percent at an oil price of up to C$75 ($77.85) a barrel, closely held FirstEnergy said today. Crude oil traded as high as $92.22 a barrel in New York today.

``The landscape of opportunity for the smaller capitalized juniors has shrunk discernibly,'' FirstEnergy analysts Robert Fitzmartyn and Cody Kwong said in a research note. ``Economics will be challenged for both natural-gas and oil projects, particularly on exploration projects.''

Alberta, which supplies about 10 percent of U.S. oil needs, yesterday announced plans to raise royalties to gain an additional C$1.4 billion in government revenue in 2010. There will be no exemptions for existing projects.

Galleon Energy Inc. fell C$1.65, or 10 percent, to C$14.60 as of 12:27 p.m. on the Toronto Stock Exchange. Highpine Oil & Gas Ltd., a producer that sold its first shares in 2005, dropped C$1.84, or 17 percent, to C$9.01. Duvernay Oil Corp. declined 91 cents, or 2.7 percent, to C$33.25. All three companies are based in Calgary.

The new royalty system reduces Highpine's net asset value by 31 percent to C$8.31 a share and Galleon's value by 18 percent to C$13.71 a share, FirstEnergy estimated. Duvernay's value is seen declining 15 percent to C$21.01 a share.

Galleon and Highpine ``have high-productivity wells that are going to be subject to higher royalties,'' said Glenn MacNeill, who manages the equivalent of $1.04 billion at Toronto-based Sentry Select Capital Corp. ``They will be penalized the most.''

Sharing in Boom

The royalty increase will ensure all Albertans get their share from a boom in projects to extract crude from Alberta's tar sands, Alberta Premier Ed Stelmach said yesterday. The projects were spurred by a rally in crude-oil prices that sent futures traded on the New York Mercantile Exchange to a record today.

Companies including EnCana Corp., Canada's biggest gas producer, Talisman Energy Inc. and Canadian Natural Resources Ltd. previously said they would pare spending in Alberta next year if the royalties were raised in line with recommendations made by a government-appointed panel last month.

Alberta's share of oil-sands revenue will vary from 56 percent to 66 percent depending on prices. The government's panel had proposed boosting the share to 64 percent. Alberta won't implement a proposed new tax on oil-sands projects.

The government's share of gas royalties will rise to 60 percent, up 2 percentage points from current levels. The royalty panel recommended boosting the rate to 63 percent.

Alberta's take from oil wells will climb the 5 percentage points suggested by the panel and rise to 49 percent.

`Substantial' Changes

The government's changes are ``substantial and could have a significant impact on industry economics,'' Suncor Energy Inc. Chief Executive Officer Rick George said in a statement late yesterday. Suncor, the world's second-biggest oil-sands producer, will take time to study the changes, he said.

Canadian energy stocks dropped the day after the royalty panel released its report on concern the changes may be implemented in full. The 74-member S&P/TSX Energy Index fell 2.6 percent on Sept. 19.

The new policy will ``deepen the gloom'' for smaller producers, said Jeffrey Fiell, an energy analyst at Calgary-based Octagon Capital Corp. ``It squeezes the margins more and the attractiveness to investment from outside of Alberta, and outside Canada even, is a lot less. Larger companies obviously can absorb the changes a lot easier.''