Changes to royalty regime could threaten viability of natural gas; Industry appeals for status quo as it struggles with exploding costs

CALGARY - Wholesale changes to Alberta's royalty regime could threaten the viability of natural gas production in the province and raise rates for consumers, industry insiders told the Alberta government's Royalty Review Panel meeting in Calgary Wednesday.

Rising costs, falling prices and an uncertain regulatory environment are already leading to reduced rig counts, lower production and ultimately, lower government revenues, said Tailisman Energy Inc. CEO Jim Buckee.

"You have a zero-per-cent royalty you get zero; with a 100-per-cent royalty you also get zero," Buckee told the province's travelling review panel. "The current regime has worked and is best left alone."

Where previous sessions have focused on the government's share of oilsands revenues, Wednesday's discussions revolved around conventional royalties and how they relate to natural gas.

Buckee argued higher royalties would discourage activity at a time when high costs and falling prices are putting the bite on an already margin-squeezed segment of the oil and gas business.

According to the Canadian Association of Oilwell Drilling Contractors (CAODC), 107 of 885 rigs were working this week, down from 342 active rigs at this time last year.

Likewise, the number of new well licences issued by the province are off a third from last year.

According to Buckee, declining field activity is a leading indicator of the overall economic viability of natural gas.

Talisman, along with Canadian Natural Resources Ltd. and EnCana Corp. earlier this year reigned in gas spending in response to higher costs and lower prices. An additional financial load in the form of higher royalties will inevitably lead to lower drilling, lower production and in turn, lower government royalty payments.

If major oil companies balk at paying higher royalty rates on oilsands projects, then the Alberta government should consider developing the resource itself by working in equity partnerships with more co-operative companies, says Gil McGowan, president of the Alberta Federation of Labour.

"I think we should learn a lesson from other oil-rich jurisdictions, especially Norway. And that lesson is that if private sector firms aren't willing to develop our resources in the public interest we shouldn't be afraid to do it ourselves. Royalties are one way to guarantee returns for the public, but ownership is another."

McGowan's remarks were made as part of his presentation to the Alberta government's the government panel.

The hearings continue through today.

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