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Alberta Royalty Review

Alberta Royalty Review. September 28, 2007. Alberta Royalty Review This is too important to get wrong. Initial Reaction Fundamental Flaws in the panel report The other half of the story Consequences to Alberta Too important to get it wrong Principles/Framework

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Alberta Royalty Review

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  1. Alberta Royalty Review September 28, 2007

  2. Alberta Royalty ReviewThis is too important to get wrong • Initial Reaction • Fundamental Flaws in the panel report • The other half of the story • Consequences to Alberta • Too important to get it wrong • Principles/Framework • Balancing the two objectives: Fair Share/Competitive Regime • How to achieve a better balance

  3. Fundamentals Flaws • Report only tells part of the story – why? • Natural gas – report says 82% of gas wells pay less but does not say that at $7/GJ (breakeven prices) that 100% of gas wells pay more • Maximum royalty rates – states max is reached at $17.50/GJ for gas and C$120/bbl for oil but really can reach max at $11.00/GJ and C$70/bbl • Comparisons – shows Government Take but ignores returns on investment, Alberta’s small discovery size and low production per well and high costs • Assumes costs that are lower than actual for both oil sand and conventional – results in distorted view of economics • Ignores lease bonus bids as part of government take • $3.5 billion in 2006, $2.4 billion in 2007

  4. Royalties higher than status quo Royalties lower than status quo Natural Gas RoyaltiesHigher rates at all economic prices Source: Tristone Capital

  5. Royalties higher than status quo Royalties lower than status quo Crude Oil RoyaltiesHigher rates at almost all prices Source: Tristone Capital

  6. Global Oil/Gas Investment Returns5 Year Return on Cumulative Capital Costs Source: John S. Herold Inc. 2007 Global Upstream Performance Review

  7. Understated Costs • Oil Sands costs (100,000 b/d) • Panel used range of $4 to $8 billion • Actual is $10-11 billion • As shown in the recent Petro-Canada, Shell, Synenco announcements • Natural Gas costs • Panel used total costs just under $3.00/mcf • Finding & Development + Operating costs • Actual is close to $4.70/mcf • As shown in recent studies by Ziff Energy Group • Understated costs results in a view that economics are better than actual and leads to recommendation that royalties can go higher

  8. Consequences to Alberta • Target seems to be an additional $1.9 billion in royalties • Assumes no impact on activity, production or lease sales • Actually could be much higher depending on price • Natural gas for example would collect: • extra $1 billion at $6/GJ • over $3.5 billion at $8/GJ • and over $6 billion at $10/GJ • Cannot fairly assume “no impact” on activity, production or lease sales with this level of extra royalties

  9. Consequences to Alberta • Industry reinvests almost 100% of cashflow • Means jobs, business and economic growth to Alberta • Short term impact exacerbates current downturn in conventional gas, mostly in rural Alberta • Impacts on oil sands in the medium term as projects under construction are past the point of no return • Sudden massive changes by government has negative impact on Alberta’s international investment climate reputation

  10. Consequences to AlbertaExternal views of panel report • Tristone Capital • If anything, further analysis highlights how negative the impact on the Alberta E&P industry would be if these proposals were implemented. • FirstEnergy • The release of proposed changes to the royalty structure submitted to the Government of Alberta could be negative if adopted, and will slow down the development of oil sands as we look ahead. • Wood Mackenzie • Wood Mackenzie concludes that if implemented in full, the changes would reduce the commercial value of current and planned oil sands projects by US$26 billion (NPV10) • BMO Capital • The Alberta Royalty Review Panel has released its recommendations on changes to Alberta’s oil and gas royalty regime. In our view, the report recommendations are very negative for the oil and gas business in Alberta, particularly the oil sands developments. • Many others have similar views (RBC, CIBC, Merrill Lynch) • US/International Investment firms are just starting to react

  11. Principles and Framework • Balancing the Government’s Objectives: • Stability and certainty for industry, and the importance of maintaining competitive fiscal and regulatory regimes • Albertans expect to receive long-term benefits from Alberta’s energy resources • Retain Alberta’s reputation of stability and open to investment

  12. How to achieve a better balance • Don’t penalize downside – share upside • Reflect the characteristics of the basin • Conventional – small size of discovery, low well productivity, emerging unconventional resource • Oil Sands – unique resource, high cost • Ensure adequate notice and transition for any major change • Provide certainty

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