Effect of royalty rates not so painful
In recent quarterly reports, energy firms say higher rates won't pinch profits so hard
NORVAL SCOTT
With files from Reuters
November 10, 2007
CALGARY -- A swath of energy companies said this week that the impact of Alberta's increased royalty charges won't be as significant as some in the oil patch had initially feared.
Last month, Alberta announced that starting in 2009 it would boost the royalties it takes from oil and gas production in the province by around 20 per cent, a change that some industry players warned would cripple investment and affect future production.
However, in recently released quarterly financial results, some of Calgary's largest energy trusts have said they see relatively minimal affects to their operations, which should forestall predictions of doom and gloom, at least for now, say industry observers.
"The impact of the royalties will vary company by company, but to have so many firms say that they will only be marginally affected should calm people down," said independent Calgary-based analyst David Doig. "It seems the impact isn't going to be as bad as the worst-case scenarios predicted."
Since Thursday, Penn West Energy Trust, Harvest Energy Trust, Crescent Point Energy Trust, Prospex Resources Ltd. and Bonavista Energy Trust have all characterized the impact of the royalty increases upon their businesses as modest or minimal.
Penn West, Canada's second-largest energy trust, said the higher royalty rates would likely cost the company an additional 3 per cent of its cash flow.
"We're concerned that the government has increased its take from our sector," chief executive Bill Andrew said in a conference call. "But that's offset by the knowledge that additional funding is required to keep up with the needs of our expanding population, who we greatly depend on for our labour, our knowledge and our services."
Harvest Energy Trust said that while the royalty hike was a "negative event" for the Alberta oil and gas sector, "the impact to Harvest's current production is relatively neutral and could actually be marginally positive."However, Harvest, which operates the North Atlantic refinery in Newfoundland and Labrador, did reduce distributions by 21 per cent, a move analysts expected since narrowing refining margins were making the company's payout ratio unsustainable.
Not all companies are as mildly affected as these firms. The higher royalty rates for conventional oil production are seen as particularly oppressive for exploring juniors such as Highpine Oil and Gas Ltd., which estimates the increases will cut cash flow by 29 per cent.
"The royalty changes are discriminatory for companies engaged in high-risk, deep conventional oil exploration. ... [They] do not strike a balance between risk and reward in our composite drilling program," the company said in a statement.
Other companies, such as Provident Energy Ltd. and Enerplus Resources Fund, indicated that while they expect much of their operations to continue in Alberta - and could even make acquisitions in the province - they may still shift some activity to other provinces or into the United States.
Enerplus said the royalty hikes will hurt its business by $15-million to $20-million, or 2 per cent of cash flow, but it expects any impact on its oil sands strategy to be offset by the federal government's plans to reduce tax rates.
http://www.theglobeandmail.com/servlet/story/LAC.20071110.ROILPATCH10/TP...
