Berkana CEO Glenn Gradeen: An Open Letter To The Premier

Berkana CEO Glenn Gradeen: An Open Letter To The Premier

October 4, 2007

Attention: Honourable Ed Stelmach, MLA

RE: An open letter regarding the Royalty Review Panel Recommendations.

Dear Mr. Stelmach;

My name is Glenn Gradeen; I am the Chief Executive Officer of Berkana Energy Corp. We are a growth focused Canadian junior energy company based in Alberta. We are a publicly traded (TSX: BEC) company with a mandate to grow our production and reserves at 20% to 30% per year. We currently produce about 3,000 barrels of energy equivalent per day; over 95% of our production is in the province of Alberta.

I wanted to write this letter to express my dismay at the conclusions and recommendations of the Royalty Review panel. My sense is that you are going to have a difficult time dealing with those recommendations in a rational fashion that is good for the Province's long term economic health. This sense of dismay is further compounded by the musings of the Auditor General in the press over the past couple of days (by the way - since when does the Auditor General set government policy? I thought he was there to ensure that policy was being followed and monies were collected and disbursed in accordance with government policy). The media and publicity opportunists are currently setting expectations based largely on spin (e.g. "Fair Share") and flawed analysis. Please do not let that run away on you. Just because one has the ability to unilaterally change a deal and take more - doesn't mean it is right to do so.

Having lived in Alberta virtually all my life - and having seen the ups and downs of this business - it is clear to me that you must resist the temptation to follow the directions being promoted by that review. I have many reasons for saying this, but fundamentally it comes down to your leadership - doing the right thing for the people of this province. Showing vision for the long term.

Let me start off with four things to consider:

1) Has the panel and the energy ministry looked at the earnings (earnings - not cash flows) of junior Canadian energy companies? You will not find many with positive earnings. The reason for that is simple. The cost structure, land bonus, royalties, capital costs and operating costs leaves very tight margins. We work in one of the highest (per unit) cost environments in the world. Is it not clear that we are already heading into a slow-down because of the high cost of doing business here in Alberta?

2) Has the Panel considered the current cost of finding new reserves? By adding more royalties onto higher deliverability wells, junior companies such Berkana will no longer be able to drill the 4 or 5 dry holes it takes to find one good well.

3) Has the Panel considered what happened to the provincial economy the last time (1981) we had a price run up and the governments (federal and provincial - just like now) tried to squeeze more and more of the margin from the energy sector? It took us more than a decade to recover from that debacle.

4) Has the Panel considered that with all the other costs - even though our royalty rates might appear to be lower than certain other jurisdictions, the overall cost of doing business here makes Alberta largely uncompetitive - EVEN WITH THE CURRENT ROYALTY AND LAND BONUS SYSTEM - hence the existing slowdown. Companies are already taking their capital elsewhere.

I am concerned that I see evidence (which I hope is incorrect) of the political leadership within Alberta becoming less and less friendly to small business. Small businesses such as Berkana, I believe are the engine of growth and prosperity here in our Province. Over the past year we have seen the federal Conservatives change the taxation rules relating to royalty trusts; we have seen the Alberta provincial government remove the Alberta Royalty Tax Credit; we have seen an appreciating Canadian dollar and increasingly volatile natural gas prices; and, we have seen a dramatic increase in the cost of doing business here in Alberta. Now, I realize not all of these things are direct results of the policies of the Alberta government; however, there is action you can take to foster and promote an environment which encourages small business. Penalizing business, especially small business, is not an action plan that will provide for long term economic health.

The Conservative Party in Canada, and particularly in Alberta, were historically (and I'm speaking to 25+ years ago) seen as the party of "big business". More recently - say the past 10 to 20 years, the Alberta Conservatives seemed to promote policies which encouraged small business growth. Perhaps it was the rural, farming and ranching roots. However, it appears to me that we are currently moving back to that old modus operandi. Look at what is happening. Do you really believe that Imperial Oil or Encana care about ARTC? (Yes - they will take it, if available - but the minor amount has no meaningful impact on their bottom lines). The only real impact is a negative one on smaller producers such as Berkana.

I ask you from the bottom of my heart to consider (a) waiting to implement and take the time to properly analyze the impact of the recommendations - they have been made with flawed and incomplete assumptions; and, (b) if some changes are to be made then provide for a phase-in over time - and some encouragement for small business to continue exploring to find those higher rate wells - so that we do not continue this slide into simply stripper wells and resource plays.

The royalty structure being proposed will seriously and negatively impact Berkana's ability to operate and generate profits for our shareholders and our employees. Berkana is just one of literally hundreds of small energy companies in Alberta - and if it damages our ability to do business - by extension it will damage most of our peers as well. This means shareholders will look elsewhere - that means less access to capital, less drilling - and therefore, less discoveries. I will follow-up this letter with one to Mel Knight with some of the numbers as we see them.

This is a question of vision and the long term. This is a critical point in your tenure as Premier. The negative impact on provincial treasury revenues will not be immediate. You and your government will be able to slide through and point to increased revenues for a brief time. The negative consequences will take some time to be felt- and we will find ourselves with a bureaucracy hooked on the high levels of easy cash income - but a declining business environment. Yes the oil sands may sustain us for a while - but small business has limited opportunity there - it is far too capital intensive - the barriers to entry are prohibitive. How many times have we seen this in Canada. One need only look at the sad state of the legacy businesses in Ontario (manufacturing) or in BC (forestry). By not continually renewing, refreshing and encouraging for the long term - we will end up in the same state.

Finally, I'd like you to consider the mixed messages your government has been sending by giving back $400 to all Albertans. Let us now rub our transient oil wealth into the faces of the rest of country. Let us spend millions to return money that we overtaxed from the people in the first place. The resources don't belong to the government of Alberta. They belong to the people of Alberta. My company employs Albertans. If you really want to show leadership and vision for the future - encourage Alberta Junior Energy Companies to find more and grow our businesses.

Increasing taxes and royalties will not do that.

Mr. Stelmach. We need a vision for the future. We need leadership. Yes there are difficult decisions to make - but I ask you to not take the easy way out. Follow the populist route and we will end up like so many other failing jurisdictions. You have the chance to take the government off of cruise control - and show leadership. Show some vision and let's continue to build this as the best place on the planet to live, do business and raise our children.

Yours truly,

Glenn D. Gradeen
President & CEO
BERKANA ENERGY CORP.

Cc Mel Knight - Minister of Energy
Dr. Kevin Taft, MLA - Leader Alberta Liberal Party