Oil major warns of $20-billion in cuts

Oil major warns of $20-billion in cuts

DAVID EBNER

October 10, 2007

CALGARY -- Oil sands projects worth more than $20-billion could be shelved by Canadian Natural Resources Ltd. if proposals to increase royalties in Alberta are fully adopted, the company said yesterday, joining a chorus of dire warnings from the energy sector.
In the oil sands, Canadian Natural's $7.6-billion Horizon mine is nearing completion and will continue, and phases two and three of the mine, which are already partly built, will also likely go ahead, the company said.

Among projects at risk that could cost more than $20-billion to develop are subsequent expansions of Horizon and plans to develop oil sands projects that use wells and inject steam to recover bitumen.

An additional $800-million of company spending in Alberta could also be slashed next year - money that would have mostly gone to drilling conventional oil and natural gas wells.

However, Canadian Natural said energy companies could pay more royalties at higher oil and natural gas prices, a concession several other major firms have also made.

"There's room for increased royalties. We're saying that," Canadian Natural president Steve Laut said in an interview.

"But it has to be at higher prices, and it has to be done in a way that makes sense, that's fair for Alberta; fair in the sense it gets more royalties but also ensures that there is a vibrant oil and gas sector." The price of oil yesterday closed at $80.26 (U.S.) a barrel, up about a third from a year earlier; natural gas was at $6.86 for 1,000 cubic feet, down about one-sixth.

With Canadian Natural joining a chorus of dire warnings from the energy business, the political pressure on rookie Premier Ed Stelmach is climbing ever higher. In September, an independent panel concluded that Alberta has been missing out on billions of dollars of energy revenue and called for much higher royalties across the board, adding that its recommendations should be implemented in full.

Last December, Mr. Stelmach unexpectedly became Premier as he squeaked past the two top contenders for Ralph Klein's job. The popularity of Mr. Stelmach's Progressive Conservative Party has plunged, though he has enjoyed a rebound recently as he continues to promise to strike the right balance on royalties.

A decision is expected this month and expectations are growing that Mr. Stelmach will capitalize on his recovering fortunes by calling an election to validate his move on royalties. He has previously said his plan is for a spring election.

The legitimacy of his leadership has been questioned by some Albertans because he became premier in a party vote rather than a general election.

In a recent poll, a majority of Albertans supported higher oil sands royalties, but didn't agree with higher rates on conventional oil and gas.

Canadian Natural, which has the biggest exposure to Alberta among the major energy companies, has taken the hardest hit in the market since the royalty report. The company's market capitalization has fallen by $3.8-billion (Canadian) to $39.2-billion as its stock has slid 8.8 per cent, compared with a 4.4-per-cent decrease in the Toronto Stock Exchange energy index.

Mr. Laut said his company would move spending to British Columbia, Saskatchewan, the North Sea and offshore West Africa, as well as pay down debt, but hopes the government makes the best decision for all stakeholders.

"There's room to move," he said. "There's somewhere we can actually make this thing work. We have high expectations the government will do the right thing."

Four thousand contractors would lose their work if the royalty recommendations are passed, and Canadian Natural would cut its 2008 natural gas drilling by 65 per cent and oil drilling by 15 per cent, he said. Jobs at the Calgary headquarters would be safe, he added.

The main problem in the oil sands, Mr. Laut said, is a proposal for a new severance tax that would give the government more money up front but would provide an inadequate return, considering the risks, for companies. The same problem, he said, is in recommendations to raise conventional oil and gas royalties.

CANADIAN NATURAL (CNQ)

Close: $72.73, down $1.06

Alberta exposure

Large North American energy companies have various amounts of their total oil and natural gas production in the province of Alberta, where higher royalties have been proposed.

Canadian Natural Resources...61%
EnCana Corp. 52%
Talisman Energy Inc. 30%
Devon Energy Corp. 20%
Apache Corp. 12%
EOG Resources Inc. 12%
Nexen Inc. 7%

Source: Peters & Co. Ltd.