The Position of the Landmen

October 2nd, 2007

Honourable Dr. Lyle Oberg
Minister of FinanceGovernment of the Province of Alberta
#408 Legislature Building
10800 – 97 Avenue
Edmonton, Alberta
T5K 2B6

Dear Minister,

RE: Report of the Alberta Royalty Review Panel

The Canadian Association of Petroleum Landmen (“CAPL”) represents over 1,600 members who play a leading role in the acquisition, maintenance and disposition of both mineral and surface rights for the petroleum industry in Alberta and throughout Canada. The work of our members is at the forefront of virtually all oil and gas field activity conducted in our province. We respectfully submit the following comments on the report of the Alberta Royalty Review Panel (“the Report”).

The ‘Our Fair Share’ theme of the Report is an admirable one, considering that, with the exception of those resources underlying “freehold” and federal lands, the oil and gas resources of the Province belong to all Albertans. That being said, it is our considered opinion that many of the conclusions reached in the Report are based on dubious assumptions. As a result, we believe that, if implemented as proposed, a number of these recommendations could serve to materially reduce the overall benefits accruing to Albertans from the oil and gas industry.

Several parties, including CAPP and private research firms, have undertaken detailed technical analyses of the Report, outlined some fundamental flaws therein, and suggested some alternative directions for consideration. The CAPL supports the conclusions reached in those analyses, and in addition wishes to draw your particular attention to the following points:

• We note that the Report has excluded “bonus” revenue received by the Alberta Government from Crown land sales due to a perceived difficulty in treating the bonus issue in a meaningful and appropriate manner in any model. We strongly disagree with this approach, and note that in 2006 industry paid just under $3.5 billion to the Alberta Crown in petroleum & natural gas and oil sands mineral rights bonuses, a very substantial component of overall government revenues. Before each land sale, companies carefully analyze the risked economics of drilling and, if successful, producing from the parcels on which they areconsidering making bids, based on projected costs, reserves, geotechnical risks, product prices and royalties. The bonus bid submitted is a direct result of that analysis, and the large land bonus prices paid in 2006 represent a substantial return to the Crown of the increased economic rent that was created due to the buoyant natural gas pricing environment that year. The material reduction witnessed in 2007 year-to-date Alberta Crown land sale bonus payments reflects the much tighter economic environment that industry is now facing, and without question the implementation of the Report’s recommendations will result in a further reduction in bonus payments, particularly in exploration prospect areas in the province and especially in the areas west of the 5th and 6th meridians. Companies acquiring Crown petroleum & natural gas and oil sands rights in Alberta have done so in good faith that the fundamental regulatory ground rules underpinning their investments would not be materially altered. It would be a serious blow to the underlying investment climate if the Alberta Government were to arbitrarily alter these ground rules, particularly if no grandfathering or phase–in period is provided for.

• Every day CAPL members are charged with negotiating the terms of joint venture deals aimed at getting new wells drilled or seismic programs underway, while other members are meeting with surface owners to secure the surface rights necessary to commence field activities. The average costs and timelines for industry to obtain surface access to drill wells, lay pipelines and construct production facilities have increased dramatically in the past several years. Additional regulatory and administrative changes pertaining to surface access issues have been implemented and are currently being considered for implementation by Alberta Government ministries and the EUB which, if all implemented, will result in further increased costs and extended timelines for industry to obtain surface access for their activities in the province. Also, we have witnessed first-hand how the business environment, particularly for natural gas, has deteriorated over the past year. Fewer wells are being drilled and budgets being planned for 2008 will result in even fewer wells, even without a more burdensome royalty regime in place. While the impacts of this deteriorating business environment for natural gas exploration and development have not yet emerged in the public arena or in the popular media, it is incumbent upon you to recognize this reality in your decisions, rather than accepting the artificially low finding and development cost assumptions incorporated in the Report.

• While the Report suggests that the royalty burden on less productive wells will be reduced, this is somewhat misleading in that at a $7.00/gj gas price all natural gas wells would be subject to higher royalties. Furthermore, these purported reductions would be offset by materially higher proposed royalties on more prolific wells. By increasing the royalty rate of higher rate wells by up to 15%, the Report would place a substantial encumbrance on the vitality of the exploration sector of our industry, a sector that is already reeling from the combined impact of lower natural gas prices, the increased technical risk of and cost to develop most remaining gas prospects, the appreciation of the Canadiandollar, the phasing out of the deep gas royalty holiday, dramatically higher service and land access costs, and taxation changes to the royalty trust sector. This segment of the industry is the driving force that makes the industry in Alberta grow, and its ability to attract capital investment will be materially impacted by the proposed increase in royalty rates for more prolific wells. Higher rate wells are typically the result of exploratory initiatives that inherently carry a substantial dry-hole risk. The reward for assuming that risk is that, if successful, the wells generally yield higher rates and lower unit costs. We submit that the Panel’s failure to recognize the broader negative implications of their proposals on Alberta’s exploration and production industry’s health is one of the unanticipated consequences of failing to thoroughly understand several of the key tenets on which our industry is based.

The CAPL acknowledges the competing demands that the Alberta government is facing and the daunting challenge of finding a fair balance in responding thereto. We also recognize that some modifications to the current royalty regime to improve administrative complexity and increase transparency are likely overdue. Furthermore, we agree with other industry organizations who have noted that some targeted increases in royalty rates may be justified in periods where product prices exceed specific thresholds (but higher than those contained in the Report). However, we urge you to tread cautiously in the implementation of many of the recommendations included in the Report, as Alberta’s natural gas industry in particular is already facing a period of significant retrenchment, with far-reaching implications on the economic vitality and longer-term natural gas production rates of our Province.

Yours truly

Cindy Rutherford, President
Canadian Association of Petroleum Landmen

Cc: The Honourable Ron Stevens