Alberta Royalty Review

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Alberta Royalty Review

• September 28, 2007

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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

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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 C120/bbl for oil but
  really can reach max at 11.00/GJ and C70/bbl
• Comparisons shows Government Take but ignores
  returns on investment, Albertas 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

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Natural Gas RoyaltiesHigher rates at all
economic prices
Source Tristone Capital
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Crude Oil RoyaltiesHigher rates at almost all
prices
Source Tristone Capital
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Global Oil/Gas Investment Returns5 Year Return
on Cumulative Capital Costs
Source John S. Herold Inc. 2007 Global Upstream
Performance Review
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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

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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

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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 Albertas international investment
  climate reputation

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Consequences to AlbertaExternal views of panel
report

• Tristone Capital
• If anything, further analysis highlights how
  negative the impact on the Alberta EP 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 US26 billion (NPV10)
• BMO Capital
• The Alberta Royalty Review Panel has released its
  recommendations on changes to Albertas 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

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Principles and Framework

• Balancing the Governments Objectives
• Stability and certainty for industry, and the
  importance of maintaining competitive fiscal and
  regulatory regimes
• Albertans expect to receive long-term benefits
  from Albertas energy resources
• Retain Albertas reputation of stability and open
  to investment

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How to achieve a better balance

• Dont 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