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Petrocan chief backs oil sands despite royalties

DAVID EBNER AND NORVAL SCOTT

Wednesday, November 28, 2007

CALGARY — Higher petroleum royalties in Alberta will not hurt the “overall viability” of Petro-Canada oil sands projects, but some planned investment in conventional oil and gas in the province will be affected, chief executive officer Ron Brenneman said yesterday.

“At least at this point [the oil sands] still look like pretty solid projects and I think that's because for the most part we're dealing with very high-quality resources. … They're the ones that should survive in the new royalty regime,” Mr. Brenneman said at the company's investor day in Edmonton.

Increases in royalties for conventional oil and gas production will mean that some exploration Petrocan might have carried out will be “no longer economic.”

It was the second time in two days that a major oil company has said it would chop spending in Alberta. Canadian Natural Resources Ltd. (CNQ) said Tuesday that it would cut back natural gas drilling in the province by 38 per cent next year.

Last month, Alberta said it will increase royalties across the board by a total of 20 per cent, aiming to collect $1.4-billion more in 2010, with higher rates coming into force in 2009.

While some conventional oil and gas producers have complained that the new regime will hurt their profits and have indicated they have plans to move spending elsewhere, the response from oil sands firms has been relatively muted.

CNQ did say on Tuesday that it is slowing down its plans to develop the oil sands, declaring the era of “megaprojects” over.

The company said the main cause was the spiralling cost of labour around Fort McMurray and didn't blame higher royalties.

The level of returns that the first $14-billion phase of Fort Hills might produce if oil prices are low has caused some concern amongst some analysts, and Petrocan itself has described them as “skinny.”

Nevertheless, the company has remained staunchly committed to the project, and even acquired an additional 5-per-cent stake in the development from partner UTS Energy Corp. for $375-million after the original royalty review panel report was released in September.

Mr. Brenneman said that while he was happy with Petrocan's current stake in Fort Hills, the company would consider taking a further increased interest there if one were to become available.

In conventional natural gas, Petrocan said it would direct some money from Alberta to exploration in the U.S. Rockies, although details on spending plans won't be revealed until next month.

The company has for many years been shifting its focus well beyond the province; in 2007, of a total capital spending budget of $4.12-billion, just 20 per cent was devoted to North American natural gas, of which Alberta is a part.

A small amount of investment would be diverted to Petrocan's plans to evaluate its holdings in the eastern Arctic.

While that process is in the very early stages, Petrocan's assets might support the development of a liquefied natural gas terminal in time, Mr. Brenneman said.

With files from Canadian Press

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