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When did Alberta elect a communist government?

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By dquinton

Posted: Monday Oct 29 9:43:42AM 2007

Here is some interesting analysis from Peters & Co. regarding the new royalty rates. I believe this will actually help companies like Cobra and Bulldog which are operating in SK and will be valued on a net cash flow basis rather than boepd: There are winners and losers under the new royalty structure, but all companies will likely be modifying their capital allocations and how they produce their reservoirs. The January 2009 implementation date will allow some time for behavioral modification and will force companies to structure their programs and model their decline profiles in order to maximize returns in 2008, and then in 2009 and beyond. Industry Valuations and M&A · Gross BOEs will have very little meaning · Will accelerate move from gross production to net production reporting · NAV calculations will have to include royalties decreasing faster over time · M&A will require detailed analysis of perforation depths (while this information is public, it is a little more difficult to use meaningfully) · Specifically, existing mature Deep Basin production (>2750 m) will receive a boost because of the lower rates and the depth relief, and therefore its value will be boosted Shallow Gas/CBM weighted company · 2008 should be business as usual · Use relative strength to buy other mature low rate production · Acceleration of program going into 2009 to capture upside Multiple-Completion Deep Basin · 2008 program to be more influenced by natural gas prices · Bring on as many wells early in 2008 so that they are in their low production rate phase when 2009 comes in and can benefit from low rate and depth relief factors · Manage initial production rates in 2009 and thereafter to be close to 1 MMcf/d IPs or whatever rate optimizes economic returns Mid-Depth Natural Gas · 2008 as a time of high-grading of prospects to ensure reasonable returns for 2009 and beyond · Bring on wells at lower rates and therefore have lower decline profiles thereafter · Investigate shallow or low rate opportunities in these same areas and look for applications of horizontal drilling to capture some depth relief Mid-Rate to High-Rate Crude Oil · High grade prospects in 2008 with a view to more selective drilling in 2009 and beyond · Bring on wells at lower rates and therefore have lower decline profiles thereafter Low Rate Crude Oil · Increased downspacing of mature low rate oil pools SUMMARY DETAILS Alberta’s New Royalty Framework Shallow Gas Wins, Deep Basin Survives, But Mid-Depth Targets Lose On Friday afternoon, the Alberta Government released more details with respect to its conventional oil and gas royalty changes. The Government’s changes to natural gas royalties include lower royalties at lower prices and the inclusion of a deep gas royalty incentive. The structure of this incentive is different from the previous program and will generally result in lower near-term economic benefits for producers, but greater economic returns over the long term. However, there were no changes to the conventional oil royalty scheme proposed by the royalty review panel, with the end result being very punitive to moderately productive oil wells. We have provided detailed analyses of the changes to the economics for various play types under the new royalty regime. We estimate that shallow gas and CBM drilling programs will fare better under most reasonable commodity price scenarios, while Deep Basin multi-zone completion natural gas wells generally lose slightly overall under our price assumptions but gain some longer term relief. However, conventional higher rate natural gas wells under ~2,750 m depth and all conventional higher rate crude oil wells will have significantly lower economic returns. Therefore, while the government’s changes to the royalty structure are less severe than the royalty review panel’s suggestions, there will be changes to the allocation of capital in the Western Canadian Sedimentary Basin and many smaller entities with less geographic diversity in their asset bases will be forced to merge or sell. Summary of Impacts Natural Gas - Shallow – Shallow natural gas projects at depths of under 1,000 m are the winners under this proposal, with royalty rates being materially decreased from the current levels. Our analysis suggests that the internal rate of return for a shallow natural gas well increases to 147%, up from 112% previously, using a C$7.00 per GJ price assumption. - Mid-depth, higher rate – This group of wells, ranging from approximately 1,000 m to 2,500 m depth, is penalized the most. The changes will likely result in materially less spending in the central part of the province and in the shallower part of the Peace River Arch. Although a typical well is difficult to define for this group, we believe that the internal rate of return for this type of well at 2,500 m depth declines to 59% from 115% previously, using a C$7.00 per GJ price assumption. - Multi-zone Deep Basin – This group of wells has a large range of productivities, with higher costs due to multiple completions per wellbore. Under the government’s changes, the economics of the median well type will decline slightly, but not to the same degree as the higher rate shallower wells. We believe that the internal rate of return for this style of play with a 1 MMcf/d initial production rate will decline to 24% from 26% previously, using a C$7.00 per GJ price assumption. However, if a 2 MMcf/d initial production rate is assumed, the internal rate of return declines more severely to 52% from 114%. Conventional Crude Oil Minimal changes to the punitive suggestions from the panel. High rate producing oil wells will be dramatically impacted. The new system has a sliding scale rate from 0% to 50% based on commodity prices and the production rate of an individual well. Higher rate oil wells (>150 B/d) reach the 50% maximum royalty rate at a price of ~C$67.00/B. Additionally, many lower rate wells will experience significant increases. We calculate that a 20 B/d well will pay ~23% in royalties based on current prices under the new system. However, very low rate wells (less than 10 B/d) will not pay royalties up to a price of ~C$60.00 per barrel.

By dundee

Posted: Friday Oct 26 8:47:11AM 2007

I am generally about as pro-business as you can get, however, oil & gas companies have had it way too good for way too long in Alberta. The fact is that the resources that they extract are owned by all of the people of the province, or the country for that matter, and taxpayers have deserved a much larger piece of the pie than they had been receiving. The net margins of most oil & gas companies are far higher than those of comparable industries. The mad rush to become income funds a number of years ago in the industry was good evidence of this. That said, I would be much more supportive of a sliding scale royalty based on an inflation-adjusted oil and natural gas price (in CDN dollars) so they paid higher royalties when times were good and lower royalties when times were tough. Of course, as an investor, this news is pretty negative, but I certainly understand the reasons behind it. On the bright side, there could be more oil & gas development now in other provinces (Nova Scotia, BC, the north?).

By Prospector

Posted: Friday Oct 26 8:22:37AM 2007

The last thing any government needs is more money to waste... I mean, "spend". Problem is, if Alberta elects any of the other parties it would only get worse.

By Bobwins

Posted: Friday Oct 26 6:49:59AM 2007

tar sands weak aos.v -.12 to 1.29 ugh! stp.v -.28 to 2.07 uff! +.66 to 43.46 Pow! Petrobank still will have to pay royalties but their lower capex and lower operating expenses will help them relative to SAGD and mining bitumen. In addition, their lack of need for ngas and water will allow them to expand production without environmental opposition or the increased expenses that are undoubtedly coming if competition for limited resources intensifies. The cream rises ! Bobwins

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