Alberta intends to take about $1.4 billion more from the province's energy industry by the end of the decade.

Premier Ed Stelmach said the decision was a measured response aimed at giving Albertans their fair share while achieving a balance with industry. But both sides in the heated debate were quick to register their disappointment and concern.

Even a member of the government-appointed royalty review panel suggested that Albertans should be disappointed with what the province plans to do with royalties.

"As future generations look back at today I believe they will see that we were fair and reasonable - not greedy or short-sighted," Stelmach said last week in Calgary.

Larry Macdougal, Business Edge
Premier Ed Stelmach stopped short of implementing the full recommendations from the panel.

"I am confident we have made the right decisions for today and for Alberta's future."

Under the government's plan, royalties will go up for conventional oil, natural gas and oilsands projects, and will be more sensitive to fluctuations in price.

The Alberta premier didn't go all the way with a royalty review panel that wanted him to increase royalties by $2 billion annually as early as next summer. And he rejected about half the panel's 26 recommendations - most notably a new tax on oilsands production.

Still, Canada's oil and gas producers - both large and small - warned that Alberta's planned royalty increase would chase cash out of the province as companies look elsewhere for better returns.

"Suncor recognizes that the oilsands resource we develop is owned by the people of Alberta, and Albertans have the right to benefit economically through royalties," president Rick George said in a release.

"However, the royalty regime changes proposed by the Alberta government are substantial and could have a significant impact on industry economics."

However, early market results following the announcement showed the impact on energy stocks was not as great as predicted, with some actually climbing.

Meanwhile, Alberta Energy Minister Mel Knight headed south to the U.S. to market the province's investment opportunities and continued security of supply.

Knight was to travel to Washington, New York, Boston and Chicago to meet with government officials, investment firms and industry representatives to update them on the new royalty framework. While the royalty changes are not slated to go into effect until January 2009, industry observers say that energy companies - particularly those involved in conventional oil and gas production - could be in for a rough ride on the markets.

Tristone Capital president George Gosbee said the decision will have a "real-time impact" with companies immediately pulling cash out of the province. And he predicted that could begin to happen soon as companies finalize their winter drilling plans.

Pierre Alvarez, president of the Canadian Association of Petroleum Producers, called it "a very, very serious day in town."

"I think that after all the work the financial community had done, I think industry had expected government to take greater recognition of the cost factors that are out there at this point in time," Alvarez said in Calgary.

"And I think we were disappointed to see that the cost factors - both for conventional and unconventional - were not picked up to the degree that we think is important."

Tax specialist Michael Unick said taking $1.4 billion "out of the hands of industry" is guaranteed to have an impact on the profitability of the sector and would also impact the Canadian economy.

And he said it would also reduce the federal government's take from the oilpatch by about $280 million annually.

Stelmach said the royalty hikes were a way of giving Albertans a larger share of resource money while continuing to support the oil and natural gas companies driving the province's booming economy.

"We need a bigger pie. We just can't carve up the existing one," he said.

But a member of the royalty review panel told The Canadian Press that panel members boycotted a government briefing because they "didn't want to listen to a snow job."

The panel member, who asked not be identified, said Albertans won't know the real numbers for at least a full year and should note that government royalty negotiations with Syncrude and Suncor - the two largest oilsands producers - will take place behind closed doors.

Oil and gas royalties as they are currently calculated are forecast to bring $10.5 billion to Alberta this fiscal year - about a third of the province's total revenues. Even without any change to royalties, the government is projecting a budget surplus of $2.5 billion for 2007-08.

The royalty ruckus erupted throughout Alberta after the review panel released its report six weeks ago, and is being viewed as a test of the rookie Conservative premier's leadership.

Some have suggested he could call an election later this fall if his royalty decision appears to be going over well.

But groups that wanted Stelmach to adopt the entire royalty review report were also unhappy with the announcement.

"Industry won, there's no question about it," said Chris Severson-Baker with environmental watchdog group the Pembina Institute.

"Their mission was to move Premier Stelmach significantly off what the panel was recommending, and they succeeded in doing that."

Government opposition parties on both sides of the political spectrum - from the Alberta Liberals and New Democrat opposition to the Alberta Alliance party - all registered their displeasure with Stelmach's decision.

The auditor general said shortly after the review panel's report that the government had known for at least three years that its royalties were out of date and needed to reflect significantly higher energy prices.

Another plan coming from the announcement is that Alberta will allow oilsands producers to pay royalties in the form of bitumen rather than cash.

Stelmach said the province would then sell the raw product to Alberta upgraders and refiners to stem the flow of refining jobs to the United States where a lot of the province's bitumen is now sent - something he has been particularly concerned about.

One of the key findings in the royalty review panel was that Alberta takes less from oil and gas than other major producers, including California, Venezuela, the United Kingdom and Alaska.

The oil industry replied that Canada's oilpatch ranks among the lowest in returns on investment. It said costs are higher, production per-well is lower and many of the other countries have equity stakes in projects.

It's hard to compare royalty systems even within Canada. In Saskatchewan, royalties and taxes are forecast to top more than $1.2 billion, or about 17 per cent of total provincial revenues.

Like Alberta, royalties are collected on a sliding scale based on the age of a well and the quality of oil.

In Newfoundland and Labrador, royalty rates differ on the three producing offshore oil projects.

Royalty Highlights

* Complex royalty increase totalling $1.4 billion starting Jan. 1, 2009.

* Conventional oil and gas royalties will fluctuate on a new sliding scale based on the world price of oil and North American natural gas markets.

* Oilsands royalties will also be linked to world crude prices. At current oil prices of about US$90 a barrel, the initial rate is five per cent before construction costs are recovered, followed by a 33 per cent royalty. This compares with the current one per cent and 25 per cent charges, respectively.

* Alberta will try to encourage value-added upgrading by accepting raw oilsands bitumen in lieu of royalties and selling them to refineries within the province.

* The province rejected a proposal to implement a new oilsands severance tax that would have taken a share off all bitumen produced in Alberta, regardless of market price.

* Existing oilsands projects will not be grandfathered in on old rules, to ensure fair treatment for all. Discussions with Suncor and Syncrude, whose operations currently account for half of Alberta's oilsands production, will take place over next three months to replace special royalty deal currently in place until 2016. If talks fail, "the government will take other measures."

- With files from Business Edge