UPDATE 2-Alberta tries to bolster oil sector with incentives

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By Jeffrey Jones

CALGARY, Alberta, March 3 (Reuters) - Alberta, Canada's top energy-producing province, offered its battered industry up to C$1.5 billion ($1.2 billion) in royalty breaks and credits on Tuesday to boost drilling and protect jobs as oil and gas prices sag.

Alberta Energy Minister Mel Knight, who championed a hike in royalty rates before prices collapsed, said the moves did not mean a softening of his stance, but rather a short-term response to the global economic crisis.

Knight also refused to characterize the initiatives, including a low, 5 percent royalty on new oil and gas wells and a royalty credit per metre of well drilled, as a bailout.

"There is not one dollar accessed from this program without Albertans at work. This has nothing to do with splashing money around," Knight told reporters.

He had said in early February help was on its way.

The incentives come as Alberta -- until last year Canada's economic powerhouse due to its resource wealth -- has warned of deficits for this year and next. Officials expect up to 15,000 job losses this year, after a decade-long boom.

Industry groups have recently slashed drilling forecasts for 2009, with oil prices more than $100 a barrel lower than in July and natural gas 40 percent below the price of a year ago.

The groups said they were pleased with the breaks, which come two months after the higher royalties took effect.

The moves are aimed partly at convincing banks to loosen their purse strings for companies that have had to slash spending as access to capital dried up. There is no firm commitment for lenders, however.

"I think we've had a very, very good and positive relationship relative to this program with the investment community," Knight said. "So what I would suggest is that I think there's an opportunity for people that have maintained a relatively good balance sheet to access some additional capital."

The new low royalty rate on production from new wells, which runs for one year starting in April, could have a royalty revenue impact of up to C$1.04 billion.

With the credit per metre drilled, the smallest producers may be able to offset as much as half the royalties owed while the biggest companies would be limited to 10 percent.

The cost of that incentive could be as much as C$466 million, while the province has earmarked C$30 million for a fund to abandon and reclaim old well sites.

No revenue would be generated at all, however, if companies do not drill, Knight said.

David Collyer, president of the Canadian Association of Petroleum producers, the industry's main lobby group, said the actions should help cushion the impact of weak prices.

"Clearly the industry is, as are a lot of sectors, under a lot of stress," Collyer said. "This is a positive step that is going to help stimulate activity in the near term."

He did not have an estimate of the number of wells his members will drill in the coming year as a result. Nor did Gary Leach, president of the Small Explorers and Producers Association, whose members have been hardest hit.

"I know that many of them have been consistently cutting their planned spending for 2009, and I know from talking about the kind of incentives we might want to see, that we will see a response from the junior oil and gas sector," Leach said. "They will have additional cash flow."

($1=$1.29 Canadian) (Reporting by Jeffrey Jones; Additional reporting by Scott Haggett; Editing by Gary Hill)