September 19, 2007 at 9:24 PM EDT

CALGARY — — Investors hammered oil sands stocks Wednesday, fearing the sector could be hurt if Alberta raises royalties following a landmark report that at once infuriated and befuddled the oil patch.

The report issued Wednesday by an expert review panel concluded that the provincial government should raise royalties and taxes on oil sands production significantly, adding that Alberta would remain competitive even with higher rates. The government has said it will decide what to do about the panel's recommendations by mid-October, leaving most oil producers unable to respond definitively.

The report, which also advocated higher rates on some conventional oil and natural gas wells, proposed that no projects be grandfathered, meaning every energy company operating in Alberta could be affected.

Investors reacted to the royalties report swiftly, driving the Toronto Stock Exchange energy index down 2.7 per cent, compared with 0.5-per-cent slide for the general market. There was a flurry of negative reports from brokerages and an opinion issued by Dennis Gartman, the popular stock newsletter writer, was circulated widely among traders and hedge funds.
“We may be premature and we may be responding too swiftly … we want out of all things Canadian and we want so immediately,” Mr. Gartman wrote in a midday assessment. “We are shocked, aghast, disturbed, disappointed … and we could go on.”

Oil sands stocks were particularly hard hit, with Suncor Energy Inc. down 4.5 per cent and Canadian Natural Resources Ltd. 5.9 per cent lower. Junior oil sands firms such as Synenco Energy Inc. fell further, down 15 per cent.

Conventional producers that could face higher royalties also were hurt, with names such as Highpine Oil & Gas Ltd. down 6.2 per cent.

The report, if implemented, could cut the average net asset value of large oil sands players by about 4 per cent, according to UBS Securities Canada Inc. Alberta's royalty report called for Alberta's total share of oil sands profits, including taxes and the like, to rise to 64 per cent from a current 47 per cent.

Tim Hearn, chief executive officer of top oil sands producer Imperial Oil Ltd. , said any additional royalties would harm companies already facing sky-high labour and construction costs for their projects.

“I'm not in a position today to say whether we've reached a tipping point or not because I can't tell you,” Mr. Hearn said. “But there's enough things working against us that if all this stays in place as is, there will be an effect in the industry, clearly.”

A former oil executive who was on the review panel lashed back at energy executives, saying they should concentrate on better managing their own businesses and contain cost increases rather than “whining” about higher royalties.

“I don't have any sympathies,” said Sam Spanglet, who ran Shell Canada Ltd.'s oil sands operation before retiring several years ago.

“[Alberta is] still going to be very competitive. I feel very confident.”

Some Calgarians were angry, with one broker e-mailing his clients with the subject line: “Caracas on the Bow River,” comparing Alberta with Venezuela and its socialist President Hugo Chavez, who expropriated oil assets this year.

“If [the report is] enacted, investment decisions will be impacted … [the report] reads a bit like a Chavez-style manifesto,” Steve Larke, a Peters & Co. Ltd. broker, said in the e-mail.

Premier Ed Stelmach wasn't shaken by the market's response.

“It wasn't any more than what many had predicted,” he told reporters in Calgary.

Some oil sands companies said they could deal with the proposals.

Marathon Oil Corp. of Houston, which is buying Western Oil Sands Inc. for $5.8-billion, said the proposed increases would not deter its takeover, though it did say the pace of future investment might be affected.

“We were of course aware of the actions being taken on royalties,” said Marathon spokesman Paul Weeditz. “It was one of the points we factored into our analysis of acquiring Western, and we are moving forward on the acquisition.”

With the government's course of action unknown, many executives in Calgary were hesitant to speak on the record.

A senior executive for a company developing a major oil sands project, speaking on the condition of anonymity, said the proposed new rates “aren't going to help us, that's for sure.”

But he admitted that the changes likely wouldn't prevent his firm's development from being built, saying that the project should still prove profitable even with higher royalties, and that it was “very unlikely” that his firm would shelve its oil sands plans, given the lack of similar opportunities elsewhere in the world.

The Canadian Association of Petroleum Producers said it is still trying to figure out what the report exactly means and considers the document a step in a discussion process rather than the final answer.