CALGARY - Alberta is rolling back a large portion of its contentious royalty hike in order to encourage more drilling in the province's sagging energy industry, which has been hit hard by tightening credit markets and falling commodity prices.

In the new year, companies that drill new natural gas or conventional oil wells at a depth of between 1,000 and 3,500 metres will be able to choose between a new transitional rate or the province's previously announced royalty framework, Alberta Premier Ed Stelmach said Wednesday.

"The overriding factor is the world has changed and this is all about creating Alberta jobs," Stelmach told a news conference in Edmonton.

The new wells will be required to shift to the new royalty framework in 2014. Existing wells and most oilsands projects will pay the higher royalty rates announced a year ago.

The changes would result in savings of $1.8 billion over five years for companies that meet the drilling criteria.

Taking into account the change, the province still expects revenues generated by the new royalty framework next year to be $1.8 billion and $2.1 billion in 2010.

When asked whether the decrease in royalty revenues will, in effect, cancel out next year's expected gains, Energy Minister Mel Knight said he didn't see it that way.

"It's like investing a dollar to get a five dollar return," he told reporters in Edmonton.

"The wealth generation coupled with the increase in royalty will indeed offset that in my opinion very handsomely."

A five-year transition period makes sense, because it takes a long time for many of the new wells to ramp up production, Knight said.

"If we put a program in place for a year, it would kick start a little bit of activity for six months and die. This will allow three or four years worth of pretty solid opportunity for us to see work in the field in that depth range," he said.

University of Alberta economics professor Andre Plourde said the move will only serve to delay the effects of the royalty hike.

"I don't think we're gaining anything that wouldn't net itself out over a longer period of time," he said.

"The government now seems to put higher value on activity right now than on capturing more value from the resource for the owners ... In the longer term, the gas, the oil doesn't really go anywhere. Do we really want to get the activity out right now?"

Plans to hike Alberta's royalties created an outcry in the energy sector, which reacted by moving much of its investment out of the province, slowing drilling and delaying projects.