UPDATE 2-Alberta backtracks on oil and gas royalties

* Maximum oil rate cut to 40 pct from 50 pct

* Maximum gas royalty cut to 36 pct from 50 pct

* No changes to oil sands royalty structure (Recasts to add detail and comment)

By Jeffrey Jones and Scott Haggett

CALGARY, Alberta, March 11 (Reuters) - The government of Alberta said on Thursday it will cut oil and gas royalties in an about-face after nearly three years of bitter complaints from the energy sector and sinking political fortunes for the ruling party.

The government of Premier Ed Stelmach said the changes to the fiscal regime in the Canadian province, one of the largest suppliers of oil and gas to the United States, are aimed at restoring investment in its petroleum reserves and competing with massive shale gas discoveries elsewhere.

"The world has changed, the realities of the energy sector have changed and Alberta must change too or risk losing its competitive edge in an industry that has given us so much and still holds so much incredible potential for our future," Stelmach told reporters.

He introduced higher royalty rates at the start of 2009, just as the recession led to a meltdown of oil and gas prices and plummeting drilling activity. Stelmach made the changes after a study concluded Albertans were being denied their fair share of resource revenues.

But since then, the government has softened its stance, tinkering with the program often to stimulate drilling. The new moves stem from a "competitiveness review" launched last year in concert with the oil industry, which had turned against the Progressive Conservative government it traditionally supports.

Alberta will lower its maximum royalty on gas production to 36 percent from 50 percent and on conventional oil to 40 percent from 50 percent at the beginning of next year.

Royalties for production of the province's vast oil sands will not change.

Energy royalties underpin Alberta's finances. Overall industry activity makes up 30 percent of its gross domestic product.

The industry welcomed the changes and a senior official refused to classify the changes as a mea culpa.

"I don't think you restore credibility and trust overnight. That's a process and it's going to take a little while," said David Collyer, president of the Canadian Association of Petroleum Producers. "But I would say that both the substance of what's been announced today and the tone in which it's been announced are both very positive steps in that direction."

Increasing the province's take was a key plank in Stelmach's 2008 election campaign, which brought him the largest majority in the province's history in the middle of a commodity-price boom that enriched the industry, sparked labor shortages and boosted inflation.

However, his popularity waned as the economy weakened and lower oil and gas prices pushed the government's budget into deficit after 14 years in surplus.

Now it will look to support the industry without reigniting public anger that led to higher royalties in the first place.

"We need to do more to explain to Albertans the ways in which our energy sector drives our economy," Energy Minister Ron Liepert said in a statement.

Several companies, including EnCana Corp (ECA.TO) and Canadian Natural Resources Ltd (CNQ.TO), cut spending in Alberta after rates were hiked, and neighboring British Columbia and Saskatchewan attracted new investment.

As well, massive new shale gas discoveries in the United States and British Columbia threatened to make the province's smaller conventional gas reserves uneconomical to produce.

Alberta expects the new changes to boost industry spending in the province by up to C$700 million ($686 million) by the 2012-13 fiscal year.

And though it expects the cuts to boost its revenue by C$168 million through the 2011-2012 fiscal year, it will see a C$363 million cut to its net revenue in 2012-13.

($1=$1.02 Canadian) (Editing by Steve Orlofsky)