Alberta's new royalty framework takes effect Jan. 1

Nina M. Rach
Drilling Editor

HOUSTON, Dec. 17 -- New royalty framework rates will become effective in Alberta on Jan. 1, 2009, for production from new natural gas wells and conventional oil wells.

Spurred by then-high commodity prices, Alberta Premier Ed Stelmach announced the "New Royalty Framework" in October 2007, saying it would bring an additional $1.4 billion (Can.) to government coffers in 2010, 20% more than the current royalty regime (OGJ, Nov. 5, 2007, p. 34).

The new royalty structure did not include oil sands, and the Alberta government spent 2008 negotiating with Syncrude and Suncor, large joint-venture projects that had royalty agreements in place through 2016. Syncrude partners were the last to come to terms, announcing their acquiescence on Nov. 18.

The unforeseen drop in prices for natural gas and oil prices and credit restrictions from the global economic crisis, however, have slowed drilling activity and project development in the province.

In response, the Alberta government recently introduced optional, 5-year transitional royalty rates for new wells commenced between Nov. 19 and Dec. 31. Operators now have the option of choosing to pay royalties under the transitional scheme or the new royalty framework scheme

Clarification
Alberta Energy announced the transitional royalty rates to the media on Nov. 19, but issued a clarification on Nov. 24: "Companies with oil and gas wells between 1,000 and 3,500 m where staging, preparatory, or initial drilling work has begun during this period will be eligible to make the one-time choice to have the transitional rates applied to production beginning Jan. 1, 2009. Any wells producing oil or gas prior to Jan. 1, 2009, must transition to the new royalty framework.

"Because this clarification will only apply to a nominal number of wells and only on production after Jan. 1, this adjustment is not anticipated to affect the estimated royalty impact of the 5-year program announced on Nov. 19, 2008."

Alberta Energy stressed that the new program is not a "royalty holiday." Operators have a one-time option to select transitional rates or framework rates for new wells. All wells drilled in 2009-13 that pay transitional rates will be required to shift to the new royalty framework on Jan. 1, 2014.

All other existing wells and oil sands projects will move to the new royalty framework Jan. 1, 2009.

Contact Nina M. Rach at ninar@ogjonline.com.

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