Oil and gas producer associations welcomed royalty innovations published Apr. 21 by the Alberta government for new wells not in the oil sands.
The changes apply to wells drilled on Jan. 1, 2017, or after. Older wells remain under the current system until Jan. 1, 2027.
The government plans to describe royalty treatment of oil sands wells by May 31.
The new system provides a "drilling and completion cost allowance" that lowers the royalty rate until certain conditions are met. It sets formulas for calculating the allowance and other adjustments that vary with commodity type.
For each well, a formula accounting for true vertical depth, total lateral depth, and amounts of drilling or fracturing material sets what the system calls a C* value.
Until revenue from the well reaches the C* value, the royalty rate is 5%. After that, the royalty rate is 5-40%, depending on the oil or gas price.
The royalty rate declines when production from a well depletes below a certain rate called the "maturity threshold."
Tim McMillan, president and chief executive officer of the Canadian Association of Petroleum Producers, said the new system "helps provide the clarity investors need to plan for the future."
Gary Leach, president of the Explorers and Producers Association of Canada welcomed "a modernized royalty framework, with more transparency and better-suited to support investment and development of Alberta's future energy resource opportunities."
System reviewed
A review of Alberta's royalty system was an early initiative of the New Democratic Party, which ousted the long-ruling Progressive Conservative Party in an election last May (OGJ Online, July 6, 2015).
The government said the new step addresses recommendations in a report published by a review panel in January to:
• Establish a structure to encourage cost reduction in the oil and gas industry, "which will increase net revenues shared by Albertans and industry in all price environments."
• Establish new royalty rates on oil and gas wells that preserve existing rates of return at the outset.
• Harmonize allowable drilling costs on oil and gas wells to remove barriers to investment.
• Incorporate existing incentive programs and ensure they operate appropriately in both low and high price environments.
The government said it continues to work on two other "strategic programs" recommended by the review group.
