Canada: Alberta's Modernized Royalty Framework

On January 29, 2016 Alberta's NDP Government announced a summary of a Modernized Royalty Framework (MRF) that it intends to implement.

During last spring's election campaign, the NDP had promised to review the Province's royalty system. The objective of this review was to design a royalty system that Albertans could trust. The promise was made in response to the concerns of some Albertans that the royalty systems designed by the previous Government (the energy industry-friendly Progressive Conservative Party) were not giving the Province its fair share of the value of its oil and gas resources.

The Royalty Review Advisory Panel

In August 2015, the Government appointed a Royalty Review Advisory Panel to conduct the review. The Review Panel's process included public engagement and technical reviews. The public engagement involved online and face-to-face dialogue with a broad cross-section of Albertans. The technical reviews included the use of three expert groups that examined the specific mechanics of the royalty framework. To support the technical reviews, the Review Panel retained energy analytics firms Wood Mackenzie and GLJ Petroleum Consultants.

The Review Panel's recommendations were originally to be proposed to the Government by the end of December, but were delayed by a month in order to ensure that they "got it right".

As the Review Panel was conducting its process, the prices of oil and natural gas were falling to their lowest levels in the past 10 to 15 years. The nose dive in prices resulted in:

  • Significant reductions in capital spending and mounting job losses in the Province by an industry struggling to survive through the downturn.
  • The Government's non-renewable resource revenues being cut in half.

At the same time, the U.S. - Alberta's biggest energy customer – emerged as a significant new competitor in the markets for the Province's oil and gas.

Against this backdrop, the Review Panel realized that the focus for Albertans should be less on "are the rates right", and more on what changes needed to be made to the royalty framework to put Alberta and its oil and gas industry in a position to address the challenges of a very different and competitive environment. The Review Panel rejected submissions that the current framework should be left alone or that only minor tinkering to the existing system was needed. They concluded that doing nothing or just making minor changes to the existing system would result in a flight of investment out of Alberta.

The Recommendations

Accordingly, in its Report to the Government the Review Panel presented recommendations, including the implementation of the MRF, to address the new reality that Alberta faces in securing value for its oil and gas resources in a highly competitive world where a return to higher prices is not a given.

The intent of the Review Panel's recommendations was to create a simpler, more transparent and efficient system that:

  • Encourages investment, creates jobs and enhances economic activity.
  • Rewards innovation and cost-efficiency. Under the MRF, producers will have economic incentives to drill and complete wells at less than the applicable prescribed costs.

Although the NDP had been concerned about whether Alberta was getting its fair share, the worsening economic conditions and the NDP's growing understanding of the industry resulted in changed priorities.

The Review Panel's recommendations were accordingly accepted by the Government in whole, with no added provisions (unlike the Climate Change policy announcement, where the Government added a 100MT/year cap on emissions from the oil sands on top of the environmental review panel's recommendations).

Key Conclusions

Some of the Review Panel's main findings and recommendations include:

  • Overall, Alberta's royalty rates are comparable with other jurisdictions, but changes are needed to simplify the system in order to make Alberta more attractive for future investment.
  • The oil sands royalty framework implemented in 2009 provides Albertans an appropriate share of value. This framework, combined with the last decade's substantial investments in oil sands projects, is poised to generate increased royalty revenues in the near future.
  • Regarding the royalty system for oil, natural gas and natural gas liquids:
    • Existing wells will continue to be governed by the current royalty system for the next 10 years, during which period existing royalty rates will be grandfathered.
    • The MRF will apply to wells drilled starting January 1, 2017.
    • For wells to which the MRF applies there will be three separate phases.  Companies will pay a flat 5% royalty until well payout based on a revenue minus cost structure.  A Drilling and Completion Cost Allowance formula administered by the Province that will include any applicable carbon levies will provide the capital costs of wells for payout purposes.  These costs will reflect the depth and, for horizontal wells, the length of the wells drilled and will be calibrated annually. Royalties paid based on revenues on all production streams (oil, natural gas and natural gas liquids) are harmonized under the new program.
    • Post-payout, there will be two other phases:
      • The Mid-life phase where royalties are strictly tied to commodity prices.  These post payout royalty rates will be higher than the 5% flat rate that applies before payout and will be intended on average to yield the same IRR as under the current royalty system.  The post payout royalty rates will not be announced until the end of March.
      • When a Maturity threshold is hit (20 bbl/ d for oil and 200 mcf/d for natural gas) royalty rates will move to a sliding scale (based on volume and price) with a 5% minimum acknowledging that lower rate older wells have higher unit costs. This arrangement is intended to delay premature shut-ins of wells that are no longer economic under Mid-life period royalties.
  • A "distortion" that discriminates on the basis of the type of hydrocarbon found will be eliminated. As a result, companies will not end up assuming the same risk of loss or inefficiencies when, for example, they drill for oil but instead locate dry gas.
  • Current drilling incentives that were set to expire in 2016 will be extended and built into the MRF. The effect of those drilling incentives will diminish in a high price environment.
  • The Government should look into creating incentives for EOR and high risk experimental drilling.
  • There should be "an unprecedented level of transparency", including information on an easy-to-use website. A new capital cost index will be published regarding oil and gas wells.  The Province will also give prices, production volumes and allowable costs used to determine oilsands royalties.
  • An annual detailed report will compare returns to Albertans with those of competing jurisdictions while measuring job creation, investment, production costs, value-added development and environmental performance.
  • Alberta should seize opportunities to develop a value-added natural gas strategy including fostering the establishment of more downstream industries in the Province.  The Province should provide financial support to accelerate the development and commercialization of partial upgrading technologies for bitumen, in order to better utilize a resource that is unique to Alberta.

Details of the MRF, including applicable royalty rates, are to be finalized by the Government in consultation with stakeholders by March 31, 2016. There is an opportunity during this period to identify and address any unintended negative effects or other adverse consequences arising from these proposed changes.

The Industry's Response

Industry's preliminary reaction to the Review Panel's Report has been positive. Although many important details remain to be worked out, the Government has clearly signalled a desire to assist the energy sector through a challenging time.

However, Premier Notley's recent comments that  "[it] is not the time to reach out and make a big money grab. That just is not going to help Albertans overall right now," leaves open the unsettling possibility that the NDP may revisit the royalty rates when prices do recover.

 It remains to be seen, however, whether any cash that left the Province as a result of the royalty review will find its way back in the near or long-term.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Osler, Hoskin & Harcourt LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Osler, Hoskin & Harcourt LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions