As part of the Government of Alberta's commitment to address "unintended consequences" of the New Royalty Framework announced in October 2007 (the Framework), the Alberta Department of Energy (Alberta Energy) recently introduced two new royalty programs and certain other amendments affecting royalty calculations.
The two new royalty programs are designed to encourage the continued development of deep, high-cost oil and gas reserves, in light of identified concerns that some deep oil and gas reserves had the potential of becoming uneconomic under the Framework. These programs are expected to be implemented on January 1, 2009 with the other Framework programs.
Deep oil wells
One of the new programs is designed to provide certain royalty adjustments for deep oil wells. Exploration wells over 2,000 metres will be subject to royalty adjustments to offset higher drilling costs and provide a greater incentive for producers to continue to pursue new, deeper oil plays. Such deep oil wells will qualify for up to $1 million or 12 months of royalty offsets, whichever comes first. This program is a five year program to begin on January 1, 2009, and will only be applicable to wells drilled after April 10, 2008. According to Alberta Energy, wells deeper than 2,000 metres represent 20% of all oil wells drilled in Alberta and 26% of new conventional oil production between the years 2002 and 2007.
Deep natural gas wells
The other new program is designed to encourage continued deep gas exploration and will replace the existing Royalty Adjustment Program. This program applies to wells deeper than 2,500 metres and will provide for a sliding scale of royalty credits according the depth of the well, up to $3,750 per meter. As with the new deep oil program, the deep natural gas program is a five year program to begin on January 1, 2009, and will only be applicable to wells drilled after April 10, 2008. Alberta Energy reports that wells over 2,500 metres represent 5% of natural gas wells drilled in Alberta and 27% of natural gas production from the years 2002 to 2007.
Framework amendments
As a result of its "unintended consequences" analysis, the Government has announced that the Framework will be clarified such that four par prices will be used to calculate royalties on oil, rather than two par prices, allowing royalties to be calculated based on a price closer to that received by the producer. Par price calculations are a weighted average market price of a wide range of crude types. Currently two par price calculations are used, one for heavy oil (greater than 25.7º API gravity) and one for non-heavy oil (less than 25.7º API gravity). The new par price calculations (light par, medium par, heavy par and ultra-heavy par) will yield royalty rates that better represent the economics of the specific oil play in question.
The Framework has been further clarified to reflect that natural gas royalties will be calculated based on the sum of vertical drill depths and all laterals, with the intent of encouraging greater development of coal-bed methane and reducing the environmental footprint of oil and gas exploration and production projects in Alberta. This is perceived as good news for horizontal drillers as natural gas royalties will be calculated on combining both vertical and lateral drilling.
Future royalty programs
Mel Knight, Alberta's Energy Minister, confirms that the Government still intends to follow through with earlier commitments in the Framework and introduce a shallow rights reversion program (estimated to be announced in the fall of 2008), as well as a bitumen-in-kind program, allowing oilsands producers to pay royalties on bitumen in kind. The Government remains optimistic that they will reach the goal of implementing all new programs by January 1, 2009.
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