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.
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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