Introduction
On January 29, 2016, Alberta's Royalty Review Panel (the "Panel") issued its report (the "Report") recommending a new modernized oil and gas royalty framework (the "New Framework") that will apply to all new wells spud on or after January 1, 2017. Further discussion of the Report and the New Framework can be found in previous Dentons articles, dated February 1, 2016 and April 27, 2016.
In the Report, the Panel recommended that Alberta's existing drilling incentive programs be replaced with new programs that are better aligned with the New Framework. On the basis of these recommendations, the Alberta Government announced the introduction of two new drilling incentive programs that will commence on January 1, 2017: the Enhanced Hydrocarbon Recovery Program and the Emerging Resources Program.
Enhanced Hydrocarbon Recovery Program
The Alberta government's stated objectives of the Enhanced Hydrocarbon Recovery Program are to: (a) provide appropriate royalty treatment for incremental hydrocarbon production to account for the higher costs associated with enhanced recovery methods; (b) generate incremental hydrocarbon production through enhanced hydrocarbon development; and (c) collect incremental royalty revenue from this additional production.
The Enhanced Hydrocarbon Recovery Program provides incentives to producers who are implementing either secondary or tertiary recovery methods for the extraction of hydrocarbons. Secondary recovery methods are defined as those that involve the injection of water or gas into a reservoir to increase hydrocarbon production. Tertiary recovery methods are defined as those that involve the injection of other materials—including carbon dioxide, nitrogen, chemicals or other approved substances—into a reservoir to increase hydrocarbon production.
Under the Enhanced Hydrocarbon Recovery Program, producers will pay a flat royalty rate of five percent on crude oil, natural gas and natural gas liquids produced from eligible wells for a limited benefit period. The length of the benefit period will be a maximum of 90 months, depending on the recovery methods used and the estimated additional amount of hydrocarbons that can be recovered. Following the expiry of the benefit period, the previously-eligible wells will be subject to normal royalty rates under the New Framework. Additional program details, including eligibility criteria, can be found on the Alberta Department of Energy's website.
Emerging Resources Program
The Emerging Resources Program is designed to incentivize the development of new oil and gas resources in high-risk or high-cost areas that have large resource potential. The Alberta government's stated objectives of the Emerging Resources Program are to: (a) provide appropriate royalty treatment for strategic emerging oil and gas resources; (b) promote innovation and industry experience to accelerate the development of these resources; and (c) generate incremental royalty revenue from these resources.
This program will apply to approved projects. Projects are defined as comprising a geographic area, target formation, set of wells and associated infrastructure. Under the Emerging Resources Program, each eligible well in an approved project will be assigned a program specific cost allowance ("C*ERP") that could range from 150 percent to 200 percent of the normal C* for that well. C*ERP will vary from well to well, with no more than 15 percent of wells in a given approved project being issued a C*ERP. Proponents of approved projects will have a period of up to 10 years in which to drill eligible wells, and this period will be determined at the time of application. Proponents will have an additional five-year period to deplete the combined C*ERP for the approved project, beginning after the last eligible well is drilled.
Eligible wells within an approved project will pay a flat royalty rate of five percent until their combined revenue equals their combined C*ERP. After this occurs, previously-eligible wells will be subject to normal royalty rates under the New Framework. Additional program details, including eligibility criteria, can be found on the Alberta Department of Energy's website.
Conclusion
At Dentons, we are monitoring developments in this area closely in order to provide our clients with practical analysis and market-leading advice.
This article was co-authored by Kim Martyn, an Articling Student in Dentons' Calgary office.
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