Daily Oil Bulletin

Oil and gas producers in Alberta can move ahead on drilling and investment plans for 2017 with new technical formulas now available, the Alberta government announced late this morning.

These formulas are part of the next step in implementing Alberta’s Modernized Royalty Framework and will determine royalty rates and certain cost allowances. “This milestone is another step towards implementing the recommendations from the Royalty Review Advisory Panel,” the government stated.

Modernized Royalty Framework

There are three primary elements to the calculation of royalty payments from a well.

The Drilling and Cost Completion Allowance (identified as the C* value in the chart), is used for all resources. It determines at what point a well moves from a flat five per cent royalty rate to a price sensitive rate. The C* value is calculated using industry-wide averages for various factors involved in drilling operations.

There are price sensitive royalty rates for various commodities. They apply over most of the life of a successful and productive well. As wells decline in production, a maturity rate applies. This recognizes higher unit costs and is aimed at minimizing the premature shutting in of production.

The full technical elements of each formula are available online at www.energy.alberta.ca.

How the Modernized Royalty Framework will work in practice

1.  A company drills a well.

2.  The well’s true vertical depth, total lateral depth and the amount of drilling or fracturing material (commonly called ‘proppant placed’ in industry terms) used will be entered into the Drilling and Completion Cost Allowance formula to determine C* value for the well.

3.  Revenue from the well will be tracked monthly by multiplying production volumes of the extracted oil or gas by their respective commodity par prices, as published by Alberta Energy.

4.  The company will pay a flat royalty of five per cent on early production up until well revenue equals the C* value.

5.  Afterwards, the company will pay royalty rates ranging from five per cent to 40 per cent (dependent on price) on all subsequent production.

6.  When resource production from the well drops below a certain rate, called the Maturity Threshold, royalty rates will be adjusted downward to reflect declining production rates and accommodate the mature economics of low productivity, much as they are under the current system.

The government also continues to work on further implementation details and two additional strategic programs that were recommended by the Royalty Review Advisory Panel, one for higher-cost undeveloped areas and another for mature fields.

Further details on these programs will be released by May 31.

The new C* and royalty formulas will apply to non-oil sands wells drilled on or after Jan. 1, 2017. Wells drilled before this date will be remain under the old system until Jan. 1, 2027. Details on application to oilsands wells are expected to be released by May 31.

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