The Alberta New Royalty Regime

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The Alberta New Royalty Regime

Robin Bertram, V.P. Engineering, AJM Petroleum
Consultants SPEE 2009 Annual Meeting, Santa Fe,
New Mexico 15th June 2009
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Introduction

• History of Land System in Western Canada
• Alberta Royalty Basics (New Royalty Framework)
• Conventional oil
• Oil sands
• Natural gas
• By-products
• Alberta Royalty Incentives
• Transition Royalty
• Natural Gas Deep Drilling Program
• Drilling Royalty Credit
• New Well Royalty Reduction
• Comparisons and Wrap-up

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Western Canadian Royalties

• A Brief History
• In 1670 the King of England granted all lands
  draining into Hudsons Bay to the precursor of
  the Hudsons Bay Company (HBC).
• The grant, which included land that comprised
  roughly half of what is now Western Canada,
  included everything from the surface to the
  center of the earth, except for gold, silver, or
  precious stones to be found or discovered.
• In 1869, two years after Canadian Confederation,
  the Dominion Government negotiated the surrender
  of the 1670 land grant. As part of the
  negotiation, the HBC retained close to 4.5
  million acres (approximately 5 percent of the
  lands).
• These retained lands were subsequently
  transferred to a subsidiary of the HBC called
  Hudsons Bay Oil and Gas. Through various
  transactions these lands are now owned by
  numerous oil companies.

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Western Canadian Royalties

• A Brief History continued
• In 1880 under the Canadian Pacific Railway
  Charter, the Dominion Government granted 25
  million acres (including both surface and
  underground mineral rights) to the Canadian
  Pacific Railway (CPR) in exchange for building
  a rail line from central Canada to the Pacific
  coast.
• In order to attract settlement in Western Canada,
  the CPR offered tracts of farm land to settlers.
  The CPR retained the mineral rights to these
  tracts.
• The retained oil and gas rights were subsequently
  transferred to a subsidiary of CP Railways, Pan
  Canadian Oil and Gas, which eventually merged
  with Alberta Energy to form EnCana Corporation.

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Western Canadian Royalties

• A Brief History continued
• The Dominion also granted or sold for token
  consideration, farm sized parcels of land (160
  acres) to individuals prepared to establish
  prairie homesteads.
• As a result, settlers who acquired homestead land
  prior to 1887 acquired the title to both the
  surface rights and the mineral rights.
• In 1930, the Dominion Government transferred its
  residual mineral rights to the provinces.
• These have now been classified as public lands
  and are considered Crown in royalties
  determination.
• Each province has its own unique set of royalty
  determination formulas.
• The mineral rights remaining in private ownership
  are termed freehold.

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New Alberta Royalty Framework

• Crown royalties are paid on
• Conventional oil
• Light oil greater than 35º API
• Medium oil between 25.8º and 35º API
• Heavy oil between 21.6º and 25.8º API
• Ultra heavy oil less than 21.6º API
• Oil sands
• Natural gas
• By-products (solution gas and natural gas
  liquids)

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New Alberta Royalty FrameworkConventional Oil

• Crown oil royalties are determined on a well by
  well basis and consist of two components (price
  and quantity).
• These two components are simply added together
  royalties can range from zero to 50 percent.
• The price component is a sliding scale value that
  is dependent upon a par price that is published
  monthly by the Alberta Government. The par price
  is based on fair market contract prices and
  includes adjustments for quality and
  transportation. Par prices are published for
  light, medium, heavy and ultra heavy oil.
• The quantity component is also a sliding scale
  value.

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New Alberta Royalty FrameworkConventional Oil
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Data Source AJM, 2009
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New Alberta Royalty FrameworkConventional Oil
Ultra heavy Heavy
Medium Light
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Data Source AJM, 2009
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New Alberta Royalty FrameworkOil Sands

• For approved Oil Sands Projects royalties are
  determined on a project basis and are based upon
  WTI oil prices as well as a government defined
  payout status.
• On a gross project revenue basis royalties range
  from 1 percent to 9 percent of the gross project
  revenue.
• On a net revenue basis royalties range from 25
  percent to 40 percent.
• Pre-payout projects are subject to the gross
  revenue royalty.
• Post-payout projects are subject to the greater
  of the gross revenue royalty or the net revenue
  royalty.

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New Alberta Royalty FrameworkOil Sands
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Data Source AJM, 2009
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New Alberta Royalty FrameworkNatural Gas

• Crown natural gas royalties are determined on a
  well by well basis and consist of two components
  (price and quantity).
• These two components are simply added together
  royalties can range from five to 50 percent.
• The price component is a sliding scale value that
  is dependent upon a par price that is published
  monthly by the Alberta Government. The par price
  is based on the gas composition as well as fair
  market contract prices and includes adjustments
  for transportation.
• The quantity component is a sliding scale value
  that is also influenced by the measured depth of
  the well.

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New Alberta Royalty FrameworkNatural Gas
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Data Source AJM, 2009
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New Alberta Royalty FrameworkNatural Gas
Non-Deep (lt6,560 ftKB) Depth
Adjusted (8,200 ftKB)
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Data Source AJM, 2009
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New Alberta Royalty FrameworkBy-Products

• Solution gas is handled similar to natural gas
  except that the solution gas volume used in the
  quantity component calculation includes the oil
  volume (expressed as a equivalent gas volume).
• Liquid recoveries of propane and butane are
  burdened at 30 percent.
• Liquid recoveries of pentanes are burdened at 40
  percent.

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New Alberta Royalty FrameworkProvincial
Incentives

• Transition Royalty Incentive Program
• Natural Gas Deep Drilling Program
• For wells with a true vertical depth greater than
  8,200 feet
• New Well Royalty Reduction Program
• Drilling Royalty Credit Program

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New Alberta Royalty FrameworkProvincial
Incentives

• Transition Royalty Incentive Program
• Program developed to partially offset impact of
  the NRF and will be administered on a well by
  well basis.
• Operator of the well must apply for the
  transition royalty before the end of the first
  production month.
• Eligible wells must have total measured depths
  ranging from 3,280 ft to 11,480 ft.
• Oil wells have spud dates between Jan 1, 2009 and
  Dec 31, 2013.
• Gas wells have spud dates between Nov 19, 2008
  and Dec 31, 2013.
• Transition royalties revert to NRF on January 1,
  2014.

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New Alberta Royalty FrameworkProvincial
Incentives
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Data Source AJM, 2009
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New Alberta Royalty FrameworkProvincial
Incentives
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Data Source AJM, 2009
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New Alberta Royalty FrameworkProvincial
Incentives
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Data Source AJM, 2009
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New Alberta Royalty FrameworkProvincial
Incentives
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Data Source AJM, 2009
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New Alberta Royalty FrameworkProvincial
Incentives

• Natural Gas Deep Drilling Program
• Royalty adjustment is based on total drilled
  amount. Eligible wells must have the producing
  zone deeper than 8,200 ft.
• Maximum royalty adjustment is 8,000,000 for
  development wells and 10,000,000 for exploration
  wells. Royalty adjustment is a declining balance.
• Monthly royalties payable are reduced by the
  royalty adjustment to a minimum of five percent.
• Eligible wells qualify for incentive for a total
  of five years.

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New Alberta Royalty FrameworkProvincial
Incentives

• New Well Royalty Reduction Program
• Wells commencing production between April 1, 2009
  to March 31, 2010 are eligible.
• Eligible wells will pay a five percent royalty
  subject to a maximum of 12 producing months and
  maximum recovered volumes of 50,000 bbl, 500
  MMcf, whichever occurs first.

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New Alberta Royalty FrameworkProvincial
Incentives

• Drilling Royalty Credit Program
• All conventional wells drilled in the province
  from April 1, 2009 to April 1, 2010 qualify
  (including dry holes).
• Operator of well will earn a 200 per drilled
  meter (656 per drilled ft) royalty credit that
  is applied as a company wide royalty reduction.

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New Alberta Royalty FrameworkComparison of Oil
Royalties
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New Alberta Royalty FrameworkComparison of Oil
Royalties
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New Alberta Royalty FrameworkComparison of Gas
Royalties
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New Alberta Royalty FrameworkComparison of Gas
Royalties
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New Alberta Royalty FrameworkAdditional
Information

• Alberta Energy website
• www.energy.gov.ab.ca
• British Columbia Ministry of Energy, Mines and
  Petroleum Resources website
• www.empr.gov.bc.ca
• Saskatchewan Energy and Resources website
• www.er.gov.sk.ca

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Thank you
This presentation can be downloaded at
www.ajmpc.com