Alberta says its two new oil and gas royalty programs are meant to encourage new development

Alberta energy minister Marg McCuaig-Boyd. Image: Government of Alberta

The Alberta government has announced the details of two new royalty programs, Enhanced Hydrocarbon Recovery and Emerging Resources , designed to encourage oil and gas producers to explore new areas and boost production in other areas.

When determining royalty rates, these programs will take into account the higher costs associated with enhanced recovery methods as well as the higher costs and higher risks associated with developing emerging resources. The intent of these strategic programs is to make difficult investments economically viable and increase royalties for Albertans, said the government in making the announcement following months of consultation with industry.

The Royalty Review Advisory Panel had recommended the programs as part of Alberta’s new Modernized Royalty Framework.

"Enhanced recovery" involves the injection of approved gas or liquids into wells to help stimulate increased production from a site. The "emerging resources" program will apply to wells drilled in areas with large resource potential that are in an early stage of development.

Both programs are application-based and companies will need to meet established criteria. They will take effect Jan. 1, 2017 with the overall Modernized Royalty Framework.

Detailed program and application guidelines will be available in the coming months. For purposes of the program, scheme eligibility will be subject to an economic and technical review conducted by the energy department.

The energy department also released the royalty formulas for ethane and methane.

The Canadian Association of Petroleum Producers (CAPP) welcomed the two programs which Tim McMillan, president and CEO, said serve to recognize the higher risks and greater project costs of drilling in emerging resource plays and implementing secondary recovery schemes.

“We can get more rigs out there drilling, create jobs and help generate greater long-term returns for Albertans by promoting production in underdeveloped or yet-to-be-developed areas,” said Margaret McCuaig-Boyd, minister of energy.

Enhanced Hydrocarbon Recovery Program

The Enhanced Hydrocarbon Recovery Program consists of two main components. The first component targets tertiary recovery methods involving the injection of materials into a reservoir to increase hydrocarbon production. These materials may include carbon dioxide, nitrogen, chemicals or other substances approved by the minister.

The second component targets secondary recovery methods involving the injection of water or gas into a reservoir to increase hydrocarbon production.

Under both components of the program, a company will pay a flat royalty of five per cent on crude oil, natural gas and natural gas liquids produced from wells in an approved scheme for a limited benefit period, instead of a maximum five per cent royalty rate under the existing Enhanced Oil Recovery Program.

After the benefit period ends, wells in these schemes will be subject to normal royalty rates under the Modernized Royalty Framework.

The new Enhanced Hydrocarbon Recovery Program, unlike the existing EOR program, will apply to all types of hydrocarbons produced from wells in an approved scheme, including crude oil, natural gas and natural gas liquids. The new program will extend eligibility to additional recovery methods and injection materials such as water or gas (i.e. water flooding or gas cycling), as well as polymer.

Program benefits

The benefit period that schemes approved under the program receive could be up to a maximum of 90 months. This period will depend on the recovery methods used and the estimated additional amount of hydrocarbons that can be recovered using enhanced recovery methods.

For schemes that use tertiary recovery methods, the benefit period will be determined using the benefit schedule for the current Enhanced Oil Recovery Program. However, the benefit periods in this schedule will be reduced by 25 per cent to better align with new royalty rates under the Modernized Royalty Framework.

For schemes that use secondary recovery methods, including schemes that inject polymer, the benefit period will be determined on a case by case basis as part of a two-year pilot.

After two years, the approaches for determining royalty benefit periods for both tertiary and secondary recovery methods will be reviewed, and possibly revised, to better align with the Modernized Royalty Framework’s cost allowance approach.

Program eligibility

Enhanced recovery schemes must meet all of the following criteria:

  • Receive technical approval from the Alberta Energy Regulator (AER) on or after Jan. 1, 2017;
  • Involve the injection of water, hydrocarbons, carbon dioxide, nitrogen, chemicals or other substances approved by the minister;
  • Produce more hydrocarbons from the pool than could be produced from the base recovery scheme for that pool;
  • Demonstrate that costs are significantly greater than operating the base recovery scheme; and
  • Provide a net royalty benefit to the Crown over the life of the scheme.

In addition, new schemes involving the injection of water or gas must be located in a pool or a part of a pool where these activities have not occurred previously.

The existing Enhanced Oil Recovery Program will accept new applications until Dec. 31, 2016. Schemes approved under the Enhanced Oil Recovery Program will continue to receive benefits until their royalty benefit period ends or until the Enhanced Oil Recovery Program terminates on Dec. 31, 2026, whichever comes first.

Emerging Resources Program

The Emerging Resources Program is designed to encourage industry to open up new oil and gas resources in higher-risk and higher-cost areas that have large resource potential. This will promote industry innovation and experience to accelerate the development of these resources, generating incremental royalty revenue, according to the government.

Program design

For the purposes of the program, a project consists of a defined geographic area, target formation, set of wells and associated infrastructure.

Wells that receive program benefits will pay a flat royalty rate of five per cent until their combined revenue equals their combined program specific cost allowances. After that, wells will be subject to normal royalty rates under the Modernized Royalty Framework.

Program benefits

Under the program, eligible wells will be assigned a program specific cost allowance (C*ERP) that will replace a well’s normal Drilling and Completion Cost Allowance (C*). The C*ERP could range from 150 per cent of the normal C* to double the C*. The C*ERP will vary from well to well and earlier wells in an approved project will receive a larger C*ERP than subsequently drilled wells to acknowledge the project’s early development.

A C*ERP will be calculated for each eligible well in a project and will be combined to create a project cost allowance for use by all eligible wells in a given project (i.e. cost allowances will be pooled). Eligible wells will pay a flat royalty of five per cent until their combined revenue equals the total project cost allowance.

Only a limited number of producing oil and gas wells in an approved project, no more than the first 15 per cent of the total projected well inventory, will be eligible to receive benefits.

An approved project will have up to 10 years to drill wells eligible under the program. The length of the project’s benefit period will be determined at the time of application based on an assessment of existing development within the same formation in the vicinity of the project. This acknowledges the project’s proximity to other development activity.

An additional five years will be provided for eligible wells to deplete the project cost allowance after the last eligible well is drilled.

Program eligibility

To be eligible, a proposed project must be in the public interest, as judged by the minister of energy, and meet the following criteria:

  • Large resource potential targeting a resource that has a large hydrocarbon potential and can generate substantial long-term returns for Albertans;
  • Early stage of development of a resource that is at an early and pre-commercial stage of development;
  • Strong potential of commerciality: the proposed project must be uncommercial and unlikely to become commercial without this program but a line of sight must be provided as to how the project could achieve commerciality within a reasonable timeframe with the program; and
  • Net royalty benefit to Albertans, providing incremental net royalty revenues with the assistance of the program in comparison to the royalty that would have been collected without the program.