British Columbia revamps natural gas and oil royalty system

British Columbia (BC) has unveiled a revamped oil and natural gas production royalty system that would replace a patchwork of complex incentives with a flat rate of 5% on all wells until that the costs are fully paid.

Decreasing royalties on paying wells would vary from 5% to 40%. Rates would be determined by prices obtained in various markets for oil, condensate, natural gas and liquid by-products. For new boreholes, the reform takes effect on 1 September. For producing wells, the change takes place on September 1, 2024.

“This new system is long overdue and will replace an outdated system that has been in place for almost three decades,” said BC Energy Minister Bruce Ralston.

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Upstream activity increased in the Montney gas shales in British Columbia and Alberta.

Ralston, along with B.C. Premier John Horgan, pointed out that the royalty reform package would scrap a 19-year-old deep-well incentive program that environmental critics attacked during the public consultation for the new system.

“For too long, a flawed system of fossil fuel subsidies has failed to align with our climate goals or ensure people fully benefit from these resources,” Horgan said.

The policy change sets a revenue sharing target of an equal 50-50 split between industry and government for sliding scales of royalty rates that would be levied after cost recovery.

Exploration and production executives urged Canada to be more proactive in seizing new liquefied natural gas export opportunities.

British Columbia’s revamped royalty system includes “land healing and emissions reduction pools.” This would allow producers who accumulated unused credits against royalties from the old system to transfer the profits to accounts dedicated to cleaning up oil and gas fields.

The details of the reform have yet to be worked out through further negotiations, which would include the participation of representatives from industry, government, first nations in northeastern British Columbia, environmental groups and others.

“Additional engagement with oil and gas stakeholders will take place during the summer of 2022 to further develop and define the allowable cost policy and the amounts contained in the drilling and completion amount,” said the Department of Energy.

With variations tailored to British Columbia conditions, the new system parallels Alberta’s revenue structure for provincially owned Crown oil and gas resources.

“A specific cost policy is being developed that will take into account costs associated with gathering and processing, as well as drilling and completion,” said the British Columbia Ministry of Energy. . The details of the environmental program remain negotiable.

The reform plan follows a finding last fall that “the royalty system for natural gas and oil is broken”, according to a report commissioned by the government. “These are piecemeal modifications of a system that was designed for a different era with different risk, technology and market conditions.”

In combination with periods of low commodity prices, an array of deep, marginal, ultra-marginal and low productivity sink deductions. as well as a Clean Growth Infrastructure Incentive Plan. have limited provincial royalty revenues and complicated collection.

The Canadian Association of Petroleum Producers said its “initial assessment” showed that British Columbia “has modernized its system to align and remain competitive with other jurisdictions by September 2024.”

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