Quick, gather your long-lived U.S. assets: The Canadian royalty trusts are coming. Calgary-based Provident Energy Trust has broken the tax barrier, leaping to southern California into the land of U.S. tax consequences to buy proved, producing reserves at a price more competitive than mature assets can be had in western Canada. The trusts have become stacked upon each other in Calgary bidding rooms, where prices have been driven to more than US$2 per implied thousand cubic feet of gas equivalent (Mcfe) for proved reserves-until now. Asset-dealers and -owners have expected it would be only a matter of time before they would venture across the border. At press time, Provident announced it has paid C$190 million for privately held California-based producer BreitBurn Energy LLC. In exchange, it receives 32 million barrels of oil equivalent of proved reserves in the Los Angeles Basin, for a price of about US$0.77 per implied Mcfe. The reserves have an 18.6-year life. "I think it is a precursor," says one source close to the asset marketplace. "I heard the trusts were coming close-not to breaking the tax code, but in minimizing the tax leakage." Trusts don't pay taxes in Canada, so what they bid for producing assets goes through a different price deck than what traditional producers use. But, they will have to pay U.S. taxes on their U.S. production, so that changes their math when considering assets across the border. The BreitBurn deal appears to be an exception-long-lived, southern California proved producing reserves can be bought less expensively than some other U.S. assets. With a lower purchase price, the tax consequences can be absorbed and still be competitive with western Canadian asset price tags. Provident reports that royalties on BreitBurn's production average 15%, compared with the average royalty of 22% paid on its Canadian production. So, the effective tax rate in 2005 will be approximately 10% to 15% of earnings before interest, taxes, depreciation and amortization (EBITDA), averaging C$2.75 per barrel of oil equivalent of BreitBurn production. In 2006, Provident expects the tax rate to increase to 25% of EBITDA. All told, the effective tax rate on cash flow earned from BreitBurn production is expected to average 15% to 20% over the life of the assets, it adds. Provident will reorganize BreitBurn into a limited partnership and hold 92% while BreitBurn co-founders and co-chief executive officers Randy Breitenbach and Hal Washburn will buy 8% for C$13.7 million. Washburn and Breitenbach will continue to manage BreitBurn, which is one of California's largest independents. (For more on BreitBurn, see "Urban Oil" in this issue.) Its assets are 99% operated. Production is 4,200 barrels of oil equivalent per day (89% light/medium oil). "BreitBurn is an exceptional platform for growth in the U.S.," says Provident chief executive officer Tom Buchanan. Some other long-lived U.S. assets-in the Appalachian Basin, for example-that sell for less than those in some U.S. hot spots-South Texas and the Rockies, for example-may survive the Canadian royalty trust tax abacus hurdle too. -Nissa Darbonne, Executive Editor