The Canadian province of Alberta introduced two new oil and gas royalty programs on July 11, the latest step in an overhaul of the fees producers pay to the government to exploit hydrocarbon reserves.
Alberta said the royalty programs its government promised last year will encourage producers to explore new areas, boost production and keep people working. A two-year oil price slump has forced companies to slash billions in capital investment and lay off tens of thousands of employees.
Industry players, meanwhile, welcomed the latest move and said it would reward higher risk exploration and schemes designed to maximize oil and gas recovery from older wells.
"These programs serve to recognize the higher risks and greater project costs of drilling in emerging resource plays and implementing secondary recovery schemes," Tim McMillan, president of the Canadian Association of Petroleum Producers said in a statement.
Alberta's NDP government, elected in a sweeping majority last year, unsettled producers when it first announced plans to review oil and gas royalties to ensure the province received its fair share of hydrocarbon revenues.
However, the new framework unveiled in January was less radical than some industry players had feared, leaving rates unchanged on existing wells and oil sands projects, and alleviated concerns that costs could rise to punishing levels.
The Emerging Resources Program will apply to wells being drilled in hotly-tipped oil and gas plays in the early stages of development, and allow producers to pay a flat royalty rate of 5% to the government until revenue equals the wells' program-specific cost allowances.
After that, the wells will be subject to normal royalty rates laid out in Alberta's Modernized Royalty Framework, released in January.
The second scheme, the Enhanced Hydrocarbon Recovery Program, is aimed at boosting production from aging wells, which usually involves injecting gas or liquids to stimulate more output.
Producers will be able to pay a flat royalty rate of 5% for a benefit period up to a maximum of 90 months.
BMO analyst Randy Ollenberger said in a note that the Enhanced Hydrocarbon Recovery Program will benefit producers such as ARC Resources, Whitecap Resources and TORC Oil & Gas, while the Emerging Resources Program should spur development in areas like the East Shale Basin in Alberta's Duvernay play.
Both programs will begin on Jan. 1 2017.
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