Alberta Royalty Overview ARF and MRF Compared and Contrasted Steve Carmichael, Associate May 20, 2016
Introduction Alberta’s Modernized Royalty Framework (MRF) was announced January 29, 2016 and takes effect January 1, 2017. It was developed based on recommendations from the Alberta Royalty Review Panel which submitted its report on Alberta’s royalties to the government after a six-month review process. Most of the MRF formulas were finalized on April 21, 2016. Details are pending on the maturity threshold for natural gas wells. Strategic programs will be announced in the summer of 2016 and immediate areas for consideration include enhanced hydrocarbon recovery and high-risk experimental wells. The MRF will replace the old ARF (Alberta Royalty Framework) with implementation as follows: Wells spud on or after January 1, 2017 – Will fall under MRF
May 19, 2016
Wells spud prior to January 1, 2017 – Will transition to MRF after 10 years. Will continue to operate under ARF until December 31, 2026.
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Introduction Continued One of the most common questions that we have encountered is, which royalty regime is better? The old ARF or the new MRF. This question can not be answered without context: Oil vs Gas Low vs High Prices Low vs High Rates Horizontal vs Vertical Wells Sweet vs Sour Gas Shallow vs Deep
There are numerous variables to consider when trying to determine which royalty framework is more or less favorable.
May 19, 2016
To understand the differences let’s first take a 40,000 ft view of the two frameworks and breakdown a wells life into three distinct life cycles…
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Life Cycle of Oil/Gas Wells in Alberta:
Mid Life (Post Incentives)
Early Life (Royalty Incentives)
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Lower royalties to incent oil and gas development
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Higher royalties to share economic benefits with the Province
Late Life (Post Mid Life)
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Lower royalties to incent continued economic production
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Early Life Comparison: Early Life (Royalty Incentives)
Mid Life (Post Incentives)
Late Life (Post Mid Life)
(5% Royalties)
ARF – Alberta Royalty Framework
MRF – Modernized Royalties Framework
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NWRR (New Well Royalty Rate) »
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Applied to all new development
NGDDP (Natural Gas Deep Drilling Program) »
May 20, 2016
Applied to all new development
C* (Drilling and Completion Cost Allowance)
Applied only to gas wells meeting a prescribed criteria
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Early Life ARF Royalty Incentives ARF Incentives NGDDP
NWRR »
» »
Terminates based on either a cumulative volume produced or time limit Clock starts with first production Wells classified based on the following criteria: » » » » »
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Oil vs Gas Horizontal vs Vertical Exploratory vs Development Production Type (ex. CBM, Shale Gas etc.) TVD and/or Total MD
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Applies to gas wells with a MD > 2000m Begins after NWRR expires Terminates when royalty credits are depleted or 5 years from “finish drill date” Data required to calculate incentive balance: TVD of producing zone Total MD Determination of “Exploration vs Development” Prescribed government table
Is a royalty credit. The remaining balance is updated each month
TVD = Total Vertical Depth MD = Measured Depth 6
Early Life MRF and C* MRF Incentives
» » » » »
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No volume or time limit Payout reached when cumulative gross revenue from a well equals C* Revenue based on Par Prices (PP) The remaining balance will need to be updated each month Data required to calculate incentive balance: TVD of producing zone Total MD Total Lateral Length (TLL) = MD - TVD Total Proppant Placed (TPP) Prescribed government formulas
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Early Life Differences ARF vs. MRF ARF
vs
MRF
Potential Consequences: » Under ARF » Some wells were hard to classify as oil or gas (ex. very liquids rich Montney and Duvernay wells) » Because of time constraints, some wells were not able to fully utilize their royalty incentive credits and some economic benefits were forfeited » Only prescribed gas wells received NGDDP
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» Under MRF » No need to classify wells as oil or gas » No time limit; therefore, a well could conceivably remain in the royalty incentive life cycle in perpetuity » More rigorous tracking of TPP in the public domain required » Currently, no acid gas royalty reduction announced 8
Mid Life Comparison: Mid Life (Post Incentives)
Early Life (Royalty Incentives)
Min/Max Royalties under ARF
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Oil / Condensate: Natural Gas1: Propane (C3): Butane (C4): Pentane Plus (C5+):
0 – 40% 5 – 36% 30% 30% 40%
(1) Natural Gas includes methane (C1) and Ethane (C2)
Late Life (Post Mid Life)
Min/Max Royalties under MRF » » » »
Oil / Condensate / Pentanes: Natural Gas1: Propane (C3): Butane (C4):
10 – 40% 5 – 36% 10 – 36% 10 – 36%
(1) Natural Gas includes methane (C1) and Ethane (C2)
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Mid Life Comparison - Fundamentals ARF Variables »
Royalty rate variable on raw monthly Production Rates and Par Prices
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Two main Natural Gas royalty reduction programs: »
DF (Depth Factor) DF = (MD/2000)2 DF = 1 (min) for MD = 4000 m
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AGF (Acid Gas Factor) AGF = 1.03 – (H2S% + CO2%) AGF = 3% (min) AGF = 25% (max) Reduces ADP: (Adjusted ADP = ADP * AGF)
MRF Variables »
Royalty rate variable on Par Prices only
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No known royalty deduction for acid gas at the current time
May 19, 2016
ADP = Average Daily Production
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May 19, 2016
Mid Life Royalty Comparison - Oil
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May 19, 2016
Mid Life Royalty Comparison – Nat. Gas
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May 19, 2016
Mid Life Royalty Comparison – Nat. Gas
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May 19, 2016
Mid Life Royalty Comparison - Propane
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May 19, 2016
Mid Life Royalty Comparison - Butane
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May 19, 2016
Mid Life Royalty Comparison - Pentane
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Late Life Comparison:
Early Life (Royalty Incentives)
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May 19, 2016
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Mid Life (Post Incentives)
Late Life (Post Mid Life)
Differences between ARF and MRF for late life wells is still under construction. The Government has not released the maturity rates for Natural gas The conversion factors for natural gas are pending
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Late Life Comparison:
Min/Max Royalties under ARF
Min/Max Royalties under MRF
(No changes relative to Mid Life)
(Lower minimum royalties relative to Mid Life)
» » » » » May 19, 2016
Late Life (Post Mid Life)
Mid Life (Post Incentives)
Early Life (Royalty Incentives)
Oil / Condensate: Natural Gas1: Propane (C3): Butane (C4): Pentane Plus (C5+):
0 – 40% 5 – 36% 30% 30% 40%
(1) Natural Gas includes methane (C1) and Ethane (C2)
» » » »
Oil / Condensate / Pentanes: Natural Gas1: Propane (C3): Butane (C4):
5 – 40% 5 – 36% 5 – 36% 5 – 36%
(1) Natural Gas includes methane (C1) and Ethane (C2)
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Late Life Comparison - Fundamentals ARF Variables
MRF Variables
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When resource production from the well is too low to sustain the full royalty burden, it crosses its Maturity Threshold (MT)
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The MT recognizes that as a well matures its production level declines. After the MT is crossed, royalties are adjusted based on a declining linear function proportional to declining production to a minimum rate of 5 percent
No changes relative to Mid Life
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The productivity threshold for maturity is:
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Oil and Equivalents: 194.0 m3e/month (~40 Boe/day) Gas and Equivalents: TDB
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Late Life Royalty Comparison - Oil » Table displays the difference in Royalty % between MRF less ARF for a given oil price and production rate » Red indicates MRF > ARF Royalty Rate » Green indicates MRF < ARF Royalty Rate Oil Price ($/bbl)
Oil Rate (bbl/d)
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0 5 10 15 20 25 30 35 40
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30 5% 5% 5% 5% 5% 5% 3% 2% 3%
35 5% 5% 5% 5% 5% 4% 1% 0% 1%
5% 5% 5% 5% 5% 2% -1% -1% -1%
40 5% 5% 5% 5% 4% 0% -3% -3% -3%
50 5% 5% 5% 4% -3% -7% -6% -5% -4%
60 5% 5% 4% -3% -8% -9% -8% -7% -6%
70 5% 5% -1% -6% -9% -10% -9% -8% -7%
80 5% 3% -3% -7% -10% -10% -9% -9% -8%
90 5% 0% -4% -7% -10% -10% -9% -9% -8%
100 4% 0% -3% -6% -9% -10% -9% -8% -7%
110 4% 1% -2% -5% -8% -9% -8% -7% -7%
120 4% 1% -2% -5% -8% -9% -8% -8% -6%
130 3% 0% -3% -6% -9% -10% -9% -8% -5%
140 3% 0% -3% -6% -9% -10% -9% -7% -4%
150 4% 1% -2% -5% -8% -8% -8% -6% -2%
160 6% 3% 0% -3% -6% -7% -6% -4% -1%
170 6% 3% 0% -3% -6% -6% -5% -3% 0%
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Late Life Royalty Comparison – Nat. Gas
May 19, 2016
» Awaiting final guidance from Alberta Government
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May 19, 2016
Late Life Royalty Comparison - Propane
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May 19, 2016
Late Life Royalty Comparison - Butane
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May 19, 2016
Late Life Royalty Comparison - Pentane
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Relevant Links & Contact Info » Links to the ARF Formulas: » » »
ARF Royalty Calculator ARF Oil Formulas ARF Gas Formulas
» Links to MRF Formulas:
May 19, 2016
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MRF Drilling and Completion Cost Allowance (C*) MRF Oil, Pentane Plus and Condensate Parameters MRF Natural Gas and Ethane Parameters MRF Propane Parameters MRF Butane Parameters
For additional information regarding royalties please contact Steve Carmichael: 403-218-1395 25