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Nova Scotia Gets Tough on Offshore Royalties

Nova Scotia Gets Tough on Offshore Royalties

There will be no free rides on Canada's newest gas-supply frontier, after Nova Scotia's Liberal government established a royalty regime that it admits puts it on the expensive side of offshore development areas by international standards.

Premier Russell MacLellan, whose Liberals barely clung to power in a spring election in which resource revenues played a starring role among campaign issues, vowed "no one will get out of paying the people their fair share by artificially inflating cost to hide profits. It's our oil and our gas." At a news conference in the Nova Scotia capital of Halifax, he said, "we will get our fair share, as will those who put their money on the line in the Atlantic."

In Calgary to present the terms to the Canadian gas capital, MacLellan added that he knows the industry did not like everything about the new regime but that his government remains confident the system will eventually be rated as fair and competitive with offshore regions such as the Gulf of Mexico, the North Sea and Australia.

The new rules, intended to be a permanent and generic regime, are considered somewhat tougher than the separate, negotiated royalty structure achieved by the Sable Offshore Energy Project as a founding development for the Nova Scotian gas industry. The new system covers expansions of SOEP contemplated by forthcoming drilling on recently-awarded resource-rights blocks, as well as entirely new fields. MacLellan, relying on estimates of the region's gas resource endowment by the Canada-Nova Scotia Offshore Petroleum Board and the Geological Survey of Canada, estimates the SOEP region alone could grow six-fold into a 20 Tcf gas field.

The features of the new royalty regime that drew the sharpest attention from industry analysts and producers guarantee that any new development will pay some royalties from the commencement of production. The provincial government's information package on the new system departs sharply from Canadian traditions of incentives for new development by stipulating "there is no royalty holiday" or period when projects will be clear of government levies as an inducement to proceed.

The scale starts with the province immediately collecting 2% of gross project revenues, rising to 5% as developments approach earning a profit on costs plus interest on capital employed. After payout or recovery of project costs, the royalties become a profit-sharing system, with the province collecting 20-35% of net revenues after capital and operating costs.

For going out to new areas beyond the SOEP region around Sable Island, about 120 miles offshore of Halifax, the industry will be rewarded with some breaks on the royalties. Maximum rates on high-risk projects will be held down to 20%, or 15 percentage points below the ceiling in the SOEP area. In new areas, developers will also be able to count unsuccessful exploration drilling in calculating their costs. Around SOEP, as well as in newer areas after they have become established production zones, the province will allow only costs of successful drilling to be counted in adding up costs for purposes of calculating profit-share royalties.

Offshore developers such as SOEP leader Mobil Canada, partner Shell Canada and PanCanadian Petroleum, which has a gas-liquids project offshore of Halifax, expressed surprise at some of the terms but added that all sides now at least have a predictable regime for making their calculations. Negotiating revenue-sharing with the province one project at a time was becoming increasingly risky, after SOEP arrangements came under heavy fire during the spring election in Nova Scotia.

Under the new generic royalty regime, the province forecasts it will net CDN$240 million (US$170 million) from a relatively small gas project that produces 300 billion cubic feet over 14 years. The province expects to reap CDN$2.5 billion (US$1.75 billion) in royalty revenues from any new project that approaches the scale of SOEP by tapping 3 Tcf over 25 years.

MacLellan's Liberals predict Nova Scotia will become one of Canada's "have provinces" by attracting enough development to relieve its share of the Atlantic region's chronic unemployment, as well as netting sufficient royalties to pay off a high government debt burden and run balanced budgets.

Gordon Jaremko, Calgary

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