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Quebec to Enact New Royalty Regime for Shale Gas

Quebec said Thursday a new royalty regime for shale gas will take effect in the province once it concludes a two-year strategic environmental assessment of the industry.

The new royalty rate -- outlined in the 48-page report "A Fair and Competitive Royalty System for Responsible Shale Gas Production" -- would vary from 5% to 35%, depending on the market price of natural gas and the productivity of an individual well.

Producers currently pay a fixed royalty rate in Quebec based on the market value at the wellhead. The rate is 10% at wells that produce 2,966 Mcf/d or less. At more productive wells, the rate is 10% on the first 2,966 Mcf/d, and 12.5% on the remainder.

"It is now reasonable to believe that Quebec's subsoil holds substantial shale gas potential," Raymond Bachand, the province's finance minister, said Thursday of Quebec's portion of the Utica Shale play. "If the gas potential can be developed economically and respectfully in regard to the environment and the public, Quebecers will benefit from their fair share of this resource."

Similar progressive rate structures for natural gas have been implemented in British Columbia and Alberta. Bachand said Quebec's new royalty rate will "compare favorably" with the other provinces.

Quebec estimates that the new royalty regime would generate C$443.2 million in revenue annually and create about 11,000 jobs in 15 years, assuming that 250 wells are brought into production every year. That scenario further estimates that there would be 3,030 wells producing 427 Bcf in 15 years, generating C$398.8 million in royalties, C$187.5 million in gas duties and C$63.2 million in corporate income taxes.

The Quebec government announced March 8 that it would conduct a two-year strategic environmental assessment of shale gas, at the suggestion of a report by the Bureau d'audiences publiques sur l'environnement. Hydraulic fracturing would be allowed to continue in the province, but companies would need to go through an approval process to do so (see Shale Daily, March 14; March 10).

Bachand said the provincial government would allocate C$7 million to conduct the assessment and another C$6 million in three years to step up inspection of shale gas facilities.

"As stated by [Premier Jean Charest] in his inaugural address on Feb. 23, this development will be carried out correctly or not at all," Bachand said.

Quebec plans to mimic other jurisdictions and abolish its 15% tax credit for shale gas exploration, replacing it with non refundable royalty credits when the new shale gas royalty regime takes effect. Exact details of the new royalty credit program will be announced at a later date, but the province estimates that it will pay royalty credits totaling C$206.3 million in 15 years.

Quebec also said it will reimburse municipal governments C$100,000 over 10 years for every shale gas well operated on its territory. The reimbursement is meant to cover any additional expenses related to exploration and production. Municipalities will receive C$25,000 in the year the well begins producing, then smaller amounts in the years following.

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