British Columbia (BC) has unveiled a revamped oil and natural gas production royalty system that would replace a patchwork of complex incentives with a flat 5% rate on all wells until costs are fully paid.

aeco price graph

The sliding-scale royalties on paid-for wells would range from 5% to 40%. Rates would be driven by prices fetched on various markets for oil, condensate, natural gas and liquid byproducts. For new drilling, the reform takes effect Sept. 1. For producing wells, the switch occurs Sept. 1, 2024.

“This new system is long overdue and will replace an outdated system that was in place for nearly three decades,” said BC Energy Minister Bruce Ralston.

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Upstream activity has been rising in the gassy Montney Shale in BC and Alberta. 

Ralston, along with BC Premier John Horgan, stressed the royalty reform program would abolish a 19-year-old deep well incentive scheme that environmental critics attacked during public consultation for the new system.

“For too long, a broken system of fossil-fuel subsidies has failed to align with our climate goals or ensure people fully benefit from these resources,” said Horgan.

The policy change sets a revenue-sharing target of an equal 50-50 split between the industry and the government for sliding scales of royalty rates that would be levied after costs are recovered.

Exploration and production executives have urged Canada to take a more proactive stance toward capturing emerging opportunities to export liquefied natural gas.

The revamped BC royalty system includes “land healing and emissions reduction pools.” It would allow producers that have accumulated unused credits against royalties from the old system to transfer the benefits into accounts dedicated to oil and gas field cleanups.

Details of the reform remain to be settled by further negotiations, which would include participation from representatives of industry, government, First Nations in northeastern BC, environmental groups and others.

“Additional engagement with oil and gas stakeholders will occur during summer 2022 to further develop and define allowable-cost policy and amounts contained within the drilling and completion amount,” said the energy ministry.

With variations tailored to BC conditions, the new system parallels the Alberta revenue structure for provincially owned Crown oil and gas resources.

“Specific cost policy is under development and will consider costs related to gathering and processing, as well as drilling and completion,” said the BC Energy Ministry. Details of the environmental program remain negotiable.

The reform plan followed a conclusion last fall that BC’s “royalty system for natural gas and oil is broken,” according to a government-commissioned report. “It consists of piecemeal modifications to a system that was designed for a different era with different risks, technology, and market conditions.”

In combination with low commodity price spells, an array of deep, marginal, ultra-marginal and low productivity well deductions. plus a clean growth infrastructure incentive plan. have limited provincial royalty revenues and complicated collection.

The Canadian Association of Petroleum Producers said its “initial assessment” showed that BC “has modernized its system to align” and stay competitive with other jurisdictions by September 2024.