There will be no free rides on Canada’s newest gas supplyfrontier, after Nova Scotia’s Liberal government established aroyalty regime that it admits puts it on the expensive side ofoffshore development areas by international standards.

Premier Russell MacLellan, whose Liberals barely clung to powerin a spring election in which resource revenues played a starringrole among campaign issues, vowed “no one will get out of payingthe people their fair share by artificially inflating cost to hideprofits. It’s our oil and our gas.” At a news conference in theNova Scotia capital of Halifax, he said, “we will get our fairshare, as will those who put their money on the line in theAtlantic.”

In Calgary to present the terms to the Canadian gas capital,MacLellan added he knows the industry did not like everything aboutthe new regime, but his government remains confident the systemwill eventually be rated as fair and competitive with offshoreregions 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, negotiatedroyalty structure achieved by the Sable Offshore Energy Project asa founding development for the Nova Scotian gas industry. The newsystem covers expansions of SOEP contemplated by forthcomingdrilling on recently-awarded resource-rights blocks, as well asentirely new fields. MacLellan, relying on estimates of theregion’s gas resource endowment by the Canada-Nova Scotia OffshorePetroleum Board and the Geological Survey of Canada, estimates thatthe SOEP region alone could grow six-fold into a 20-Tcf gas field.

The features of the new regime that drew the sharpest attentionfrom industry analysts and producers guarantee that any newdevelopment will pay some royalties from the commencement ofproduction. The provincial government’s information package on thenew system departs sharply from Canadian traditions of incentivesfor new development by stipulating “there is no royalty holiday” orperiod when projects will be clear of government levies as aninducement to proceed.

The scale starts with the province immediately collecting twoper cent of gross project revenues, rising to 5% as developmentsapproach earning a profit on costs plus interest on capitalemployed. After payout or recovery of project costs, the royaltiesbecome a profit-sharing system, with the province collecting 20-35%cent of net revenues after capital and operating costs.

For going out to new areas beyond the SOEP region around SableIsland, about 120 miles offshore of Halifax, the industry will berewarded with some breaks on the royalties. Maximum rates onhigh-risk projects will be held down to 20%, or 15 percentagepoints below the ceiling in the SOEP area. In new areas, developerswill also be able to count unsuccessful exploration drilling incalculating their costs. Around SOEP, as well as in newer areasafter they have become established production zones, the provincewill allow only costs of successful drilling to be counted inadding up costs for purposes of calculating profit-share royalties.

Offshore developers such as SOEP leader Mobil Canada, partnerShell Canada and PanCanadian Petroleum, which has a gas-liquidsproject offshore of Halifax, expressed surprise at some of theterms but added that all sides now at least have a predictableregime for making their calculations.

Under the new generic royalty regime, the province forecasts itwill net C$240 million (US$170 million) from a relatively small gasproject that produces 300 Bcf over 14 years. The province expectsto reap C$2.5 billion (US$1.75 billion) in royalty revenues fromany new project that approaches the scale of SOEP by tapping 3 Tcfover 25 years.

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