Nova Scotia Gets Tough on Offshore Royalties (2024)

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 that he knows the industry did not like everythingabout the new regime but that his government remains confident thesystem will eventually be rated as fair and competitive withoffshore regions such as the Gulf of Mexico, the North Sea andAustralia.

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 theSOEP region alone could grow six-fold into a 20 Tcf gas field.

The features of the new royalty regime that drew the sharpestattention from industry analysts and producers guarantee that anynew development 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 2% ofgross project revenues, rising to 5% as developments approachearning a profit on costs plus interest on capital employed. Afterpayout or recovery of project costs, the royalties become aprofit-sharing system, with the province collecting 20-35% of netrevenues 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. Negotiating revenue-sharingwith the province one project at a time was becoming increasinglyrisky, after SOEP arrangements came under heavy fire during thespring election in Nova Scotia.

Under the new generic royalty regime, the province forecasts itwill net CDN$240 million (US$170 million) from a relatively smallgas project that produces 300 billion cubic feet over 14 years. Theprovince expects to reap CDN$2.5 billion (US$1.75 billion) inroyalty revenues from any new project that approaches the scale ofSOEP by tapping 3 Tcf over 25 years.

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

Gordon Jaremko, Calgary

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.

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 that he knows the industry did not like everythingabout the new regime but that his government remains confident thesystem will eventually be rated as fair and competitive withoffshore regions such as the Gulf of Mexico, the North Sea andAustralia.

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 theSOEP region alone could grow six-fold into a 20 Tcf gas field.

The features of the new royalty regime that drew the sharpestattention from industry analysts and producers guarantee that anynew development 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 2% ofgross project revenues, rising to 5% as developments approachearning a profit on costs plus interest on capital employed. Afterpayout or recovery of project costs, the royalties become aprofit-sharing system, with the province collecting 20-35% of netrevenues 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. Negotiating revenue-sharingwith the province one project at a time was becoming increasinglyrisky, after SOEP arrangements came under heavy fire during thespring election in Nova Scotia.

Under the new generic royalty regime, the province forecasts itwill net CDN$240 million (US$170 million) from a relatively smallgas project that produces 300 billion cubic feet over 14 years. Theprovince expects to reap CDN$2.5 billion (US$1.75 billion) inroyalty revenues from any new project that approaches the scale ofSOEP by tapping 3 Tcf over 25 years.

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

Gordon Jaremko, Calgary

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.

Nova Scotia Gets Tough on Offshore Royalties (2024)
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