Provincial Government Releases Offshore Oil Royalty Framework
November 2, 2015
Maximizing Offshore Oil Royalties
The Honourable Derrick Dalley, Minister of Natural Resources, today announced the framework for the Provincial Government’s enhanced generic offshore oil royalty regime.
“Establishing the enhanced generic offshore oil royalty regime is yet another strategic achievement made by this government as we prepare for future offshore oil projects. This generic royalty and our equity participation, provides the fiscal certainty that industry has been seeking. It also provides progressive sharing of revenues from resource development between the province and the investor. With increased prospectivity and certainty on our fiscal regime, we will continue to attract companies to our offshore, ensuring resource projects benefit our province, our economy and our people now and well into the future.”
– The Honourable Derrick Dalley, Minister of Natural Resources
The new regime is a commitment in the Provincial Government’s long-term energy plan. Main highlights include:
- The new framework was rigorously tested against a number of development concepts;
- It will serve the best interest of Newfoundland and Labrador while respecting the need for oil companies to earn a fair return on investment;
- Royalty rates will increase as fields become more profitable, and the highest royalty rate will be payable by oil fields that have returned $3 to the producers (after royalty) for every $1 spent; and
- It is internationally competitive, simplified, and transparent.
“The new offshore oil royalty regime demonstrates that this government understands the potential that exists in our offshore and we recognize the tremendous opportunities we must seize. We are leveraging our significant natural resources as well as supporting the strengths of an innovative business community that is competing in global markets. The Provincial Government remains focused on the province’s long-term prosperity and through sound fiscal management and responsible decisions, we are positioning Newfoundland and Labrador for success for generations to come.”
– The Honourable Ross Wiseman, Minister of Finance and President of Treasury Board
Wood Mackenzie, a trusted source of commercial intelligence for the world’s natural resources sector, has been a strategic energy adviser to the Provincial Government for over 10 years. They have been evaluating a range of options for the new generic offshore oil royalty regime with the Department of Natural Resources.
“The stated objectives of the Government of Newfoundland and Labrador were to define a royalty regime which is transparent, profit-based, progressive, and competitive. Our independent perspective and our ability to provide in-depth analysis of global fiscal systems has supported government in achieving its objectives.”
– Graham Kellas, Vice President, Global Fiscal Research, Wood Mackenzie
Additional information about the framework can be found in the backgrounder below. A detailed breakdown of the offshore oil royalty regime framework is available at www.nr.gov.nl.ca/nr/royalties/oil_gas.html
- The Honourable Derrick Dalley, Minister of Natural Resources, today announced the framework for the Provincial Government’s enhanced generic offshore oil royalty regime.
- Royalty rates will increase as fields become more profitable, and the highest royalty rate will be payable by oil fields that have returned $3 to the producers (after royalty) for every $1 spent. It is internationally competitive, simplified, and transparent.
- The regime is built around the R (or return) factor which is a ratio of project revenue over costs and accounts for variables that affect project economics such as sales revenue, pre-development and development costs, transportation costs, and historical royalties paid.
- Basic royalty, which is applied to gross revenue, begins at first production and increases from 1 per cent to 7.5 per cent as the project recovers its costs.
- Net royalty, which is applied to net revenue, only begins once project costs are fully recovered, and ranges from 10 per cent to 50 per cent. Basic royalty is a credit against net royalty once it becomes payable.
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Newfoundland and Labrador Generic Offshore Oil Royalty Regime
The Provincial Government today announced the framework for the Provincial Government’s enhanced generic offshore oil royalty regime. Some important aspects of the framework include:
- The Provincial Government will continue to secure local benefits for all projects. Benefits agreements, which will be negotiated for individual projects, will be in the best interest of Newfoundlanders and Labradorians. Costs associated with local benefits, like other project costs, will be fully royalty deductible in the enhanced regime where eligible.
- The new regime will apply to all new production licences, including production licences issued based on existing exploration and significant discovery licences and on future exploration and significant discovery licences obtained through the scheduled land tenure system, including the upcoming land sale on November 12, 2015. There will be no retroactive application of the new regime to existing projects where regulated or negotiated royalty terms are in place.
- The framework is subject to formal regulation development and final approval under the Petroleum and Natural Gas Act, which is expected in early 2016.
- Stakeholder consultations on the new framework were held with over 30 oil and gas companies and groups starting in August 2015. These included oil and gas companies active in the province, the Canadian Association of Petroleum Producers, and other potential new industry entrants. Briefings and presentations were also held with Noia, St. John’s Board of Trade, Canada-Newfoundland and Labrador Offshore Petroleum Board, Government of Canada, Government of Nova Scotia, and the Nunatsiavut Government.