Maintaining a royalty regime consistent with the economics of discovering and developing oil and gas in Alberta is the primary mandate of the Department of Energy's Supply and Royalty Policy Branch. Based on its, and its predecessors, analyses a number of changes have been made over time to accommodate an environment subject to both rapid fluctuation in price, and incremental permanent change in the resource base and the technology used to exploit it.
The royalty regime in Alberta consists of three main elements. The bonus bid is the price paid for the right to explore and produce from a parcel of Crown land. This right is sold into a competitive market by sealed bid. It represents the expected economic rent, or value above the minimum necessary rate of return ('hurdle rate'), of the highest bidder over the life of the pool the bidder expects to find.
Crown royalty is a percentage calculated monthly of production from wells on the Crown parcel. The royalty share of oil and gas is sensitive to price and productivity.
The third element is the series of effective programs added on occasion to enhance the royalty structure. These were generally used to stimulate activity in response to dramatic changes in the economic climate.
The most recent changes are based on policy reviews of both natural gas and oil. These included a number of analyses.
Review of exploration and production economics historically and into the future provided answers to two questions. Is the level of royalty over the life of a new pool appropriate? And, has the system coped well with changes in the environment?
Consideration of resource base trends indicated the direction of future economics and problems likely to arise from maturity. Review of industry financial performance indicated the likelihood of continued investment in this sector.
Economic Modelling and Analysis
The project began with modelling of natural gas exploration economics in a number of regions considered to have distinct costs and resource quality. The oil review built on that previous work, with different regions recognizing different distributions.
The gas regions were:
Southeast shallow gas,
East Central Plains,
Foothills,
West Central Plains,
Northern Deep Basin (Elmworth area),
North East, and
Rainbow Lake.
The oil regions were:
Rainbow Lake,
North Central,
Peace River/Grande Prairie,
Central,
Foothills, and
Southeast.
Data Gathering and Manipulation
Figure I depicts the model used for both oil and gas. Cash flows were modelled from the bonus bid through to abandonment of the pool. These included exploration and development capital, as well as operating costs and sales revenues.
To reflect actual experience, ERCB data on actual drilling and pool characteristics from 1967 to 1990 were used to estimate most parameters_ Others were estimated from large scale sampling for groups of large, medium, and small pools.
