May 20, 2022
Canadian E&P Perspectives
BC Royalty Structure Unveiled - Mirroring Alberta's Model
Our view: The province of British Columbia unveiled its updated royalty framework which will be fully implemented by September 2024, with a transitional period starting September 2022. As expected, the framework will incorporate a revenue-minus-cost ("RMC") model similar to Alberta's, which replaces the prior Deep Credit drilling framework. While the result will be modestly increased royalties for BC producers, this announcement helps to improve visibility to future development in the region and will likely help equalize investment decisions between Alberta and BC. For more details on company exposures and sensitivities please see our recent note BC's Royalty Review - Lay of the Land.
Updated royalty review - phased in over several years. The updated regime will be phased in over several years with full implementation by September 2024. The new system will eliminate the Deep Well Royalty Program, the largest source of credits, as well as other historical programs, such as the Marginal Well, Ultramarginal Well, Low Productivity Well Rate Reduction and the Clean Growth Infrastructure Royalty programs. Under the new system, existing credits will expire in four years unless transferred to an environmentally focused land healings and emissions reductions pool.
Transitional system until 2024. A transitional system wlll be in place from September 1 2022 - September 1, 2024 until the full framework is in place. The transitional system will feature the first 365 producing days at a minimum rate of 5%, then shifting to the price-determined rate (to be determined). While this is shorter than the existing minimum period (currently 2+ years for most wells), the model still allows for a meaningful return of capital until higher rates kick in.
Shifting to a revenue minus cost model - drilling credits to be phased out. A new minimum royalty rate of 5% will be in effect, which is a significant increase from the current 3%. Once revenues from a well exceed capital costs, a price-sensitive royalty rate will apply (between 5% and 40%), similar to the Alberta model. The specific range of price sensitivity will vary by commodity type and has yet to be determined.
BC's Model is now comparable to Alberta's. While full details of how BC's cost assessment are 'in development', the model now mirrors that of Alberta's, which now employs a RMC model via the C* calculation. In our view, this updated structure will help to smooth the development model and reduce distortions as producers look to allocate capital on both sides of the border.
Impact to producers. Key BC producers and their exposures are detailed within the report linked above with the most BC leverage being via Crew Energy, ARC Resources, Tourmaline Oil, and Ovintiv. Full grid details are still in development and will be released in due course with the full new framework to be implemented in 2024, with our initial impression pointing to a modest (<5%) increase in gross BC royalty rates at that time, but a function of regional leverage and product mix. This announcement also helps to improve visibility in a region currently encumbered by this review plus ongoing BRFN discussions.