Royalties

When oil and natural gas resources are produced in B.C., the Province charges producers either a royalty or a freehold production tax on behalf of British Columbians.

In the case of public resources, a royalty is collected from producers by the Province. Most natural gas and oil in B.C. is publicly owned and managed by the Province. The Province licenses oil and gas companies to develop these resources and collects royalties from oil and natural gas production on those lands. Producers who develop resources on freehold land pay freehold production tax. Royalties and freehold production taxes are covered in the same legislation, and both are commonly referred to as royalties.

The money raised by oil and natural gas royalties and freehold production taxes is used to fund vital public services, such as education and health care, and some are shared with First Nations communities under revenue-sharing agreements.

Royalty deductions

B.C.’s existing royalty system was set up nearly three decades ago. Royalty deductions reduce royalties payable to the Crown when production occurs. The Deep Well Royalty Program was created in 2003 and was initially intended to offset higher drilling and completion costs incurred by wells considered particularly deep. The reduction program is sometimes viewed as fossil fuel subsidies.

The way natural gas is produced has changed significantly over the past three decades, as have market conditions, drilling technology and costs, and global concerns on the need to address climate change.

Royalty review

On Oct. 7, 2021, the Ministry of Energy, Mines and Low Carbon Innovation launched a comprehensive review of B.C.’s decades-old oil and gas royalty system to ensure it would be modernized, aligned with the government’s climate goals and provides a fair return for British Columbians.

As part of the review, the Province released an independent assessment of B.C.’s current royalty system, completed by Nancy Olewiler, director and professor in the school of public policy at Simon Fraser University, and Jennifer Winter, associate professor of economics and scientific director of the energy and environmental policy research division in the school of public policy, University of Calgary.

The Independent Assessment found that B.C.’s outdated royalty system is broken and does not contribute to government and societal goals.

On Nov. 10, 2021, the Province released the royalty review discussion paper and launched an extensive consultation process on the design of a new oil and gas royalty system.

The majority of British Columbians who participated in the oil and gas royalty review public engagement said they are in favour of a revamped royalty system.

On May 19, 2022, the Province introduced a new oil and gas royalty system that puts the interests of British Columbians first and eliminates outdated and inefficient fossil-fuel subsidies.

A transitional system will take effect on Sept. 1, 2022, with a new royalty framework scheduled to be in place effective Sept. 1, 2024.

New royalty framework

The new framework will be based on a revenue-minus-cost royalty system. It will use price-sensitive royalty rates designed to achieve a return of 50% of profits on the public resource after costs are accounted for. Revenue-minus-cost royalty systems are globally recognized for maximizing economic value and minimizing distortions.

B.C.’s new royalty framework will use a royalty rate of 5% during the pre-payout period (i.e., from initial production until revenue from a well exceeds the total capital cost for drilling and completion). Actual development costs (drilling and completion) will be used to determine the cost for each well. Producers will submit these costs to government after a well begins production. The cost submissions will be subject to audit.

Once revenues from a well exceed capital costs, a price-sensitive royalty rate will apply (between 5% and 40%). The specific range of price sensitivity will vary by commodity type.

The minimum royalty payable will be 5% of monthly production.

Government intends to implement this system on Sept. 1, 2024.

Transition – new wells

Effective Sept. 1, 2022, new wells (i.e., those that begin drilling on or after that date) will not be eligible to qualify for the old deep-well royalty program, the Marginal Well Royalty program, the Ultramarginal Royalty program, the Low Productivity Royalty program, or the Clean Growth Infrastructure Royalty programs.

Wells drilled beginning Sept. 1, 2022, will pay a 5% royalty rate for the equivalent of the first 12 production months (8,760 production hours of production). At the end of this period, these wells will pay the prevailing price-sensitive royalty rates.

Transition – existing wells

Current wells, and any wells that begin drilling before Sept. 1, 2022, will pay royalties based on the current royalty framework until Sept. 1, 2024.

Effective Sept. 1, 2024, these wells will transition to the rules of the new royalty framework. After this date, these wells will not be eligible for rate reductions under the Marginal Well Royalty program, the Ultramarginal Royalty program, the Low Productivity Royalty program, or the Clean Growth Infrastructure Royalty programs.

Deep wells with unused deep well deductions will be able to continue to use those deductions to reduce royalties owed until Sept. 1, 2026.

Beginning in early 2023, producers will be given periodic opportunities to repurpose unused deep-well deductions by transferring them to a land-healing and emissions-reduction pool. These pooled deductions are discussed below.

As of Sept. 1, 2026, producers will no longer be eligible to reduce royalties on deep wells using deep-well deductions and no further transfer of unused deep-well deductions to a producer’s land-healing and emissions-reduction pool will be allowed.

Calculating costs under the revenue-minus-cost framework

A revenue-minus-cost royalty framework compares the cost to put a well into production with the revenues earned from that well in determining when price-sensitive royalty rates should apply. Specific cost policy is under development and will consider costs related to gathering and processing, as well as drilling and completion.

The new royalty framework will seek to use actual costs when accounting for drilling and completion costs. Producers will be required to submit cost data within six months of a new well commencing production. The methodology to determine what costs are eligible to include in setting these costs will be aligned with existing taxation standard Canada Revenue Agency – Canadian Development Expense comprised of actual costs and most expenditures below the surface that are not removable or transferable to another site, but are tailored to fit with the B.C. context.

This process is intended to be transparent and result in a fair set of policies categorizing drilling and completion amounts in the royalty system. Additional engagement with oil and gas stakeholders will occur during summer 2022 to further develop and define allowable-cost policy and amounts contained within the drilling and completion amount.

Land healing and emissions reduction pools

Producers will have the option to transfer unused deep-well deductions to a land-healing and emissions-reduction pool before Sept. 1, 2026. Multiple “transfer windows” will be provided between early 2023 and Sept. 1, 2026, to allow producers to allocate deep-well deductions to the land-healing and emissions-reduction pool. Producers will have the option to allocate some or all of the deep-well deductions associated with a well to their pool.

Once allocated to a producer’s pool, the royalty deductions will not be available to reduce royalties on the well they were originally associated with. Transfers between producers’ pools will be permitted only in circumstances related to corporate acquisitions.

The pool is intended to support work going above and beyond regulatory requirements to reduce emissions or cumulative impacts on the land base. The final scope of activities supported through the pool will be developed in the coming months based on discussions within government, with First Nations in northeastern B.C., environmental groups, industry and other stakeholders.

Next steps

The ministry will conduct annual calls for projects from producers that wish to undertake work to qualify for deductions from their land-healing and emissions-reduction Pool. Producers will be able to reduce royalties equal to expenditures on projects approved through these annual calls up to the value of deductions they have available in their pool.