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Offshore Natural Gas Royalty Regime

The province’s offshore contains large natural gas deposits. The Provincial Government has developed an Offshore Natural Gas Royalty Regime that will ensure these resources are developed in the best interests of Newfoundlanders and Labradorians, while at the same time providing those investors who develop the resource with a fair return.

The Provincial Government developed the Offshore Natural Gas Royalty Regime by looking at best practices from around the world and at lessons we learned from our own experience over the past 10 years. During this process, we engaged an advisory consultant to provide international consulting assistance, and benefited from ongoing consultation with industry participants.

In designing our Offshore Natural Gas Royalty Regime, the province had five principal objectives:

  • Encouraging development of economic projects
  • Obtaining higher royalties from a project when prices and profitability are higher and providing “downside protection” for developers in low price environments
  • Creating a predictable and transparent system
  • Designing a system that is sufficiently flexible to adapt to different types of projects
  • Ensuring the regime is internationally competitive.

The royalty has two components: Basic Royalty and Net Royalty. These components exist in the current oil royalty regimes, however, the mechanics of the Natural Gas Royalty terms are quite different.

Basic Royalty provides a revenue stream to the province at all stages of a project. The basic royalty rate is linked to realized prices, rather than volumes or project economics as under existing oil royalty terms. This means that the province’s percentage share of the gross revenue from each project will be largely driven by price. This approach leads to greater transparency and ensures that the interests of the Provincial Government and industry are well-aligned. Net Royalty is based on project profitability and reflects the revenue and costs associated with a particular project. Where profitability of a project is higher, the province will share in that profitability. Where profitability is less or declining, the Net Royalty Rate will be lower and the province’s share will decline.

Both the Basic Royalty rate and Net Royalty rate will be determined by a smoothing formula, rather than the existing “step” based system. This enables the new system to respond quickly to falling or rising prices, sending a positive message to investors and demonstrating that the province is prepared to share in price risk.

We have designed an Offshore Natural Gas Royalty Regime that recognizes the cost and shares the risk associated with various natural gas developments. The Regime will automatically provide a lower royalty return from the more costly and remote natural gas projects and a higher return from lower risk /lower cost projects. For a project that develops new infrastructure and is the pioneer project, the province is prepared to consider modifications to the rate structure within the Offshore Natural Gas Royalty Regime to reflect that higher project risk and infrastructure investment if economics warrant such consideration.

In order to implement the Natural Gas Royalty Regime, detailed Natural Gas Royalty Regulations are being development and are expected to be promulgated in 2010.

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