B.C. oil and natural gas royalty transition impact on new wells

As a result of government’s Royalty Review project, royalty rates on new gas wells with a spud date on or after September 1, 2022, and new dry gas and oil wells with a spud date on or after September 1, 2024, have changed. How allowances and deductions apply have also changed.

On January 1, 2027, the new royalty framework will take effect.

For the transition period, new wells are defined as:

• Gas wells with a spud date on or after September 1, 2022
• New dry gas wells with a spud date on or after September 1, 2024
• New oil wells with a spud date on or after September 1, 2024

A dry gas well is a well that produces less than 0.05618 m³ of petroleum (condensate and pentanes plus) per 1,000 m³ of natural gas (Condensate-Gas-Ratio, based on raw wellhead volumes).

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Transitional provision for new gas wells

Wells drilled between September 1, 2022 and August 31, 2024

For gas wells with a spud date on or after September 1, 2022, until August 31, 2024 a flat 5 percent royalty rate is payable for the initial production period (or 8,760 production hours, equating to approximately 12 production months) following the spud date.

After the initial production period concludes, that well falls under the pre-transition royalty system until December 31, 2026. On January 1, 2027, proposed new price-sensitive royalty rates apply. The proposed new rates depend on commodity price and range from 5 to 40 percent.

For example, for a gas well with a spud date of December 15, 2022, a flat 5 percent royalty rate applies for the initial production period (8,760 production hours). From the end of the initial production period until December 31, 2026, the variable monthly rate under the pre-transition royalty system applies. Starting January 1, 2027, the new price-sensitive royalty rates apply.

Wells drilled on or after September 1, 2024

For new gas wells with a spud date on or after September 1, 2024, a flat 5 percent royalty rate is payable for the initial production period (or 8,760 production hours, equating to approximately 12 production months) following the spud date.

After the initial production period, wells are evaluated based on volumes produced during this period. Depending on the wells’ production, the gas wells will either:

• Revert to the current royalty framework, or
• If qualified as a dry gas well, be granted an additional 5 producing months (3,647 production hours) at a 5% royalty rate. At the end of the 17-month period, these wells pay royalties based on the current royalty framework

At the end of this period, these wells fall under current royalty framework until December 31, 2026. On January 1, 2027, new price-sensitive royalty rates apply. The proposed new rates depend on commodity price and range from 5 to 40 percent.

Transitional provision for new oil wells

For new oil wells with a spud date on or after September 1, 2024, a flat 5 percent royalty rate is payable for the initial production period (or 4,380 production hours, equating to approximately 6 months) following the spud date.  

At the end of this period, these well falls under the current royalty framework until December 31, 2026. On January 1, 2027, proposed new price-sensitive royalty rates apply.

Find answers to questions about how the new royalty framework affects new wells

What do we have to do if the royalty rate that applies to our gas or oil well changes?

You don’t have to do anything. Our systems will automatically apply the appropriate royalty rate. The adjusted rate will be reflected in the royalty invoice you receive in the month following the month that your initial production period concludes.

Starting in December 2022, if you spud a new gas well on or after September 1, 2022 that has begun producing, the OGR Gas Invoice Details and OGR Oil Invoice Details CSV files that you normally get through Petrinex will reflect the flat 5% royalty rate introduced during the royalty transition period. Look for a new “NG05” code for crown land, a new “NGF5” code for freehold land, or a new “[OL05]” code for crown land in the Rate Type column of the files.

What are production months?

In relation to a well event, production months are based on a certain number of production hours. The transition regulation provides the following definitions:

• “Initial production period”, means(a) in relation to a gas well event, the period that
  • (i) begins on the first day of the first producing month, and
  • (ii) ends on the last day of the producing month in which the gas well event reaches 8 760 production hours, and
• (b) in relation to an oil well event, the period that
  • (i) begins on the first day of the first producing month, and
  • (ii) ends on the last day of the producing month in which the oil well event reaches 4 380 production hours;
• “Production hour”, in relation to a well event, means an hour in which any quantity of oil or natural gas is produced from the well event

Is our gas well eligible for the producer cost of service (PCOS) allowance? 

For the initial production period (8,760 production hours), a new gas well does not receive a PCOS allowance. After the initial production period concludes, if the well is not a dry gas well, it will receive the PCOS allowance until December 31, 2026. If the well is a dry gas well, it will not receive a PCOS allowance for the initial production period and the additional subsequent period (3,647 production hours), after which it will receive the PCOS allowance until December 31, 2026. You apply for the PCOS following the normal process.

After this point, a gathering and processing allowance replaces all cost allowances. The new gathering and processing allowance is still under development.

Is our oil well eligible for the producer cost of service (PCOS) allowance?

For the initial production period (4,380 production hours), a new oil well does not receive a PCOS allowance. After the initial production period concludes, the well will receive the normal PCOS allowance until December 31, 2026. You apply for the PCOS following the normal process.

How do we apply for the producer cost of service (PCOS) allowance for the remainder of the transition period?

Report your production hours as you normally would. When your production hours exceed the relevant initial production period (and subsequent period for dry gas wells), apply for the PCOS following the normal process.

Does our gas well receive a gas cost allowance?

Yes, the current gas cost allowance continues until December 31, 2026, at which point a new gathering and processing allowance replaces all cost allowances. The new gathering and processing allowance is still under development.

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Does our gas well qualify for the low productivity, marginal or ultra-marginal royalty reduction?

Effective September 1, 2022, new gas wells with a spud date after September 1, 2022, no longer qualify for the low productivity, marginal or ultra-marginal royalty programs.

Does our gas well qualify for the deep well deductions?

New gas wells spud on or after September 1, 2022, do not qualify for the deep well deductions.