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Feb 12, 2016

Alberta Royalties: Alberta at a Crossroads – Enersight MRF Alberta Royalty Regime

Author: Josh Beierle

As industry awaits the finer details associated with the Modernized Royalty Framework (MRF) proposed by the Royalty Review Advisory Panel, Enersight has created an interface that will allow clients to begin preliminary evaluations of the impact the new regime may have on oil and gas development projects in the province.

The government of Alberta has formed the Calibration Team which has been tasked with releasing full details of the MRF no later than March 31, 2016. The initial version of the Enersight interface will be subject to change based on these final details.
If you haven’t had a chance to review the report released by the review panel it can be foundhere.
All royalty calculations in Enersight associated with the MRF are based on details as outlined in this report. We recommend paying particular interest to Appendix E.

To use the MRF Enersight interface, the first step is to check the “Use Proposed MRF 2017 Alberta Royalty Regime (*** For Testing Purposes Only ***)” check box:

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Currently, the interface only requires a value for the Drilling and Completion Cost Allowance, C*. The value of C* will be used to determine payout and trigger a shift in royalties from 5% to a post payout royalty rate determined by the commodity prices of the various hydrocarbon streams, using a price function similar to current royalty calculations. Once hydrocarbon production falls below a certain Maturity Threshold, the well will be classified as mature and royalty rates will be adjusted downwards to a minimum of 5%. The Maturity Threshold will be set by the Calibration Team but initial indication is that these threshold values will be 20 bpd or less for oil and 200 mcf/d or less for gas.
The current formula suggested for C* has been included in the Notes section of the Enersight interface. In this initial state, the payout calculations in Enersight do not utilize the formula as details of coefficient values are not yet released.

Wells with a spud date before January 1, 2017 will use the old royalty structure for 10 years before automatically switching over to the new post payout calculations.

As an interim estimate of C*, Enersight has added a function that will allow users to set C* to the present Drilling and Completion costs modelled in a project:

@CapitalDetailSteps(Capital Data Type, Start Step, End Step, Capital Class, [Capital Class]…)

In essence, C* is meant to represent average drilling and completion costs. A user can assume that the Drilling and Completion costs modelled in their project are in line with the expected average costs and use these costs as a value for C*. In addition, if a user assumes Drilling and Completion costs are over or under the expected average, a user can simply multiply the Capital Detail Steps function by a user variable factor.

The following is a recommended workflow:

1. Create a user data variable to be used as an adjustment factor at the project or scenario level. The value of this factor can be set either in the project or using the Risk Scripting tool (for multiple sensitivities)
– ex. @CstarFactor()
2. Use the Capital Detail Steps function to model C* in the MRF interface and multiply this function by the adjustment factor:
– ex. @CapitalDetailSteps(CapitalAmount,0,@FirstProductionIndex(),1,2) * @CstarFactor()
3. To run multiple sensitivities on the difference in Drilling and Completion costs from the expected average and the impact on the royalties, simply set up risk scripts that alter the value of the adjustment factor.
As further details are released regarding the new royalty framework, please rest assured that Enersight will continue to provide details on how calculations will be handled in the tool.

The new royalty interface will be accessible in the latest beta version: 2.9.0.82