SASKATCHEWAN CRUDE OIL CROWN ROYALTY AND FREEHOLD PRODUCTION TAX Conventional Crude Oil Crown royalty and freehold production tax (royalty/tax) rates are determined each month on an individual well basis using published royalty/tax rate formulas that are sensitive to oil quality, finished drilling date, average oil price and well productivity.
Sensitive to Oil Quality • For royalty/tax purposes, there are three types of conventional oil production, including: • heavy oil – conventional oil produced in the Lloydminster and Kindersley areas of the province, other than the light sweet oil produced from the Viking formation; • southwest designated oil – conventional oil produced in the southwest area of the province from wells drilled on or after February 9, 1998; and, • non-heavy oil – all conventional oil other than heavy oil and southwest designated oil. • Royalty/tax rates are highest for non-heavy oil and lowest for heavy oil.
Sensitive to Finished Drilling Date • There are four different conventional oil production royalty/tax classifications. While there are exceptions, a very general description of the four classifications is as follows: • “old oil” – oil from wells drilled prior to 1974 (all “old oil” produced in the heavy oil areas and the southwest medium oil area was reclassified to “new oil”); • “new oil” – oil from vertical wells drilled after 1973 and before 1994 and horizontal wells drilled on or after April 1, 1991 and before October 1, 2002; • “third tier oil” – oil from vertical wells drilled after 1993 and before October 1, 2002; and, • “fourth tier oil” – oil from all wells drilled on or after October 1, 2002. • Royalty/tax rates are highest for “old oil” and lowest for “fourth tier oil”. • “Fourth tier oil” royalty rates, which apply to newly drilled wells, vary from a low of 0 per cent for low productivity wells to a high of approximately 35 per cent for high productivity wells at very high prices. “Fourth tier oil” freehold production tax rates vary from a low of 0 per cent to a high of approximately 22.5 per cent.
www.economy.gov.sk.ca
Sensitive to Average Oil Prices • A provincial average price is estimated and set each month by the Minister of Economy for each of the oil types (heavy oil, southwest designated oil, non-heavy oil). These prices are: • HOP – provincial average heavy oil price; • SOP – provincial average southwest designated oil price; and, • NOP – provincial average non-heavy oil price. • The HOP, SOP, and NOP are used to determine royalty/tax rate formula factors for each royalty/tax classification (old, new, third tier, and fourth tier) each month in accordance with established revenue sharing policies. • An increase in the HOP, SOP or NOP results in an increase in royalty/tax rates.
Sensitive to Well Productivity • The total monthly volume of oil produced from each well (MOP) is a variable in the royalty/tax rate formulas. • The higher the MOP, the higher the calculated royalty/tax rate.
Royalty/Tax Calculation • The applicable royalty/tax rate for each well is multiplied by the total monthly volume of oil produced from the well to determine the royalty/tax volume. The amount of royalty/tax payable is then calculated by multiplying the average well-head price received for the sale of oil produced from the well in the month by the calculated royalty/tax volume. The following graph shows the royalty rates applicable to conventional non-heavy oil produced from Crown land during the month of March 2012.
Saskatchewan Conventional Non-Heavy Oil Crown Royalty Rates (for the production month of March 2012) 55
Old Oil
Crown Royalty Rate (per cent)
50 45 New Oil 40 35
Third Tier Oil
30 25
Fourth Tier Oil
20 15 10
March 2012 Non-Heavy Oil Price (NOP) = $77.40 per barrel
5 0 0
10
20
30
40
50
60
70
Oil Well Productivity (barrels per day)
80
90
10
Drilling Incentives • New exploratory wells and certain types of development wells qualify for a drilling incentive that provides reduced royalty/tax rates. Eligible oil production is subject to a maximum royalty rate of 2.5 per cent and freehold production tax rate of 0 per cent for a specified volume of oil produced from qualifying wells. The specified volumes are: • 25,169 barrels for non-deep exploratory vertical oil wells; • 37,754 barrels for non-deep horizontal oil wells; • 50,339 barrels for deep development vertical oil wells; and, • 100,677 barrels for deep exploratory vertical oil wells and deep horizontal oil wells.
Enhanced Oil Recovery (EOR) •
Approved oilfield projects, including developments in oil sands and oil shale, that utilize high cost injection of substances such as steam, gas or chemicals are referred to as enhanced oil recovery projects.
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Oil produced from EOR projects that commenced operation on or after April 1, 2005 is subject to a cost sensitive regime that provides a royalty rate of 1 per cent of gross revenue prior to project payout (point at which the project recovers all investment and operating expenses). The royalty reverts to 20 per cent of operating revenue after project payout. The freehold production tax rate is 0 per cent prior to project payout and reverts to 8 per cent of operating revenue after project payout.
Additional Information Visit www.economy.gov.sk.ca/oilgasroyaltytax for royalty/tax information including: Royalty/Tax Structures and Drilling Incentive Information Circulars: PDF files of all royalty/tax structures, available drilling incentives and valuation policies applicable to crude oil and natural gas. Royalty/Tax Rate Formula Factors, Graphs and Calculator: Current and historical monthly royalty/tax formula factors for both crude oil and natural gas, PDF format graphs showing the royalty/tax rates versus well productivity for the most current month and a downloadable spreadsheet file that can be used to calculate the royalty/tax rates applicable to various oil and gas well types at various well productivity levels. Royalty/Tax Forms and Instruction Directives: Forms related to the reporting and payment of crude oil and natural gas royalties/taxes.
Want to know more? Contact: Mike Ferguson Director, Petroleum Royalties Petroleum and Natural Gas Saskatchewan Ministry of the Economy 200 - 2101 Scarth Street, Regina SK S4P 2H9
Phone: (306) 787-2605 Fax: (306) 787-2478 E-mail: mike.ferguson@gov.sk.ca
Disclaimer: The information in this document is accurate as of May 2012; however the Government of Saskatchewan accepts no liability for any actions taken as a result of the information contained herein. Printed in Canada.