SASKATCHEWAN NATURAL GAS CROWN ROYALTY AND FREEHOLD PRODUCTION TAX Natural Gas Produced from Gas Wells 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 finished drilling date, average natural gas price and well productivity.
Sensitive to Finished Drilling Date • There are four different natural gas production royalty/tax classifications. While there are exceptions, a very general description of the four classifications is as follows: • “old gas” – natural gas from gas wells that first produced gas prior to October 1, 1976 (with some exceptions related to unit wells); • “new gas” – natural gas from gas wells drilled before February 9, 1998 and with a first production date on or after October 1, 1976 (with some exceptions related to re-entered wells, unit wells and special reclassifications); • “third tier Gas” – natural gas from gas wells drilled on or after February 9, 1998 and before October 1, 2002; and, • “fourth tier gas” – natural gas from all gas wells drilled on or after October 1, 2002. • Royalty/tax rates are highest for “old gas” and lowest for “fourth tier gas”. • “Fourth tier gas” 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 gas” freehold production tax rates vary from a low of 0 per cent to a high of approximately 22.5 per cent.
Sensitive to Average Natural Gas Prices • A provincial average natural gas price (PGP) is estimated and set each month by the Minister of the Economy. • The PGP is 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 PGP results in an increase in royalty/tax rates.
Sensitive to Well Productivity • The total monthly volume of natural gas produced from each well (MGP) is a variable in the royalty/tax rate formulas. The higher the MGP, 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 natural gas produced from the well to determine the royalty/tax volume. The amount of royalty/tax payable is then calculated by multiplying the calculated royalty/tax volume by the applicable well-head price for the gas, where the applicable well-head price is determined by subtracting the gas cost allowance from the product of the well’s heating value and the PGP. • The following graph shows the royalty rates applicable to natural gas produced from a gas well on Crown land during the month of March 2012:
Saskatchewan Natural Gas Crown Royalty Rates
Crown Royalty Rate (per cent)
(for the production month of March 2012) 50
35 New Gas
Third Tier Gas
Fourth Tier Gas
15 March 2012 Provincial Gas Price (PGP) = $1.80/GJ
Gas Well Productivity (Thousand Cubic Feet per Day)
Drilling Incentives • New exploratory or horizontal gas wells are eligible for a drilling incentive that provides a reduced royalty/tax rate. Eligible natural gas production is subject to a maximum royalty rate of 2.5 per cent and a freehold production tax rate of 0 per cent for the first 887 million cubic feet of natural gas produced from the well.
Natural Gas Produced from Oil Wells Royalty/tax rates for natural gas produced from oil wells is determined in a similar manner to natural gas produced from gas wells, except that: •
No royalty/tax is payable on gas produced from oil wells drilled prior to October 1, 2002 unless the well has been given special approval for waiver of certain production restrictions. In such cases, the natural gas is classified as “new gas” or “third tier gas”, depending on when the oil well was drilled. There are some exceptions for oil wells producing with a high gas/oil ratio.
No royalty/tax is payable on gas produced from oil wells drilled on or after October 1, 2002 unless the gas is gathered for use or sale and the monthly natural gas production volume from the well exceeds 2,296 thousand cubic feet.
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 – 2101Scarth 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.