Royalty rates are different for each well or oil sands project

The Government of Alberta collects royalties on oil and gas production where the mineral rights are owned by the Crown in Right of Alberta. Royalties are one of the ways that the Province of Alberta derives value from our province's oil and natural gas. 81% of mineral rights in Alberta are owned by the Crown.

The amount payable to the Government of Alberta (the royalty rate), may be different for each producing well or oil sands project. That's because the formulas used to determine the royalty rates consider factors such as:

  • The price the resource is sold for;
  • the volume produced;
  • an industry average of capital costs for each individual oil and gas well; and
  • capital costs to begin production for oil sands projects.

Due to the variables used for the calculation, the royalty rate may shift significantly as the well or oil sands projects' performance fluctuates with market conditions and the amount of oil or gas produced.

Producers must submit their royalty calculations, but the window of time to amend submissions has changed

Oil and gas producers are responsible for calculating their royalty rate on an ongoing basis. The Crown's royalty share of production is payable monthly, and producers must submit their records showing the royalty calculation.[1] The calculation may be subject to audit by the Department of Energy, but producers are allowed to amend the records they submit.[2] Producers had four years to amend their submitted records, until a 2014 amendment (Amendment) to Section 38(4) of the Mines and Minerals Act reduced the period for filing amendments to submissions from four years to three.[3]

The Amendment applies to submissions made for all "prescribed matters",[4] which are mostly related to royalty calculations, but also include "any interest or penalty arising or imposed" under the Mines and Minerals Act or its regulations.[5]

The submission, amendment, audit, and recalculation process may span up to five years and six months

Following the new three-year amendment period, there is now a two-year assessment period.[6] During the assessment period, the Department of Energy can audit the producer's royalty calculation.[7] If an audit determines that a recalculation is necessary, the department will notify the producer, and the department has an additional six months after the assessment period to conduct the recalculation.[8] The Mines and Minerals Act prescribes that the total timeline of five years and six months are to be calculated from the end of the calendar year in which production occurred or in which the royalty became payable.[9]

Why are we writing about this now?

The Amendment came into force beginning with the 2015 production year, which means that disclosure for 2015 was set to become statute barred three years after the end of that year. Both the 2014 and 2015 production years became statute barred on December 31, 2018 because the pre-Amendment four-year period applied for the years up to and including 2014. [10]

It is therefore proactive for industry participants who interact with the royalty system to check their agreements. If agreements were drafted to reflect the submission, amendment, and audit procedure under the Mines and Minerals Act, the agreements should be amended to reflect the new timeline.

Penalties for not submitting amendments on time

Penalties for failing to file amendments for royalty payments will likely depend on the nature of the information not submitted on time. It is possible that late information may simply not be considered, or perhaps if the late submissions would amount to a higher royalty payment, then penalties could fall under Section 23.8(1) of the Mines and Minerals Administration Regulation, which sets out:

23.8(1) If a person is required to furnish any information to the Minister, as required by the Act or a regulation under the Act, and fails to do so by the date required by the Act or a regulation, the Minister may impose a penalty of not less than $1000, and not more than $5000, for each month or part of a month during which the failure to furnish the information continues.

The amended Section 38 of the Mines and Minerals Act has not yet been judicially interpreted—further implications of the Amendment, and the Department of Energy's approach to penalizing late submissions will become apparent in 2019 if amendments for the 2015 production year were not filed by December 31, 2018.