With the announcement of Alberta’s Modernized Royalty Framework (“MRF”) details on April 21, we are now in a position to assess the impact on corporate portfolios and individual play types.
Overall, the royalty calculation is simplified, but with increased commodity price dependency relative to the existing Alberta Royalty Framework (ARF). The simplicity stems principally from the replacement of various incentives (New Well Royalty Relief, New Gas Deep Drilling) with a single cumulative revenue-based trigger, the C* function, wherein royalties transition from an early-life constant 5 percent royalty rate to mid-life par price dependent royalties. The transition is handled consistently for all wells and play types, excluding oil sands leases.
Along with the implementation of the MRF within our proprietary economic modeling software, we have conducted a wide range of comparisons to the former ARF in order to provide perspective on play-by-play impacts.
In general, the MRF calibration has succeeded in maintaining the targeted IRR-neutrality across most plays at prices that are likely to be seen in the short to medium term. There are, however, notable differences between the MRF and ARF, particularly at the extreme low (below $45 WTI) and high (above $85 WTI) ends of commodity price scenarios.
One of our recurring observations is that the MRF generates more favorable discounted net present values in many plays at the lower end of the price spectrum, whereas the ARF generates more favorable values at the high end of the price spectrum. In the Kaybob-area Duvernay liquids-rich gas case presented below, crossover in the IRR curve is visible at around $70/bbl WTI. The driving factor for this crossover is rooted in the change from a linear price-to-royalty relationship for C3/C4/C5+ liquid and in-stream components in the ARF to nonlinear par price functions in the MRF. The curves show a moderately reduced Crown take at lower commodity prices, and moderately increased Crown take at higher commodity prices. The lower Crown take at weak commodity prices will be helpful to industry if commodity prices take another dip.
The MRF appears to offer less variability in well profitability for a range of type curves at a given price point. We have investigated this effect by preparing constrained probabilistic production models developed from distributions of production forecasts within a selection of Alberta’s oil and gas plays. Sample model outputs are shown below for the Kaybob-area liquids-rich Montney gas play based on $35/bbl and $110/bbl WTI prices. The MRF cases exhibit less dispersion in IRR for both the low and high price scenarios, indicating reduced uncertainty in IRR for the MRF relative to the ARF for a defined production decline profile distribution. This increase in predictability, while relatively minor, will be a welcome piece of knowledge to industry given other uncertainties currently present.
We look forward to working with clients and industry in progressively assessing the impact of the MRF. Please contact your portfolio manager or send an email to email@example.com to learn more about how the MRF will affect your Alberta assets.
The author of this post is Trevor Rix, P.Eng. Mr. Rix is a Senior Engineer at GLJ Petroleum Consultants