The royalty game

Moira Baird
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Growing offshore oil royalties bump up the bottom line

— File Photo

It’s no surprise oil is the economic driver of the provincial economy these days. What’s less known is that royalty rates have climbed higher than ever and the role those rates play in the province’s finances.

This week, oil helped turn the provincial deficit into a surplus thanks in part to higher production, higher corporate income tax revenue largely fuelled by the offshore — but also due to hefty royalties.

If the fiscal forecast holds true, oil royalties will pump almost $2.2 billion into the provincial treasury this year — accounting for more than one-third of the province’s revenues.

Since oil first flowed from the Grand Banks in late 1997, the province has reaped almost $7.2 billion in royalties. (For more details, see below, Offshore Royalty Revenue Since 1998.)

This week’s update from Finance Minister Tom Marshall is expected to bump that royalty take to almost $9.4 billion by the end of March 2011.

In the past few years, oil royalty rates have also picked up steam:

— Hibernia started paying 30 per cent royalties in mid-2009.

— Terra Nova hit its top tier of 42.5 per cent in 2008.

— White Rose reached 30 per cent in March 2008.

Those royalty numbers are contained in Suncor Energy’s annual information report for 2009.

Under the Terra Nova royalty rules, there are two kinds of royalties — basic and net.

Terra Nova is currently paying the higher net royalties, which are triggered when the oilfield reaches profitability. A return on investment is also factored in for the oil companies.

At 42.5 per cent, Terra Nova is paying its top royalty rate.

Fiscal forecast

On Tuesday, Marshall revised his fiscal forecast for 2010-11, predicting a $12.3-million surplus rather than the previously anticipated $194.3-million deficit.

The following day, he told CBC Radio’s “Morning Show” oil production is expected to be higher thanks to the Hibernia oilfield.

While production at Terra Nova and White Rose is expected to be down, Marshall said Hibernia production is expected to increase by about 17.5 million barrels.

That’s on top of the 40 million barrels of crude the oilfield is expected to produce during this fiscal year.

The overall result is an extra 12.1 million barrels of oil this year.

That translates into an additional $65 million in oil royalties than originally forecast.

What Marshall didn’t say is that included in the Hibernia production is a newly tapped part of the oilfield known as AA Block — one of the four pieces of Hibernia South.

The AA Block has paid royalties of 42.5 per cent from the moment it pumped first oil in November 2009.

That block pays the same 30 per cent royalty rate as the rest of the Hibernia oilfield, along with an additional 12.5 per cent under the Hibernia South agreement signed last year.

Its top royalty rate is 50 per cent.

Unlike other parts of Hibernia South, though, royalties from the AA Block are not price-sensitive — meaning they won’t increase as world oil prices rise.


­­­­­Offshore royalty revenue since 1998

Here are the combined royalties from all the producing offshore oilfields off Newfoundland and Labrador.

Those oilfields are: Hibernia which has been in production since November 1997; Terra Nova since January 2002; White Rose since November 2005; a portion of Hibernia South known as the AA Block since November 2009; and North Amethyst since May of this year.

    Fiscal year Total royalties

    1997-98    $651,000

    1998-99    $3,295,000

    1999-00    $19,992,000

    2000-01    $40,006,000

    2001-02    $28,468,000

    2002-03    $72,952,000

    2003-04    $123,824,000

    2004-05    $234,420,000

    2005-06    $471,800,000   

    2006-07     $385,932,000

    2007-08    $1,473,127,000

    2008-09    $2,501,068,000

    2009-10    $1,826,383,000


    Total to date    $7,181,918,000




    forecast:    $2,193,400,000


Source: Government of Newfoundland and Labrador budgets, 2010 Fall Update, Telegram files

Organizations: Hibernia, Suncor Energy, CBC Radio

Geographic location: Terra Nova, White Rose, Hibernia South Newfoundland and Labrador

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Recent comments

  • Mark
    December 04, 2010 - 16:29

    How is it possible for royalty rates to be expressed as a percentage, and not be affected by the price of oil?