Royalty treatment for gas ~ Shale wells could generate $440...

Royalty treatment for gas ~ Shale wells could generate $440 million in annual royalties and tax revenue?THE GAZETTE MARCH 18, 2011

Should shale gas production get the go-ahead in Quebec, there will be a new royalty regime waiting for the controversial industry. The rate, which will vary with the market price for natural gas and the output of each well, could reach 35 per cent, Finance Minister Raymond Bachand said Thursday. Including corporate taxes, Quebec's share of revenue from shale gas production "could exceed 50 per cent," he said.

Gas wells could easily generate more than $440 million in annual royalties and tax revenue for Quebec 15 years after production begins, according to government forecasts. But before the industry moves from exploration to production, there will be a strategic environmental assessment, recommended recently by Quebec's environment review body, known as BAPE.

A budget of $7 million has been allocated for that assessment and another $6 million will be set aside to step up inspection of existing shale gas facilities and wells to ensure that gas companies protect the environment during the exploration stage. "This development will be carried out correctly or not at all," said Bachand, echoing Premier Jean Charest. "It is now reasonable to believe that Quebec's subsoil holds substantial shale gas potential," he said. "If that is indeed the case, and only if the resource can be developed responsibly, all Quebecers must be able to benefit from it." A legal framework that defines "fair compensations" for landowners will be established, the government said.
Municipalities will receive compensation of $100,000 per producing well, to be paid over 10 years.

The new royalty rate will "compare favorably" with those in such jurisdictions as British Columbia, Bachand said. Parti Qu?b?cois finance critic Nicolas Marceau described the revised royalty regime as a "virtual project for sometime later," that will let millions in revenue from exploration "go up in smoke for several years." Under the current regime, companies producing natural gas pay a royalty at a fixed rate of 10 or 12.5 per cent.

There are also exploration and operating licenses to which costs are attached. The new regime provides for progressive royalty rates, calculated for individual wells, that vary from five per cent to 35 per cent. Costs related to exploration and operating licenses will be rolled into a new calculation of duties, the details of which are to be announced later.
Currently, shale gas activity in Quebec is essentially exploratory in nature, but Quebec expects that 250 wells could be drilled each year in Quebec if production is given the go-ahead. That scenario is based on industry information provided to the government.

According to that scenario, revenues from royalties, duties and corporate taxes collected by Quebec would reach $254 million in six years with 780 wells in production.
By Year 15, about 3,030 wells would be in production in Quebec, according to the industry scenario. Those wells would produce 427 billion cubic feet of gas, generating almost $193 million in royalties, $187 million in duties and just over $63 million in corporate income tax. Municipalities will receive $100,000 for each shale gas well on their territory, with highest annual payment of $25,000 made the year the well goes into production. Quebec has set aside $2.5 million over three years to compensate municipalities.

Once the shale gas industry is up to speed in Quebec, the government will determine the means by which compensation to municipalities will be financed by the gas industry.
Quebec anticipates that the shale gas industry would generate $1.5 billion in investments and support or create 11,000 jobs.

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