Petroleum royalties

The Financial Analysis and Royalty Administration (FARA) division within the Department of Industry, Tourism and Investment (ITI) administers the oil and gas royalty regime for onshore petroleum production in the Northwest Territories (NWT).

The Petroleum Resources Act and Petroleum Lands Royalty Regulations govern the setting and collecting of royalties in respect of petroleum produced from public lands and prescribes the royalty rates, the calculation, reporting and associated interest or penalties.

The royalty regime is a generic profit-sensitive regime that is robust and competitive and provides industry with full cost recovery. As a profit-sensitive regime it takes a higher share from the most profitable developments and a lower share from less profitable developments. It is robust, as it adjusts automatically to changes in the price or quality of the resources. It is competitive with other jurisdictions, and with other investment options, providing an attractive return that encourages northern investment.

A combination of "resource rent" royalty (royalty as a share of net revenue after payout) and a minimum ad valorem royalty (royalty as a share of the value of the resource) allows risks and profits to be shared.

Royalty rates for frontier lands are specified in the Petroleum Lands Royalty Regulations. Royalty is payable by each individual interest holder of a production licence in a project. Interest holders are required to submit monthly royalty returns and pay a royalty on their monthly production. For detailed instructions on how royalty is calculated, please refer to the submission guides for the monthly royalty return and monthly production and cost statement.

Payout status is key in determining royalty rates. Payout is a measure of when an interest holder has recovered the cost of their initial investment in a project, including a specified return allowance. Prior to "project payout", royalties of 1% of gross revenues are payable for the first 18 months of production, increasing by 1% every 18 months to a maximum of five percent. After recovery of initial investment (i.e. payout) royalty is the greater of 5% of gross revenues or 30% of net revenues.

Project Life Cycle

The following chart highlights the royalty life cycle of a project:

The 1%-5% royalty rate is charged in the pre-payout phase of a project. Once the project reaches payout, the royalty rate becomes either 30% of net or 5% of gross revenues - whichever is greater.

Pre-production Licence Costs

For the purposes of computing project payout, costs incurred prior to project commencement are indexed to inflation from the date they were incurred to the date of project commencement

Payout Status

Payout is reached the first month in which the interest holder's cumulative gross revenues from a project are equal to or greater than the interest holder's cumulative costs for that project.

Cumulative costs include allowed capital costs, allowed operating costs, 1% capital cost adjustment, 10% operating cost adjustment, royalty paid, and a return allowance.

Return Allowance

The return allowance is calculated for every month following project commencement up to, but not including, the month of payout. The return allowance is generally equal to 10% plus the long-term bond rate applied to the interest holder's payout balance.

Gross Revenues

Gross revenues of an interest holder in a project are the revenues in a month from petroleum produced from project lands less allowed gas processing and transportation allowances.

Net Revenues

Net revenues of an interest holder in a project are equal to gross revenues for the month minus the aggregate of allowed capital costs, allowed operating costs, 1% capital cost adjustment, and 10% operating cost adjustment.

Royalty Management System (RMS) is an online electronic reporting application used by interest holders - oil and gas companies owning a share in a Production Licence - to submit required production and sales figures. The automated royalty calculations produced by RMS are based on the rates prescribed under the Petroleum Lands Royalty Regulations. RMS has the following features:

• The secure electronic submission of required royalty information. This online application provides confidence in the computational accuracy of the royalty submissions, has a last minute reporting capacity, and a time/date stamped acknowledgment feature.
• The ability to amend previously submitted royalty returns. Any associated interest that is payable or receivable will be computed automatically.
• The ability for interest holders to view and print their previously submitted returns, as well as to view an up-to-date account summary, including monthly details of each individual project.
• Information needs to be entered only once. Production volumes, capital costs and operating costs entered by representatives of Production Licences on the Monthly Production & Cost Statement will flow automatically to each interest holder's Monthly Royalty Return at the appropriate allocation percentage. The Payout Statement will be updated automatically from submitted Monthly Royalty Returns.

If you have questions, contact us. 

The royalty reports and returns have been prepared by the Financial Analysis and Royalty Administration (FARA) Division of Industry, Tourism and Investment. They are to be used by interest holders to meet their filing obligations under the Petroleum Lands Royalty Regulations (PLRR).

Any questions regarding these reports and returns should be directed to FARA.