Deep-Well Royalty Program

This program provides royalty credits to companies when they drill deep wells.  The credits cover a portion of the drilling and completion costs for these wells and can be used to reduce the royalties payable for a producing well.

NOTE: Producers do not need to apply separately for this program. Qualified wells will receive deep-well credits automatically, subject to review by the Province.

Effective April 1, 2014, the Deep-Well Royalty Credit Program has two tiers.

Tier 1: for shallower wells

Tier 1 targets shallower wells with long horizontal segments.

Qualification Criteria

To qualify for Tier 1, a well must meet all of the following criteria:

  1. A gas well with a spud date of April 1, 2014 or later that is not part of a coalbed methane project;
  2. A horizontal well with a completion point (the point where the well bore first exceeds 80 degrees from vertical) shallower than 1,900 metres; and,
  3. A “Deep-Well Depth” (calculated based on total vertical depth plus horizontal length times horizontal length factor) greater than 2,500 metres.

Royalty Credits

Royalty credits available to Tier 1 Deep Wells range from a minimum of $440,000 (for a well with a deep-well depth of 2,500 metres) to a maximum of $2.81 million (for wells 5,500 metres or deeper).

The exact value of the royalty credit available to a Tier 1 Deep Well is set out in Table 3 in section 7(7)(c) of the Royalty and Freehold Production Tax Regulation.

Table 3

Deep Well Depth (metres)

Cumulative Value ($000)

Incremental Value ($/metre)

2500

445

430

3000

660

720

3500

1020

980

4000

1510

1006

4500

2013

974

5000

2500

622

5500

2811

 

Minimum Royalty

Wells that qualify for credits under Tier 1 of the Deep-Well Royalty Credit Program attract a six per cent minimum royalty.

Tier 2: for deeper wells

Tier 2 targets deeper wells than Tier 1 and offers a higher maximum royalty credit. It has been in place since 2003 (and was designated as Tier 2 with the introduction of Tier 1 of the program in 2014).

Qualification Criteria

To qualify for Tier 2 a well must have one of the following sets of criteria:

Vertical Well

A gas well that is not part of a coalbed methane project and is not a deep re-entry well, and has a completion point deeper than 2,500 metres;

Horizontal Well

A gas well that is not part of a coalbed methane project and is not a deep re-entry well, and has a completion point deeper than 1,900 metres;

Royalty Credits

Royalty credits available to Tier 2 deep wells vary based on the location of the well (whether it is “east” or “west”) and the concentration of Hydrogen Sulfide in the gas produced from the well (whether the well is “sweet” or “sour”).  The exact value of the royalty credit available to a Tier 2 deep well is set out in Table 2 in section 7(7)(c) of the Royalty and Freehold Production Tax Regulation.

Minimum Royalty

Wells that qualify under Tier 2 of the Deep Well Royalty Credit Program attract a three per cent minimum royalty. 

Deep-Well Depth and Horizontal Length Factor

The credit available to a well under the Deep-Well Royalty Credit Program is calculated based on the “deep-well depth” for that well. The deep-well depth is calculated differently for vertical wells and horizontal wells.

Vertical Wells

The deep-well depth for a vertical well is the measured depth to completion point.

Horizontal Wells

The deep well depth for a horizontal well is the sum of

  • The measured depth to completion point; and,
  • The product of the horizontal length factor multiplied by the difference between the measured depth to completion point and the total measured depth (i.e., the length of the horizontal legs of the well).

Horizontal Length Factor

The horizontal-length factor used to calculate the deep-well depth is determined by the following formula:

[60-0.035 x (measured depth to completion point – 2300)]/100

The Regulation limits the horizontal-length factor to values of 1 or less (i.e., a well cannot have a deep-well depth greater than the total measured depth of the well).