Transition Wells - Frequently Asked Questions

 If gas is flared during gas well testing, and no other production takes place in that month, is Transition election required by the end of that month?  Any production, including test production, is included as it is recovered or obtained during the production month in which testing took place. Once testing has started election must occur by the end of that month.   Is this a well or well event program?   
Eligibility will be determined on a unique well event basis based on the deepest producing interval in the unique well event.   Royalties will continue to be calculated on a unique well event basis.

How does a well event qualify for the transition option? 
The well event must be part of (tied to) a well license that has a spud date on or after November 19, 2008, and must elect the transition well royalty rates prior to the end of the first calendar month in which the leased substance is produced from the unique well event.  The base of the producing interval in the well event must be deeper than 1000 metres and no deeper than 3500 metres.  The transition well royalty formulas only apply to production obtained starting January 1, 2009 and ending December 31, 2013.

What will the election process be? 
A separate election screen will be created in the Petroleum Registry of Alberta (PRA).

When will the election need to be made?  How will a well/event be treated if it was spud on or after November 19 and prior to the election process be treated?   
For qualifying wells that had production before July 1, 2009, a one-time election must be made on PRA between June 4 and June 30, 2009 inclusive of those dates. For a qualifying well/event coming on production after June 30, 2009, a one-time election must be made on PRA before the end of the first production month.

Who is authorized to elect for the royalty client? 
The licensee of the unique well event is authorized to make the election.   

What will be the acknowledged receipt of an election request? 
Once election is made, the Department of Energy will make a determination regarding qualification of a well event for Transition rates that result will be sent to the PRA.

When will the election process be ready? 
The Department of Energy is undertaking the required changes to applicable regulations and to the Petroleum Registry of Alberta.  These changes are expected to be in place by June 2009.

Prior to production, companies will not know how the royalty framework will treat their well (e.g., is the well eligible for a deep drilling program).  How will the election process accommodate this? 
Companies will have to make a decision based on their expectations of which will be better prior to the end of the first calendar month in which the leased substance is produced from the unique well event.  Companies may take advantage of knowledge gained from drilling of the well event.

Will the election for transition be automatically moved to twinned wells in the case of original well event being unable to produce or having problems? 
No, twinned wells are assigned a separate unique well identifier and therefore require a separate election. 

Can new wells/events within a unit agreement elect differently from the rest of the unit? 
Yes, new wells in a unit are eligible for the transition well formulas same as all other wells.

If a well/event has multiple production streams, do all of the production streams have to share an election or can they elect separately?  
All unique well events are required to make a separate election prior to the end of the first calendar month in which the leased substance is produced from the unique well event.

Are companies eligible to elect one way for shallow zone and another for deeper zones? 
Yes, provided that each zone reports production separately as a unique well event. 

Will partners in a well/event be allowed to elect differently? 
No, only one election will be allowed for each unique well event.  All participants in the well event are required to accept the same election.

Can the election be changed if the well/well event changes ownership? 
Companies are free to change the election for a well event at any time prior to the end of the first calendar month in which the leased substance is produced from the unique well event. No changes are allowed after this.

Can the election be withdrawn? 
Companies are free to change the election for a well event at any time prior to the end of the first calendar month in which the leased substance is produced from the unique well event. No changes are allowed after this.

Are newly completed zones (events) in a well eligible? 
Yes, provided that each zone reports production separately as a unique well event, and they are part of a well that was spud on or after November 19, 2008.

Are new well events in wells drilled prior to November 19, 2008 eligible? 
If an existing well is assigned a new spud date that is on or after November 19, 2008 and the production from a new well event is reported separately as a unique well event then it is eligible to make an election, otherwise the well event is not eligible.

Are reactivated zones in existing wells eligible? 
Reactivated zones are treated the same as new well events for the purposes of this program.  If an existing well is assigned a new spud date that is on or after November 19, 2008 and the production from a well event within a reactivated zone is reported separately as a unique well event then it is eligible to make an election, otherwise the well event is not eligible.   

Are new zones or reactivated zones in abandoned wells eligible? 
Yes.  Reactivated zones are treated the same as new well events for the purposes of this program.  If it is assigned a new spud date that is on or after November 19, 2008 and the production from the event is reported separately as a unique well event then it is eligible to make an election, otherwise the well event is not eligible.

Are reactivated zones in abandoned wells eligible to apply? 
Yes

Is this for all wells or just exploratory wells? 
All new wells are eligible.

Are wells drilled in an oil sands lease eligible to apply?
Wells drilled in an oil sands lease are not eligible for transition royalties.  Oil Sands leases are in deposits that are generally shallow (e.g., less than 800 metres).  Oil Sands Developers have the option to apply for a project approval under the Oil Sands Royalty Regulation, 2009, which would base their royalties on 1-9% gross revenue for the project until payout and then the greater of 1-9% gross revenue and 25-40% net revenue.
Developers have the choice for their wells to pay royalty under the terms of the Royalty Framework, or to apply under the generic oil sands royalty regime as described above.  The intent is that all oil sands projects be under the same program or regime. Wells in which the royalty is not payable under the Petroleum Royalty Regulation and the Natural Gas Royalty Regulation are ineligible to elect the transitional royalty rates. 

How is the depth measured?  
Qualification for the transition well royalty formulas is based on the measured depth of the producing interval.  It is the longest distance in metres according to the records of the Energy Resources Conservation Board, measured along the bore of the well from the kelly bushing of the well to the base of the producing interval in the unique well event.

Does the production need to be coming from a depth that exceeds 1000 metres or does the well just have to be drilled to that depth? 
Each unique well event’s eligibility for the transition well formulas is based on the measured depth to the base of the producing interval.  Unique well events that have a measured depth for the base of the producing interval that is shallower than 1000 metres or deeper than 3500 metres do not qualify.

What will happen with co-mingled production where not all production is below 1000 metres or above 3500 metres? 
Well events that are commingled with qualifying events are automatically qualified if they were spud on or after November 19, 2008 and the measured depth of the deepest producing interval does not exceed 3500 metres.  The election will be based on the well event that is reporting the production.

How will a well that is deepened or lengthened be treated if the new production is coming from a measured depth that is less than 3500 metres? 
If it is assigned a new spud date that is on or after November 19, 2008 and the production from the event is reported separately as a unique well event then it is eligible to make an election. 

How will a well that is deepened or lengthened be treated if the new production is coming from a measured depth that is greater than 3500 metres? 
The well event is not eligible.  If the well event is commingled with an eligible well event, then the combined well event will become non-eligible.

Is production from qualifying wells that is prior to January 1, 2009 eligible? 
No, the transition well royalty formulas are not in effect prior to the January 2009 production month. For eligible wells that have production prior to January 1, 2009, the royalty rates under the Natural Gas Royalty Regulation 2002 and the Petroleum Royalty Regulation would apply until January 1, 2009.

Are wells that start production prior to January 1, 2009 eligible to apply? 
The unique well event must be spud on or after November 19, 2008 to be eligible.  For eligible wells that have production prior to January 1, 2009, the royalty rates under the Natural Gas Royalty Regulation 2002 and the Petroleum Royalty Regulation would apply until January 1, 2009.

How long will the 5 year transition option be available? 
Wells spud on or after November 19, 2008 will be eligible for a one-time election for the 5 year transition option. The elective must be made prior to the end of the first calendar month in which the leased substance is produced from the unique well event. The modified royalty formulas under the 5 year transition option will apply as of January 1, 2009 until December 31, 2013.  Wells producing oil or gas after January 1, 2009 will have the modified royalty formulas apply for a five year period, whereas wells spud later will have a shorter time period with the modified formulas.  Wells spud in 2013, will have less than a full year with the modified formulas.

If I elect the 5 year transition option will it apply for the entire production life of the selected well? 
No, the 5 year transition option applies to production on or after January 1, 2009 and prior to January 1, 2014. 

Does the 5 year transition option apply to natural gas liquids? 
No, the flat rate royalties of 30 per cent for propane and butane and 40 per cent for pentanes plus are not impacted by this option.

Does the 5 year transition option apply to field condensate? 
Yes, companies that choose to have the 5 year transition option apply to their qualifying natural gas well will also be subject to the 5 year transition option for the associated field condensate production from this well event.  Companies may not elect to have the 5 year transition option apply to only a portion of the production from the well event. The methodology for determining the volume for royalty formulas will remain consistent with the Royalty Framework.

Does the 5 year transition option apply to solution gas? 
Yes, companies that choose to have the 5 year transition option apply to their qualifying oil well will also be subject to the 5 year transition option for the associated natural gas production from this well event.  Companies may not elect to have the 5 year transition option apply to only a portion of the production from the well event. The methodology for determining the volume for royalty formulas will remain consistent with the Royalty Framework.

If a new well is drilled in an approved Enhanced Oil Recovery Scheme (EOR), is the company eligible to apply? 
Yes, wells within an EOR scheme are eligible to make an election.

Starting January 1, 2014, do wells/events that elected the transition well royalty formulas qualify for any other royalty programs at that time?  
Yes, wells selecting transition well royalty formulas are not excluded from other royalty programs.

Is a well selecting transition royalty formulas eligible to receive either the Natural Gas Deep Drilling Program (NGDDP) or the Deep Oil Exploration Well program (DOEW)?  
Yes, wells selecting transition well royalty formulas are not excluded from other royalty programs.

If a well is lengthened or deepened after a well event(s) within the well has elected and qualified for the transition well program, will the well be eligible for the Natural Gas Deep Drilling Program (NGDDP) or the Deep Oil Exploration Well program (DOEW)? 
Yes, wells that are lengthened or deepened would be eligible for the NGDDP or DOEW, subject to the rules and regulations for those programs.

Will the depth factor adjustment and the acid gas adjustment factor apply to wells that have opted for the 5 year transition option? 
No, the depth factor adjustment and acid gas adjustment are specific to the new royalty formulas and do not apply to the 5 year transition option.

Starting January 1, 2014, do wells/events that elected the transition well royalty formulas qualify for the depth factor adjustment at that time? 
Yes the depth factor is an integral part of the Royalty Framework formulas.

Starting January 1, 2014, do wells/events that elected the transition well royalty formulas qualify for acid gas factor adjustments at that time? 
Yes the acid gas factor is an integral part of the Royalty Framework formulas.  

Can a well selecting transition royalty formulas receive the Drilling Royalty Credit or the New Well Royalty Reduction announced in the Three-Point Incentive Plan?
Yes, wells selecting transition royalty formulas can still obtain the Drilling Royalty Credit and New Well Royalty Reduction subject to the requirements of those programs.

Last reviewed/revised: 2009-06-15