June 13, 1996
(Mines and Energy)

The following statement was issued today by Dr. Rex Gibbons, Minister of Mines and Energy. It was also read in the House of Assembly:

Royalty regime

It is my pleasure to rise today to announce the establishment of a royalty regime that will apply to the development of all petroleum resources in the Newfoundland and Labrador offshore area, with the exception of the Hibernia and Terra Nova projects. In conjunction with this regime, the government intends to provide an exemption from the application of the province's Retail Sales Tax (RST) to all petroleum related capital and operating expenditures in the offshore area.

This announcement follows a previous statement I made in June of 1994, when a generic royalty regime was established for the province's onshore petroleum resources.

This is a significant event from a provincial perspective. Sparked by the Hibernia and Terra Nova oilfield developments, there has been renewed interest by the petroleum industry in the Newfoundland and Labrador offshore. Establishing a generic royalty regime will produce a framework that will benefit future developments in the province. It will ultimately translate into more employment creation and a stronger provincial economy as well as provide government with a new source of revenue. The regime has been structured to ensure that we receive our fair share of the revenue from petroleum resources while at the same time promoting their exploration and development.

The new regime is designed to reflect the level of prospectivey of the province's offshore area while being sensitive to the costs and risks associated with offshore petroleum activities. The system is similar to the one applied to the Hibernia project and to that applied by the Government of Canada on federal lands and provides for an equitable sharing of revenues.

The basic royalty commences at a low rate and increases as certain cumulative levels of production are reached, providing an incentive to develop small and marginal prospects by ensuring that minimal royalties are paid on these types of fields. Once cumulative production reaches 100 million barrels or, if the project becomes profitable before that point, the province will receive five per cent of gross revenue increasing to 7.5 per cent at higher levels of cumulative production.

The two tier net royalty is profit sensitive, designed to reflect changing economic circumstances and to ensure competitiveness with royalty systems in other jurisdictions. When a certain profit level is achieved, the net royalty is applied with the province receiving the greater of the gross or tier one net royalty payable. If profits increase beyond that level, government revenue will also increase. If these profits increase significantly, then government revenue will also increase significantly as the tier two net royalty component will levy an additional 10 per cent of net revenue.

The design of the basic/two tier net royalty system is purposeful. It provides for three important basic insurances for the province:

1. It ensures the viability of small/marginal fields, thereby ensuring that these fields will be developed and produce economic activity and royalties for the province.
2. It ensures that the province will receive a royalty from each and every barrel of oil produced, starting with the very first barrel; and
3. It ensures that if oil prices increase or the profitability of field otherwise increases, the royalties to the province also increase.

I expect that the competitiveness of the royalty regime, coupled with the elimination of Retail Sales Tax on all petroleum-related expenditures in the offshore area, will contribute significantly to the growth of the petroleum industry in Newfoundland and Labrador.

The royalty regime is attached to this statement for Members of the House of Assembly.

Newfoundland and Labrador
Offshore Royalty Regime The regime is composed of the following components:

     1.   Basic Royalty  an ad valorem royalty, increasing with
                         production, from one per cent to 7.5 per cent
                         of gross revenue.

     2.   Two Tier Net Royalty
          (a)  Tier 1    20 percent of net revenue after a rate of
                         return of five per cent plus the long term
                         government bond rate.

          (b)  Tier 2    10 per cent of net revenue after a rate of
                         return of 15 per cent plus the long term
                         government bond rate.