The most widely read magazine for Canadian lawyers
Issue link: https://digital.canadianlawyermag.com/i/50823
LEGAL REPORT: BUSINESS/CORPORATE LAW "The government needs to increase the curve up gradually and not so steep. If there are no major changes to the steepness of the curve, then the reduction in maximum royalty rate will have very little effect and industry will not recover." — ROSS FREEMAN, BORDEN LADNER GERVAIS LLP Should these proposed changes have a positive effect on the industry, there will be more activity which translates into more work for Alberta lawyers. "If the proposed changes encourage invest- ors to invest in the industry and for pro- ducers to drill new wells, then there will be more work for lawyers in the form of financings and possibly more mergers and acquisitions. However, regardless of changes in the royalty framework, natural gas prices remain critical to the industry's success and the low natural gas prices we are presently experiencing limit the activity that many natural gas companies may pursue." Freeman also has a roster of oil- and-gas clients that range from juniors to intermediates to majors, and from service companies to exploration and production companies to international corporations. He concurs with Laffin that certain changes to the New Royalty Framework are helpful. However, he says the reduction in the maximum royalty rate is not so good. "The revised max- imum royalty rate of 50 per cent for conventional oil and natural gas were not the problem. If natural gas was at $15 per gigajoule or more and oil was at $150 per barrel or more, a 50-per-cent royalty rate would have been OK." Rather, says Freeman, the elephant in The Law of Contracts Sixth Edition A classic text, The Law of Contracts has been cited repeatedly by the courts, including the Supreme Court of Canada. This work looks beyond the surface rules of this complex area of law to identify the underlying conflicting principles, so you're never in doubt about their implications. New! Twelve Supreme Court of Canada cases are referenced as well as relevant provincial Court of Appeal and Superior Court cases. ORDER your copy today Hardbound • Approx. 800 pp. June 2010 • $165 P/C 0819010006 ISBN 0-88804-450-X Includes more than 4,000 cases The Law of Contracts, Sixth Edition delivers the same clear explanation and analysis of the law and its applications that practitioners have relied on for years. The sixth edition has been revised and updated to incorporate all the latest developments in contract law. the room is the steepness of the curve of the royalty rates. "Royalty rates are based on how much production comes from a well. A big producing well will pay a big royalty rate, and when commodity prices are high, the royalty rate is also higher. Under the current regime, industry pays a 15- to 30-per-cent royalty rate when gas prices are between $2 and $5 per gigajoule. This does not work because gas at $5 per gigajoule gas production is just becoming profitable and industry will lose most of its profit after paying this 30-per-cent royalty rate. Right now, with gas sitting at approximately $4 per gigajoule, industry is paying about 25-per-cent royalty rates. For industry to break even on drilling for gas, the price of gas must be at least $5 per gigajoule before they even pay royalties. Right now, it just doesn't pay to drill new gas wells." Freeman says the royalty curves are too steep. "The government needs to increase the curve up gradually and not so steep. If there are no major changes to the steepness of the curve, then the reduction in maximum royalty rate will have very little effect and industry will not recover." Laffin says he believes the proposed changes to the new framework are posi- tive steps for the province to attract investors and provide the needed incen- tive for producers to start drilling new wells again. "Individual companies' suc- cess is the province's success." But Freeman says if the changes to the For a 30-day, no-risk evaluation call: 1.800.565.6967 CL0610 Canada Law Book is a Division of The Cartwright Group Ltd. Prices subject to change without notice, to applicable taxes and shipping & handling. 52 JUNE 2010 www. C ANADIAN Law ye rmag.com New Royalty Framework do not work, then the government will have to go back again and make more modifications until it can bring the balance back in line so there is an incentive for investors to invest in the industry and for producers to drill new wells. Only then will Alberta get its "competitive advantage" back. Professor Stephen M. W addams