The Crown Minerals Act The Freehold Oil and Gas Production Tax Act, 2010

Transcription

1 Saskatchewan Ministry of the Economy INFORMATION CIRCULAR PR - IC09 Last Update: November 2017 ACTS: The Crown Minerals Act The Freehold Oil and Gas Production Tax Act, 2010 REGULATIONS: The Crown Oil and Gas Royalty Regulations, 2012 The Freehold Oil and Gas Production Tax Regulations, 2012 TOPIC: WELL-HEAD VALUE OF CRUDE OIL FOR ROYALTY/TAX PURPOSES EFFECTIVE APRIL 1, 2000 This Information Circular has been prepared by the Ministry of the Economy (the Ministry) to assist royalty and tax payers in understanding the Ministry s determination of the well-head price of oil for royalty/tax purposes. The policies outlined in this circular are administered in accordance with The Crown Oil and Gas Royalty Regulations, 2012 and The Freehold Oil and Gas Production Tax Regulations, 2012 (collectively the "regulations"). Reference should be made to the Acts and regulations for an exact statement of the law. In case of a conflict between this Information Circular and the provisions of the Acts and regulations, the Acts and regulations will govern. This Information Circular has no legal force or effect. Note: This circular replaces Information Circulars PNG96IC02 and EFA-IC09 and can be found on the Ministry of the Economy s web site at

2 I. DEFINITION OF TERMS REFERRED TO IN THIS CIRCULAR ASSOCIATES means any corporations that are considered to be associated corporations within the meaning of section 256 of the Income Tax Act (Canada) in relation to another operator or special operator and includes any other persons or corporations that are considered by the minister to be associates for purposes of the regulations. ARM S-LENGTH TRANSACTION means a sales transaction or agreement in which the purchaser and seller are not associates. NON ARM S-LENGTH TRANSACTION means a sales transaction or agreement in which the purchaser and seller are associates. OPERATOR means: (i) the person: (A) designated in accordance with subsection 46(1) of The Crown Oil and Gas Royalty Regulations, 2012 or subsection 55(1) of The Freehold Oil and Gas Production Tax Regulations, 2012; and (B) listed as the operator of an oil well, gas well or EOR project on the ministry s records; or (ii) any other person designated by the minister pursuant to subsection 46(2) The Crown Oil and Gas Royalty Regulations, 2012 or subsection 55(2) of The Freehold Oil and Gas Production Tax Regulations, 2012 as the operator of an oil well, gas well or EOR project; OPERATOR S REPORTING SHARE means the portion of oil and gas produced from an oil well or gas well for which an operator or special operator is responsible for remitting the royalties/taxes to the minister pursuant to the regulations. SPECIAL OPERATOR means a royalty/tax payer who: (i) who disposes of oil produced from or allocated to Crown lands separately from the operator; and (ii) who has been designated pursuant to subsection 48(1) of The Crown Oil and Gas Royalty Regulations, 2012 or subsection 56(1) of The Freehold Oil and Gas Production Tax Regulations, 2012 as a special operator with respect to the oil; ROYALTY/TAX PAYER means, for the purposes of this information circular, a person who owns a working interest in a well or facility and is responsible for remitting royalties or taxes to the minister pursuant to The Crown Oil and Gas Royalty Regulations, 2012, or The Freehold Oil and Gas Production Tax Regulations, WELL-HEAD PRICE OF OIL The following is taken from Section 11 of The Crown Oil and Gas Royalty Regulations, 2012 and Section 10 of The Freehold Oil and Gas Production Tax Regulations, 2012: (1) In this section: (a) allowable transportation expenses means: Page 2

3 (i) trucking expenses actually incurred by the royalty payer essential in transporting oil to the delivery point specified in an arm s-length agreement for the sale of that oil; and (ii) any other reasonable transportation expenses that are approved by the minister as allowable transportation expenses; (b) first subsequent month means, with respect to oil that was produced from or allocated to an oil well, gas well or EOR project in a month, the first subsequent month in which oil that is produced from or allocated to that oil well, gas well or EOR project is sold pursuant to an arm s-length agreement. (2) Subject to subsections (3) to (6), the well-head price of oil produced from or allocated to an oil well, gas well or EOR project in a month is determined as follows: (a) if any oil that was produced from or allocated to an oil well, gas well or EOR project, regardless of when that oil was produced, was sold pursuant to one or more arm s-length agreements in the month, the well-head price of the oil produced from or allocated to the oil well, gas well or EOR project in the month is the positive difference between: (i) the average price, expressed in dollars per cubic metre, received pursuant to the arm s-length agreements for the sale of all oil sold in the month with respect to that oil well, gas well or EOR project; and (ii) allowable transportation expenses, expressed in dollars per cubic metre, respecting all oil sold in the month with respect to that oil well, gas well or EOR project; or (b) if no oil that was produced from or allocated to the oil well, gas well or EOR project was sold in the month, the well-head price of the oil produced from or allocated to the oil well, gas well or EOR project in the month is the positive difference between: (i) the average price, expressed in dollars per cubic metre, received in the first subsequent month pursuant to arm s-length agreements for the sale of all oil sold in the subsequent month with respect to that oil well, gas well or EOR project; and (ii) allowable transportation expenses, expressed in dollars per cubic metre, respecting all oil sold in the subsequent month with respect to that oil well, gas well or EOR project. (3) If no oil pricing information is submitted to the petroleum registry for a month with respect to oil produced from or allocated to the oil well, gas well or EOR project in the month: (a) the minister shall assign a price for the oil for the month in which the oil was produced or allocated to the oil well, gas well or EOR project equal to the average price of oil of a similar quality for the month; (b) the royalty payer shall pay the royalty for the month on the basis of the price assigned pursuant to clause (a); and (c) subject to subsections (4) and (5), if oil pricing information is subsequently submitted to the petroleum registry with respect to oil produced from or allocated to the oil well, gas well or EOR project in the month: (i) the royalty to be paid for the month is to be adjusted based on the pricing information submitted to the petroleum Petrinex; and (ii) the minister shall deal with any adjustment pursuant to subclause (i) in a manner that complies with these regulations and reflects the change in price. (4) If, in the opinion of the minister, an arm s-length agreement mentioned in subsection (2) is entered into for the purpose of transporting oil, the price received pursuant to subsequent arm s- Page 3

4 length agreements for the sale of the oil, other than those entered into for the purposes of transporting the oil, must be used to determine the average price of the oil pursuant to subsection (2). (5) The well-head price of oil produced from or allocated to an oil well, gas well or EOR project in a month is the fair price determined by the minister if: (a) the minister is satisfied that there is no agreement for the sale of the oil or that no arm slength transaction has occurred; (b) the minister is satisfied that there was an agreement for the sale of the oil but that the royalty payer did not receive the price set out in the agreement; (c) there is a consideration for the sale of the oil in addition to or instead of the price specified in an arm s-length agreement; or (d) the minister believes that one of the purposes of a transaction evidenced by an agreement for the sale of the oil is to reduce, unduly or artificially, the liability of a royalty payer to pay royalty on the production of oil. (6) Before determining a fair price pursuant to subsection (5), the minister shall consider the following: (a) the arm s-length prices received by the operator or special operator, as the case may be, for the sale of similar quality oil in similar markets; (b) the arm s-length prices received by other operators or special operators, as the case may be, for the sale of similar quality oil in similar markets; (c) the arm s-length prices received by the operator or special operator, as the case may be, for sales of similar quality oil in other markets; (d) any other price information provided by the operator or special operator that the minister considers appropriate in the circumstances. (7) If the minister determines a fair price pursuant to subsection (5), the minister shall provide notice of the price to the operator or special operator, as the case may be. II. ALLOWABLE TRANSPORTATION EXPENSES There are two types of allowable transportation expenses; 1) allowable trucking expenses and 2) any other reasonable transportation expenses that are approved by the minister (known otherwise as allowable adjustments). The difference between the two is that, as deductions, they are applied to separate calculations and applied by different entities. To clarify, the allowable adjustments (which exclude and are separate from trucking expenses) are applied by the Royalty/Tax Payer to determine the Sales Price reported to the Ministry. The trucking expenses must not be included by the Royalty/Tax Payer to calculate the Sales Price reported to the Ministry. The trucking expenses are collected by the Ministry (through Petrinex) and applied by the Ministry, in the Ministry s determination of well-head price (see section IV.) INELIGIBLE TRANSPORTATION EXPENSES Certain expenses incurred by the Royalty/Tax Payer are not allowed in determining either type of allowable transportation expense (i.e. trucking or allowable adjustments). These ineligible expenses include but are not limited to the following: Page 4

5 insurance costs administrative/overhead costs permit fees well servicing costs storage costs non arm's-length marketing and commission fees treating/cleaning costs disposal costs tank and site cleaning costs other non-arm's length expenses that are not otherwise approved by the Ministry III. INDUSTRY SUBMISSION OF SALES PRICE The Sales Price that is to be reported to the Ministry is dependent upon the sales conditions, as described below, in which the oil has been sold. In all cases, revenue gains or losses due to financial hedges in commodity markets are not considered part of the Sales Price since these types of transactions are not directly associated with the physical sale of the oil. To be considered a physical sale, an oil sales contract must clearly: identify the producer and purchaser of the oil; identify the effective date and termination date of the contract; specify the fixed price and/or differential component, if any for the oil; not contain any other considerations in addition to or instead of the price specified; pertain only to oil produced on and after the month in which the contract was signed by the producer and purchaser; pertain only to the volume of oil specified in the contract; relate to the first arm s-length sale of oil produced in Saskatchewan; and identify the source of the oil including well, battery, facility or land locations that are located in Saskatchewan (the producing capability of the specified oil source must exceed the contract sales volume) Sales price ($/m 3 ): for the purposes of Saskatchewan oil valuation reporting, the sales price is considered as the base price typically found in the first arm s- length purchase agreement, net any of the allowable adjustments, charged at arm s-length directly to the Royalty/Tax Payer by the Purchaser, in accordance with the purchase agreement. Sediment and water penalties must not be included in the determination of Sales Price. If multiple sales are made to the same purchaser in a given month and different prices are received by the Royalty/Tax Payer, the Sales Price reported to the Ministry must not be an average price. Each Sales Price is to be reported separately. Page 5

6 SALES CONDITIONS AND ALLOWABLE ADJUSTMENTS (i.e. other reasonable transportation expenses that are approved by the minister) IMPORTANT: To clarify, only the allowable adjustments that are listed in this information circular and also specified in the arm s-length purchase agreement and charged directly to the Royalty/Tax Payer, in accordance with the purchase agreement, may be used in the determination of Sales Price that is to be reported to the Ministry. The allowable adjustments are dependent upon sales conditions; there are two types of sale conditions recognized by the Ministry. Oil sold at arm's-length prior to being blended (Non-EVAP) For oil sold at arm's-length prior to being blended, the allowable adjustments to the base price typically found in the first arm s-length purchase agreement are the following: marketing fees gathering charges pipeline loss allowances / tariffs quality adjustments terminal fees Oil sold at arm's-length after being blended (EVAP) Please see Directive PNG075 for the definition of EVAP applicable transactions. For oil sold at arm's-length after being blended, the allowable adjustments to the base price typically found in the first arm s-length purchase agreement are the following: the cost of the condensate that was blended with the oil; and marketing fees gathering charges pipeline loss allowances / tariffs quality adjustments terminal fees Sell/Buy Back Arrangements To facilitate the transportation of oil to a specific market, a Royalty/Tax Payer may enter into an arm's-length "sell/buy back" agreement with a pipeline operator. If an arm s-length agreement is entered into for the purpose of transporting oil, the price received for that transaction must not be used in calculating the Sales Price reported to the Ministry. The price received pursuant to subsequent arm s-length agreements (other than those entered into for the purposes of transporting the oil) must be used in calculating the Sales Price reported to the Ministry. Page 6

7 The Ministry of the Economy should be contacted to discuss details of EVAP transactions (Contact either the Petroleum Royalties Branch at (306) or the Information Management Branch at (306) ). IV. CALCULATION OF WELL-HEAD PRICE OF OIL, BY THE MINISTRY All Royalty/Tax Payers are required to report pertinent oil sales information (i.e. Sales Price, Sales Volume and trucking expenses) to the Ministry, through Petrinex. For royalty/tax purposes, the Ministry then uses this information to calculate a weighted average price for each Royalty/Tax Payer, for each month, by facility in the following manner: 1) Sales Value = Sales Price (submitted through Petrinex) x Sales Volume (submitted through Petrinex) 2) Net Sales Value = Sales Value allowable Trucking Expenses (submitted through Petrinex) 3) AVG. NET PRICE = Total of all "Net Sales Value" from a Non-Unit Battery/Unit Total of all "Sales Volumes" from a Non-Unit Battery/Unit 4) AVG. NET PRICE = Well-Head Price for royalty/tax purposes ALLOWABLE TRUCKING EXPENSES Trucking expenses that may be reported to the Ministry are limited to the expenses incurred from the physical loading, movement and unloading of oil by truck, from point of origin to a valid Custody Transfer Point (CTP). For the purposes of Saskatchewan oil valuation reporting, the allowable trucking expenses are considered as trucking expenses actually incurred by the Royalty/Tax Payer in transporting oil to the delivery point specified in an arm s-length agreement. Allowable Expenses: The dollar per m3 or the dollar per hour expense charged by a 3rd party transport company for the hauling of emulsion or oil to the delivery point specified in an arm s-length agreement for the sale of that oil. PPE Expense (Personal Protective Equipment) charged by a 3rd party transport company. The Fuel Surcharge charged by a 3rd party transport company. The dollar per hour expense charged by a 3rd party transport company for time spent waiting to unload at a delivery point. Expenses that are not allowable, but are not limited to: PST (provincial sales tax) GST (goods and services tax) Rural municipality road taxes, permits or costs related to road bans or road maintenance. marketing or commission fees Page 7

8 Costs related to administration or overhead Costs related to insurance Costs related to storage Costs incurred during the servicing of a well Costs related to processing, treating, or cleaning Costs related to the hauling of salt water or fresh water Costs related to water or waste disposal charged directly to the Royalty/Tax Payer by a 3rd party Costs related to the transferring of fluid on-site from one tank to another charged directly to the Royalty/Tax Payer by a 3rd party Costs related to terminal fees or handling fees charged directly to the Royalty/Tax Payer by a 3rd party Costs related to time spent waiting when service work is conducted or time spent waiting for assistance with equipment malfunction Terminal fees, including terminalling fees Any other expenses not listed as allowable in this information circular. Further Clarification: Allowable Trucking Expenses When calculating the Trucking Expenses (that are to be reported to the Ministry), the above mentioned non-allowable expenses must not be used (even if these items have been included in the trucking invoice). In the case of well servicing, only the actual time spent in the transport of the emulsion or oil can be used in the calculation. Waiting time on site for the service work to be completed cannot be included in the calculation. If a particular trucking invoice and truck tickets do not clearly separate the time spent completing the service work at the point of origin, and the time spent on the actual physical hauling of the emulsion or oil, then that invoice and truck ticket(s) may not be used. As per The Oil and Gas Conservation Regulations, 2012 only the actual trucking expenses incurred in the production month being reported may be used in the calculation of Trucking Expenses. The Ministry may at any time request trucking invoices, truck tickets or other information in order to validate the Trucking Expenses being reported in Petrinex. The supporting documentation must be provided to the Ministry in a timely manner or the Trucking Expenses reported must be removed (i.e. zeroed out). Corporate Transport Trucks: Expenses incurred by a Royalty/Tax Payer that owns and operates their own tanker trucks for use in hauling their own oil from point of origin to a valid Custody Transfer Point (CTP), are not considered arm s-length and, therefore, must not be included in the calculation of Trucking Expenses. However, ECON has determined that a Royalty/Tax Payer that owns its own trucks and contracts a 3 rd party to operate said trucks will be allowed to include only those arm s-length expenses in the calculation of Trucking Expenses. All fees and costs associated with the purchase, general maintenance, licensing, permitting and insuring of the trucks and any other fees or expense incurred by the Royalty/Tax Payer for the applicable corporate vehicles must not be included in the calculation of Trucking Expenses. Page 8

9 Waiting Time: Trucking, due to its very nature, can be subject to a variety of unforeseen events that halt or suspend the physical loading, movement and unloading of oil or emulsion. These events, for the most part, are not considered allowable expenses and must not be included in the Trucking Expenses reported in Petrinex. However, the Ministry will allow the expense incurred waiting in line to unload at the delivery point to be included in the calculation of Trucking Expenses. FOR FURTHER INFORMATION, PLEASE CONTACT: The Ministry of the Economy Petroleum Royalties Branch 1000, th Avenue Regina, Saskatchewan S4P 3Z8 Well-head Price Determination Petroleum Royalties Branch Phone: (306) or: (306) Page 9