Modernized Royalty Framework (MRF) 2017 1 D isclaimer This - PowerPoint PPT Presentation

Modernized Royalty Framework (MRF) 2017 1

D isclaimer This presentation is for informational purposes only, pending approval of the: • Petroleum Royalty Regulation 2017 • Natural Gas Royalty Regulation 2017 • Oil Sands Royalty Regulation, 2009 • Enhanced Hydrocarbon Royalty Regulation • Emerging Resources Royalty Regulation • Mines and Minerals Administration Regulation Contents of this document may be subject to change. Note: Throughout this presentation there are a number of examples which may include rounding of calculation in order to simplify presentation of the material. 2

O utline 1. High level overview of MRF 2. Drilling and Completion Cost Allowance (C*) 3. Post-C* • Revenue drawdown • Post-C* royalty formulas 4. Actual drilling and completion cost reporting for ACCI 5. Questions 4

MRF Overview - H istorical Context Royalty Review Process Advisory Panel Release of Strategic Overlays, Industry Training New Work and Final Calibration Detailed Rules Sessions Framework Report Formulas Spring/Summer Fall/Winter takes effect Fall/Winter 2015 April 2016 2016 January 2017 2016 Modernized Royalty Framework (MRF) • Applies to conventional oil, gas and gas by-products, and non-project oil sands wells • Apply to wells spud on or after January 1 2017; (and early opt-in)  January 2017 Production Month – GO LIVE • Emulates a “revenue minus costs” approach 5

H igh L evel C hanges - MRF • ARF – All programs and ARF formula only apply to wells spud on or before December 31, 2016 – Benefits continue until they run out or when the regulation expires on December 31, 2026 • MRF – Applies to wells spud on or after January 1, 2017; early opt-in and ARF wells re-entered on or after January 1, 2017 – R<C*: 5% flat royalty rate – R≥C*: Post -C* formulas Rp + Rq (includes maturity threshold) • 2 new programs – Emerging Resources Program (ERP) – Enhanced Hydrocarbon Recovery Program (EHRP) 6

N on -P roject R oyalty (NPR) W ells • NPR wells may be allowed to form part of an oil sands Project provided: – An OSR application has been submitted within 12 months of MRF production – OSR approval has been granted – Royalty payable has been adjusted accordingly 7

W hat is C* ? C*= ACCI * ((1170 * (TVD - 249)) + (3120 * (TVD - 2000)) + (Y * 800 * TLL) + (0.6 * TVDa * TPPe)) + C* Outline 1. Definitions 2. Formulas 3. Revenue 8

D efinition of Terms Alberta Capital Cost Index (ACCI) • Purpose is to capture changes in drilling and completion costs over time • Calculated annually and released by the end of July and becomes effective the following January 1 • Can change by a maximum of plus or minus 5% year to year • 2017 and 2018 the ACCI will be 1.0 • ACCI will be determined by Alberta Energy based on the information provided by industry 9

D efinition of Terms Drilling and Completion Cost Allowance (C*) The well variables that are used to determine C* are: - TVD - True Vertical Depth - TLL - Total Lateral Length - TPPe - Total Proppant Placed Equivalent These variables are used to calculate a C* dollar amount to recognize a proxy of drilling and completion costs. C* is calculated at the licence level. Production from all events draws down the C* 1 0

D efintion of Terms True Vertical Depth (TVD) – is the true vertical depth of a well in metres determined by measuring the vertical distance in metres in a perpendicular line from the kelly bushing of a well to the base of the deepest drilled leg 1 1

D efinition of Terms Total Lateral Length (TLL) - the total lateral length of a well in metres 1 2

D efinition of Terms Total Proppant Placed Equivalent (TPPe) - the total proppant placed in a well in tonnes as determined by the Minister using the records of the AER and the proppant equivalent prescribed by the Minister Proppant information will be required for each leg fractured Proppant Equivalency Table Type of Completion Equivalency Factor 1 Sand (tonnes) 1.5 Coated Sand (tonnes) 2.5 Engineered/Manufactured (tonnes) Acid (m 3 ) = Acid concentration * 10 7.5% concentration 0.75 15% concentration 1.5 28% concentration 2.8 1 3

D efinition of Terms Total Proppant Placed Equivalent Examples Proppant Equivalency Table Examples Type of Completion Equivalency Factor Volume TPPe Sand (tonnes) 1 700 tonnes 700 Coated Sand 1.5 700 tonnes 1050 (tonnes) 2.5 700 tonnes 1750 Engineered/ Manufactured (tonnes) Acid (m 3 ) = Acid concentration * 10 500m 3 7.5% concentration 0.75 375 500m 3 15% concentration 1.5 750 500m 3 28% concentration 2.8 1400 1 4

D efinition of Terms Y Factor - the linear factor for multi-leg wells, determined in accordance with the following formula: • Y = 1.39 – (0.04 * (TMD/TVDa)) • Y can range from 0.24 to 1.0 Y Factor • If Y is calculated greater than 1, the Y will equal 1.00 • If Y is calculated less than 0.24, the Y will equal 0.24 1 5

D ata R equirements to C alculate C* • When data elements are not provided, that element will default to zero • If TVD is not reported, C* will default to zero • When this data is subsequently provided, a C* will be calculated and royalty rate will be recalculated 1 6

F ormula B reakdown C*= ACCI * ((1170 * (TVD - 249)) + (3120 * (TVD - 2000)) + (Y * 800 * TLL) + (0.6 * TVDa * TPPe)) • The ACCI is used to adjust the C* by a maximum of plus or minus 5% on a yearly basis • For 2017 and 2018 the ACCI will be set to 1.00 C*= ACCI * ((1170 * (TVD - 249)) + (3120 * (TVD – 2000)) + (Y * 800 * TLL) + (0.6 * TVDa * TPPe)) • $1,170 for every metre drilled vertical from 249m to 2000m • If TVD is less than 249m this part will default to 0 • $4,290 for every metre drilled deeper than 2000m C*= ACCI * ((1170 * (TVD - 249)) + ((3120 * (TVD - 2000)) + (Y * 800 * TLL) + (0.6 * TVDa * TPPe)) • $800 for every metre drilled laterally unless the Y factor is less than 1 • For example, if the Y factor is 0.75, $600 for every metre drilled laterally 17

Formula Breakdown C*= ACCI * ((1170 * (TVD - 249)) + ((3120 * (TVD - 2000)) + (Y * 800 * TLL) + (0.6 * TVDa * TPPe)) • “TVDa” is the average of the true vertical depths of all drilled legs Proppant Equivalency Table Type of Completion Equivalency Factor 1 Sand (tonnes) 1.5 Coated Sand (tonnes) 2.5 Engineered/Manufactured (tonnes) Acid (m 3 ) = Acid concentration * 10 7.5% concentration 0.75 15% concentration 1.5 28% concentration 2.8 18

F ormulas for New Wells There are two formulas for calculating C*: 1. C* for wells ≤ 2000m TVD C*= ACCI * ((1170 * (TVD – 249)) + (Y * 800 * TLL) +(0.6 * TVDa * TPPe)) When to use: Wells spud on or after January 1, 2017 or for approved early opt-in wells 2. C* for wells > 2000m TVD C*= ACCI * ((1170 * (TVD - 249)) + (3120 * (TVD - 2000)) + (Y * 800 * TLL) + (0.6 * TVDa * TPPe)) When to use: Wells spud on or after January 1, 2017 or for approved early opt-in wells 19

E xample Calculation of a Well with A TVD ≤ 2000M Scenario: A new multi-leg well spud on June 15, 2017 with a TVD = 701m, TLL = 7610m, TMD = 8096m and TPP = 2945 tonnes of sand 3 Steps to calculate C* 1. Calculate the Y Factor Y = 1.39 – (0.04 * (TMD/TVDa)) = 1.39 – (0.04 * (8096/701)) = 0.93 2. Calculate the Proppant Equivalency = 2945 * 1.0 = 2945 3. Calculate the C* C* = ACCI * ((1170 * (TVD – 249)) + (Y * 800 * TLL) + (0.6 * TVDa * TPPe)) = 1.00 * ((1170 * (701– 249)) + (0.93 * 800 * 7610) + (0.6 * 701 * 2945)) = 1.00 * (528,840 + 5,661,840 + 1,238,667) = $7,429,347 2 0

Example Calculation of a Well with A TVD > 2000M Scenario: A new single leg well spud on June 15, 2017 with a TVD = 4724m, TLL = 1486m, TMD = 6210m and TPP = 965 tonnes of engineered sand 3 Steps to calculate C* 1. Calculate the Y Factor Y = 1.39 – (0.04 * (TMD/TVD)) = 1.39 – (0.04 * (6210 / 4724)) = 1.34 Due to Y being greater than 1, Y defaults to 1.00 2. Calculate the Proppant Equivalency = 965 * 2.5 = 2412.5 3. Calculate the C* C* = ACCI * ((1170 * (TVD – 249)) + (3120 * (TVD - 2000)) + (Y * 800 * TLL) +(0.6 * TVDa * TPPe)) = 1.0 * ((1170 * (4724 – 249)) + (3120 * (4724 – 2000) + (1.00 * 800 * 1486) + (0.6 * 4724 * 2412.5)) = 5,235,750 + 8,498,880 + 1,188,800 + 6,837,990 = $21,761,420 2 1

R e -E ntry For the purpose of C* calculation re-entry: • I s any drilling or fracture operation in an existing well bore resulting in a change to TVD, TLL or TPPe Re-Entry ARF Wells • When an ARF well bore is re-entered after Jan 1, 2017, the incremental activity is subject to MRF and a C* is calculated based on that activity only • The whole well bore will switch from ARF to MRF until the incremental C* is drawn down completely • All revenue from that well bore draws down the incremental C* from the time of the incremental activity • Once the C* is completely drawn down, the well bore reverts back to ARF 22

Re-Entry ARF Wells – C ont ’ d 2010 2010 2017 2017 2024 2024 • • • Well spud Re-entry to well C* is drawn • • Well will pay Well will receive a down to 0 • royalty under C* Whole well • the ARF Whole well bore bore will royalty switches to MRF revert back to regime royalty regime until ARF royalty C* is drawn down regime to 0 • Well will pay 5% royalty for all products 23