British Columbia Royalty Programs Ines Piccinino Executive Director Policy & Royalty Branch

1. British Columbia Royalty Programs Ines Piccinino Executive Director Policy & Royalty Branch Oil and Gas Division April 2009

2. The future is unconventional: Horn River and Montney Land Sales

3. The future is unconventional: A plausible scenario for BC production Source: MEMPR/CAPP

4. OVERVIEW OF BRITISH COLUMBIA EXISTING ROYALTY PROGRAMS

5. What Royalty Programs does BC have to offer? For further information visit http://www.empr.gov.bc.ca/OG/oilandgas/royalties/newtarget/Pages/default.aspx

6. Why are they “targeted” Royalty Programs? • Summer: targets resource development outside of the traditional drilling season. • Deep: targets very expensive, geologically complex deep resources. • Marginal: targets low productivity wells. • Ultra-marginal: targets tight gas (very low productivity). • Coalbed methane: targets CBG resources. • Infrastructure: targets “white spaces” and areas with limited infrastructure (roads/pipes) available.

7. How does the Summer Royalty Program work? • Lump sum royalty credit for wells drilled between April 1 and November 30. • The lesser $100,000 or 10% of drilling and completion costs. • A Summer Drilling Credit Application form (BC-25) must be completed and submitted by the well licensee for each well that is spudded within the prescribed time periods.

8. What about the Deep Royalty Credit Program? • Royalty credits are assigned based on depth, location and gas quality. • The credit is designed to compensate for the cost of the Crown’s “interest” in the well (effective royalty rate). • Vertical wells deeper than 2,500 metres. • Horizontal wells deeper than 2,300 metres. • The deep well credit can only be used to reduce royalties for the well event for which it was assigned. • Program was enhanced in February 2009 to include new information available on deep wells.

9. How do the Marginal and Ultra-marginal programs operate? • These are not credit programs: the royalty rate is reduced based on well productivity. • Marginal: • Qualification: wells under threshold of 80 mcf/d/100m first 12 months of production • Royalty Rate reduction: calculated as a formula for those months when production is below 880 mcf/d • Ultra-marginal: • Qualification: shallow wells under threshold of 40 mcf/d/100m first 12 months of production • Royalty Rate reduction: calculated as formula for those months when production is below 40 mcf/d/100m

10. What is the Coalbed Methane royalty Program? • Royalty or tax credit of $50,000 for each coalbed methane well completed on Crown land ($30,000 for freehold mineral land). • Includes produced-water handling costs in the Producer Cost Of Service (PCOS) allowance to address the added water management costs.

11. And what about the Infrastructure Royalty Credit Program? • Up to 50% of the cost of building high grade roads and/or pipelines in royalty credits. • Program is competed through annual Request for Applications. • Program has allocated $316 million in infrastructure royalty credits since 2004: • 72 new roadbased projects, and • 53 new pipeline projects.

12. Infrastructure Royalty Credit Program2009 Installment • $120 million in royalty credits to be competed in 2009. • Request for Applications (RFA) was released March 2nd and closes April 30th. • RFA package is available at MEMPR’s website: http://www.empr.gov.bc.ca/OG/oilandgas/royalties/infdevcredit/Pages/default.aspx

13. How can these Programs help develop unconventional resources? • These programs can be combined in many cases, thus providing enough margin to move certain projects to economic territory. • Example - a well that… • is associated with a road project that was awarded an infrastructure credit, • is drilled in the “summer”, • is deep, and • is marginal… • …can receive all the associated benefits for those programs.

14. THE NET PROFIT ROYALTY PROGRAM

15. British Columbia’s Complex Resource Base • Development of expensive resources that are not viable under existing royalty programs and either: • technically complex • remote from existing infrastructure

16. Net Profit Concept • Net Profit royalty eligibility determined through a Request for Applications (RFA) process • Province approves projects • Project location within BC • Type of project to be sponsored • Project Boundaries (Net Profit Ring Fence) • Geographic area around a project • Approved by the Province • No other royalty regime applies within the Net Profit Ring Fence

17. Net Profit Concept (continued) • 3 Tier Net Profit regime • Net Profit Ring fence (Project Area) • Project related capital, operating and abandonment cost included except for overhead cost • Five years of historical cost are recognized • Outside Net Profit Ring fence • Normal royalty programs apply

18. How does the Tier system work? Time Progression Through Royalty Tiers Royalty Rate for Each Tier Applicable Royalty for existing projects Net Profit Royalty Project Approval Net Profit Starts at Production Pre-payout: 2% on Gross Revenue Pre-payout Closing Balance = 0 Return Allowance = LTBR Tier 1: Higher of 15% of Net Revenue or 5% of Gross Revenue Tier 1 Closing Payout Balance = 0 Return Allowance = LTBR + 25% Tier 2: Higher of 20% of Net Revenue or 5% of Gross Revenue Tier 2 Closing Payout Balance = 0 Return Allowance = LTBR + 100% Tier 3: Higher of 35% of Net Revenue or 5% of Gross Revenue

19. What costs can be included? • Allowed deduction within the Net Profit Ring Fence Project • Historical Costs (5 years maximum, if available) • Capital Costs • Operating Costs • Non-Allowed costs within the Net Profit Ring Fence • Overhead cost (Uplift for capital and operating cost includes overhead) • Royalties and income tax • No other royalty schemes (GCA, PCOS, Deep, Summer Marginal and Ultra-Marginal)

20. First BC Net Profit Request for Applications (RFA) • The Ministry released its first Request for Applications (RFA) on January 7th, 2009. RFA closed on February 27th. • First RFA call targeted to: • Shale development in the Horn River Basin OR • Enhanced oil/gas recovery. • Four applications received from five companies – all for the Horn River. • Proposals have been approved. Details of approval are being completed. • The Province will decide on future calls for proposals and their characteristics. • More details on the program (including RFA in process) are available at : http://www.empr.gov.bc.ca/OG/oilandgas/royalties/NetProfitRoyaltyProgram/Pages/default.aspx

21. Contact Information Ines Piccinino Executive Director Policy & Royalty Branch - Oil and Gas Division Ministry of Energy, Mines and Petroleum Resources British Columbia Phone: 250-356-9825 Email: ines.piccinino@gov.bc.ca