Compliance and Assurance PNCB+EOPS Audit Life Cycle

Compliance and Assurance PNCB+EOPS Audit Life Cycle
Prepared by Alberta Energy for Oil Sands Royalty Business Training June 14, 2018

Disclaimer: The information contained in this presentation is provided at the sole discretion of the Department of Energy (Department). The Department makes no warranties or representations regarding the information contained in the presentation, or any statements made during the course of the presentation. All information is provided for general information purposes only. You should not use or rely on this information for any other purpose. The information in the presentation and any statements made during the course of the presentation should not be relied upon as a representation of the Department’s official position in law or policy. That material is publicly available through the Department’s website at Reproduction of the presentation in any form is prohibited.

Table of Contents Audit Mission Statement Types of Audits
Statutory Authority PNCB Audit Lifecycle Audit Timelines PNCB Pre-Screen Process Project Review Audit Queries Draft Notice of Determination Types of Audit Adjustments Final Notice of Determination EOPS Audit Lifecycle Audit Planning and Selection Audit Lifecycle & Standard of Evidence Timelines Good Afternoon, My name is Yuko Masuda from the Compliance & Assurance team in Edmonton. Introduction to Charu Leekha and Jennifer Bishop We will be presenting the Audit lifecycle. I am presenting the PNCB audit and Charu/Jennifer will be following with a presentation on the EOPS audits. This is the agenda for our presentation today. We’ll touch briefly What the mission statement of Compliance & Assurance is The types of audits completed Regulatory authority we operate under I will move into the PNCB audit lifecycle And then Charu will be presenting on the EOPS audits At the end of the presentations there will be time to ask questions about the audit processes but if you have a question please feel free to ask.

Audit Mission Statement
Facilitate the achievement of the Department’s goals by providing professional audit services to the Government of Alberta and its citizens to ensure that Crown resource revenues are complete and accurately reported. Provide professional advice regarding Crown Royalties to ensure that the Department’s policies are clearly defined and properly interpreted by our industry clients. Foster a workplace culture that attracts and retains the best talent. We, the compliance and assurance group Facilitate the DOE’s goals by providing professional audit services to ensure compliance with OS regulations and accuracy of Crown resource revenues. Provide professional advice pertaining to Crown royalty reporting Create a positive work environment to attract and retain qualified professionals

Types of Audits Prior Net Cumulative Balance (PNCB) Audits
New Oil Sands Project Applications Amendments to existing approved Oil Sands Projects End of Period Statement (EOPS) Audits OSR Projects Conducted based on the audit planning and selection Non-Project Royalty (NPR) Audits Monthly royalty reporting for non-Project well events Often part of PNCB audit Other Audits pertaining to Oil Sands Mineral Rights Compensation Regulation (MRCR) claims Review of Cost Allocation Methodology Report (CAMR) These are the types of audits the Compliance and Assurance tem focuses their audit effort on: PCNB audits - Oil Sands Prior Net Cumulative Balance reporting These are done for the initial OS project approvals, and for amendments and expansion to the approved projects End of Period Statement audits Once the application is approved and becomes an OSR Project, it is subject to the End of Period Statement Audit. These audits are conducted based on the careful audit planning and selection. NPR audits In the PNCB audit, reported sales revenues and royalties reported directly come from the Non-Project Royalty (NPR) reporting therefore audits are performed on NPR reporting. We reconcile production volumes, sales unit price, and royalties to ensure that the PNCB reflects what is reported in the NPR. If C&A finds variances we ask in the form of queries why the variances exist. We also conduct other audits from time to time. These include Mineral Rights Compensation Regulation claims Lower Athabasca Regional Plan (LARP) Urban Development Sub-Region (UDSR) And Cost allocation orders that might impact multiple projects in their annual royalty reporting

Audit Authority Statutory Reference & Links to Oil Sands Legislation & Policies
Mine and Mineral Act Sections 38, 39, 47, 48 Oil Sands Royalty Regulation, 1997 Oil Sands Royalty Regulation, 2009 Oil Sands Allowed Costs (Ministerial) Regulation Bitumen Valuation Methodology (Ministerial) Regulation Oil Sands Dispute Resolution Regulation Link to Act and Regulations Link to Oil Sands Royalty Guidelines Link to Information Letters Link to Information Oil Sands Bulletins We have included this slide is a quick reference for information pertaining to the regulatory authority C&A as auditors must follow. There has been changes to the Royalty Regulations but the Oil Sands Royalty Guidelines have not been updated as of today. We have included a link to our IB that summarizes the changes to the regulations.

PNCB Audit Lifecycle Audit Timelines PNCB Pre-Screen Process
Project Review Audit Queries Draft Notice of Determination Types of Audit Adjustments Final Notice of Determination Now we will look at the PNCB Audit Lifecycle in detail.

PNCB Audits (Overview)
Completed based on submitted Project applications and Project amendments All PNCB forms are audited 9 month timeframe to ensure completion prior to issuance of Ministerial Order (MO) (OSRR 13(b)) Once the audit is completed, the PNCB amount is not subject to future amendment (OSRR 16) A PNCB audit commences when an operator submits an project application for a new project or for an amendment or expansion to an existing project. All PNCB applications are audited. The OS royalty regulation section 13(b) gives Oil Sands Engineering a 9 month timeframe for the Ministerial Order to be issued by Oil Sands Engineering. C&A ensures that the audit is complete before issuance of the MO. Once the audit is completed the PNCB amount is not subject to future amendment. (OSRR Section 16) (OSRR 2009 Section 16 does not allow for amendment of a PNCB once the Minister has concluded an audit of the PNCB unless fraud, misrepresentation, carelessness or willful default is present.)

Audit Timelines - PNCB Pre-screen Notification Commencement letter
Screening of the data completed to identify data deficiencies Notification Notification by Oil Sands Project Engineering & Approvals team within 10 business days of Project application submission Commencement letter PNCB audit commencement letter sent to the operator Project review Audit timeframe dictated by OSRR2009 Section 13(b) – effective date of Project or Project amendment, 9 months after the date of the Project application submission Reporting and finalization Draft Notice of Determination (Draft Audit Report) issued in 8th month of audit Final Notice of Determination (Final Audit Report) issued in 9th month of audit This is an overview of timeline for the PNCB audits. Prescreen: When a Project application or project amendment is received, we conduct a pre-screen process on the PNCB supporting data to ensure that C&A has sufficient documentation to commence an audit. Notice: Operators are notified by the Oil Sands Project Evaluations team within 10 business days of the project application submission whether the application has been accepted, rejected, or further information is required. Letter: Once the prescreen is complete, an audit commencement letter is sent to the operator Project review: The Audit timeframe is dictated by OSRR2009 Section 13(b) Project effective date, which is 9 months after the date of the project application submission Reporting and finalization Typically a Draft Notice of determination (draft audit report) is issued in the 8 month of the audit to provide the operator with 30 days to review and concur with the audit findings. The Final notice of determination (final audit report) is issued after the engineer review is complete and the Ministerial Order has been issued.

PNCB Pre-Screen Purpose Required supporting documentation:
Ensure that the transaction details reconciles to the PNCB submission Ensure that the supporting documentation is sufficient for C&A to conduct audit Required supporting documentation: Electronic detailed transaction listing of costs claimed Invoice Number, Date & Amount Account Number & Description Vendor Name Cost Centre (e.g. wells identified) AFE Number & Description Document Type (e.g. JE, A/P, etc.) Payment Date Copy of Authorization for Expenditures (AFE) for all costs claimed Seismic maps Methodology of cost allocations – CAMR, salaries, seismic, etc. The PNCB pre-screen is completed within 10 business days of receipt of the PNCB application submission. The purpose of this process is to Ensure that the transaction details reconcile to the amount reported in the PNCB form submitted by the operator, and Ensure that we have sufficient supporting document to conduct our audit Main required supporting documents include 1. Electronic detailed transaction listing Invoice Number, Date & Amount Account Number & Description Vendor Name Cost Centre (e.g. wells identified) AFE Number & Description Document Type (e.g. Journal Entry, A/P, etc.) Payment Date 2. Copies of AFE 3. Seismic maps 4. Allocation methodology (CAMR – Cost allocation Methodology Report) In some cases, allocated costs are included in the PNCB. Examples include salaries, seismic, and indirect costs (allocated to well level). C&A requires a detailed description of the allocation methodology during prescreen stage to evaluate its compliance with the methodologies

PNCB Pre-Screen - Things to check
Detailed transactions Summarized journal entries are not adequate – full underlying details must be provided 10 business days Submission deficiencies are reported to the operator to be rectified within 10 business days. Failure to provide supporting documentation may lead to Project application rejection Multiple files If all data cannot be included in a single file, additional files with a common format are acceptable Here are some points to check before PNCB submission: Detailed transactions are required During the detailed review, underlying details of the costs become essential. Therefore summary information will not be accepted as it does not provide sufficient details to determine cost eligibility 10 business days If deficiencies are found in the original submission, the Oil Sands engineer responsible for the Project application review will contact the operator. The operator is notified that they have another 10 business days to correct/submit the missing information. Failure to provide the supporting documentation may lead to the Project application being rejected. Okay to send multiple files In some cases the detailed transaction listing and supporting documentation files are quite large so C&A will accept multiple files as long as a common control link can be found

Project Review Gather additional operator information through review of the following: PNCB application Prior PNCB and EOP audits Oil Sands Engineering/Economic reports Operator Annual Reports & News Releases Complete initial Project interview with operator Complete analytical review of the cost claimed and revenues reported Stratified random and judgmental sample Once the Pre-screen is completed and full PNCB audit has commenced, the auditor will go into Project review process. In the Project review stage we Gather and review additional information such as PNCB application Prior PNCB audits OS Engineering/Economic reports Operator Annual Reports & News Releases Conduct initial Project interview to obtain basic information about the Project and how the operator compiled information. Analytical review of the costs claimed and the revenues reported. Statistical (Stratified random) and judgmental sample review

PNCB Audit Queries Capital and Operating Cost Sampling
Other Net Proceeds Reporting Non-Arm’s Length Transactions Salary Cost Sampling PNCB Revenue & Royalty Amounts Claimed Sales Revenue - Netback Unit Price Calculations Cost of Service Calculations Duplicate Transactions Journal Entries (Underlying details) Response time is normally 2 weeks for each query. During Project review stage, we request information in a form of queries. Typical audit queries C&A issue are Capital and Operating Cost Sampling Other Net Proceeds NAL transactions Salary Cost Sampling PNCB Revenue & Royalty Amounts Claimed Sales Revenue - Netback Unit Price Calculations Cost of Service Calculations Roads Camps Co-generation assets Duplicate Transactions Journal entries We are seeing “Allocated amounts” under document type “JE”. Sometimes costs are put into a parent AFE (cost pool) and allocated based on the number of wells or child AFEs in the parent AFE. In the situation like this we request for underlying cost details so that we can trace the amount back to the source document. We request Transaction details for the parent AFE Methodology used to allocate the amount in the parent AFE Copies of invoices to verify the amounts and the nature of costs in the pool Response time requested is normally 2 weeks for each query. However, information requests related to sales revenues and salaries may require additional time to gather information because they usually involve various departments within a company. In a situation like this the due date of the query can be extended.

Audit Query Statistical sample testing
This is an example of the typical query pertaining to capital and operating costs substantive testing. Query will contain a description of the type of information requested (e.g. CAPEX, OPEX, ONP, NAL transactions, Revenue Net back pricing, etc.) Reason for the Request ( Determination of cost eligibility based on Regulatory Authority (OSRR2009, OSACR, Information Bulletin, etc.) Timeline for information receipt - usually a 2 week response time is requested, extension requests may be considered All information provided by operators are kept confidential as dictated by Section 50 of the Mines & Minerals Act

Audit Queries - Salary Costs
First query requests for Payroll process and organizational charts Second query requests for PNCB transaction details should provide breakdown of the salary costs with the following information: Employee name Actual salary paid to the employee Description of the amount (Salary, bonus, benefit etc) Position title of the employee Duties performed by the employee Location of the employee Pay period, date worked, date paid Timesheets Hourly rate for employee Detailed description of allocation methodology if costs are allocated Third query requests for Supporting documentation for the sample transactions selected (OSRR 15(3)(iv) and OSACR Schedule 1.1 items 4 and 58, IB ) Multiple queries on one issue Sometimes a number of queries can be issued for more complex cost categories. Salary costs are good example. The first query – Requests for general payroll process and org. charts Second query – Requests for breakdown of the salary costs. C&A reviews to identify eligible employees for the Project. Employee name Amount paid to the employee Description of the amount (Bonus, salary, benefit) Position title of the employee Duties performed by the employee Location of the employee Timesheets Hourly rate for employee A detailed description of the allocation methodology if salaries are allocated Any other supporting documentation that would help in determining if the employee was carrying out oil sands Project operations Third query - we then select sample transactions and issue the third query requesting supporting documentation. Note: Bonuses and other related employee benefits may be verified through written HR policies. OSACR Schedule 1.1 item 4 (bonus) and 58 (salary) IB

Draft Notice of Determination
Once a Project review is completed, C&A issues a draft notice of determination (draft audit report) to notify the operator of the audit findings and the proposed adjustments to the PNCB amount. Here is an example of a draft notice of determination showing proposed audit adjustments. The draft notice of determination shows Description of the issue Proposed dollar amount of adjustment Regulatory authority Issue status – Closed if concurred and pending if waiting for response The draft notice of determination indicates that the operator has 30 days to respond to the draft report. (if the operator agrees or submit additional information for the C&A to review) This is the ONLY opportunity for the operator to provide any additional information in regards to the proposed audit adjustments. Additional information is reviewed and considered in determination of the final PNCB amount to be reported in the Final notice of determination.

Types of Audit Adjustments
Cost Adjustments Costs outside Project lands or Project description Costs incurred outside allowable PNCB period (5 years preceding the effective date – OSRR 09 Section 15(2)(a)) Cost duplication between PNCB & End of Period Statement (EOPS) reporting Ineligible costs claimed (Overhead, membership, shared services etc) - OSACR Schedule 1.1 Ineligible salary costs Cost of Service calculations Cost Accruals Revenue Adjustments Volumetric Valuation – Netback sale prices Handling Charges Other net proceeds not reported Here is a list of the most common cost and revenue adjustments found in the PNCB. Common cost errors Costs outside Project lands or Project Description Costs incurred outside allowable PNCB period ( From 2017, 5 years preceding the effective date – OSRR 2009 section 15(2)(a)) Ineligible costs claimed per OSACR Schedule 1.1 (overhead, membership, shared service ) Cost duplication audit adjustments Cost of Service calculations Ineligible salary costs - not solely dedicated to Project activities Cost Accruals Common Revenue Errors Incorrect Volumetric data Netback sale prices due to costs for processing or water disposal being claimed Handling Charges that include ineligible marketing fees or internal tariffs Other net proceeds not reported Common errors to follow

Common Cost Adjustment Costs outside Project lands or Project description
Eligible PNCB & EOPS costs are incurred on Project lands AER approval includes development lands and potentially includable lands whereas the Oil Sands Project approved lands are only the Ministerial Order development lands which may include specifically includable assets off Project lands Eligible PNCB & EOPS costs are incurred for Project activities only and are outlined in the Project description The Ministerial Order will specifically exclude assets or activities (e.g. camps, roads, airstrips, electricity portion of co-generation, etc.) The Ministerial Order describes the “ring fence” of the Project that determines the eligibility of costs. Common cost adjustment #1 Costs outside the Project Lands or Project Description Eligible costs are Incurred on Project lands (Operators tend to claim costs incurred on both the AER approved development lands and potentially includable lands) Incurred for Project activities (If assets are specifically excluded from Project description, the costs are not eligible) Examples of assets are camps, airstrip, roads, etc. If an operator has assets that they are unsure of PNCB cost eligibility they should contact the Oil Sands Engineering team to meet and discuss the particulars of the asset and receive clarification of the asset eligibility. We will go through some samples in the next slides.

Common Cost Adjustment - Sample Costs outside Project lands or Project description
Here is an example of a project map with some assets on and off project development lands. The Project lands are highlighted in green. Specifically included assets and specifically excluded assets are determined by the DOE Engineer assigned to the project and are described in the Ministerial Order (MO) The orange highlighted asset It is on project development lands but specifically excluded from the MO. An example of this would be a shared camp or airstrip. Subject to the other OSR regulatory provisions, costs associated with this orange asset are not allowable because the asset is specifically excluded from the MO. The pink highlighted asset It is off project development lands but is specifically included in the MO. An example of this would be a water disposal well. Subject to the other OSR regulatory provisions, costs associated with this pink asset are allowable because the asset is specifically included in the MO.

Common Cost Adjustment - Sample Allocated costs
Based on well AFE/CC Invoice amount # of eligible wells in PNCB # of wells in AFE/CC Allocation % Amount claimed $630,528 20 130 15.38% $97,004 $557,607 16 95 16.84% $93,913 Based on LSD Common cost adjustment #2 Another common adjustment is allocated costs. PNCBs are specific to each Project application or Project amendment application. Sometimes costs are allocated based on number of AFEs, number of wells in each AFE, or number of LSD in AFE/agreement (Crown land agreement). Good examples are Seismic costs and Crown lease agreement costs. The idea is the same for both situation. We calculate the allocation % based on the number of eligible wells/LSDs and apply their % to the amount on the source documents. Well base - the number of eligible wells are 20. Total wells in AFE is Therefore the ratio is 15.38% and the amount includable in the PNCB is $97,004. Land base – the number of eligible LSDs are 34. Total LSDs in the agreement is 96. Therefore the ratio is $35.41% and the amount includable in the PNCB is $1,866. AFE/CC Invoice amount # of eligible LSD in PNCB Total LSD in AFE/CC Allocation % Amount claimed 12345T67 $5,269 34 96 35.41% $1,866 12345T89 $66,024 158 1027 15.38% $10,154

Common Cost Adjustment Cost Duplication
PNCB transaction details are reviewed to determine if there is a potential for duplication of allowed costs between: New Project application and an amendment to an existing Project. Project application and Oil Sands EOPS reporting (Note that amendment Project application PNCB amounts should not be reported in the EOPS until the audit of the PNCB has been finalized and the Ministerial Order issued to the operator) Project A and Projects B owned by the same operator Common error 3 Cost duplication Another common audit adjustment relates to duplication of costs between: 1. the new Project PNCB application and a subsequent amendment to the Project 2. The PNCB application and the annual Oil Sands EOPS reporting (Note that amendment PNCB amounts should not be reported in the EOPS until the audit of the PNCB has been finalized and the MO issued to the operator.) Sometimes multiple Projects are owned and operated by the same operator. We will look for duplications between these Projects. C&A may Request supporting documentation associated with the Filed EOPs.

Revenue Adjustments Sales revenues reported in the PNCB are a deduction from the allowable costs claimed Reconciliation completed between PNCB reporting and NPR submissions for the following: Sales volumes are equal to the conventional oil well’s production for the month Sales value is either the netback price for the product sold or BVM if no sales occurred within the month with no deductions allowed for processing or water disposal Royalties paid on production from conventional oil wells are an allowable PNCB costs. We also propose audit adjustments related to the reporting of sales revenue in the PNCB Revenues are a deduction from the costs claimed and are related directly to the Non-Project Royalty reporting. We reconcile between the PNCB and NPR to ensure that Sales volumes = conventional oil wells’ production Sales value = netback price or BMV Royalties paid on production from conventional oil wells are allowable PNCB costs. PNCB report is to follow.

PNCB Sales Revenue In PNCB reporting, the product is deemed to be sold at the well site. Sales volumes = NPR production volume Sales revenues are calculated using the netback price received in that month. We follow OSRR 27 & 28 (non project well events) when reviewing the revenues included in the PNCB.

Final Notice of Determination
After 30 days if the PNCB audit is concluded the final PNCB amount is provided to Oil Sands Engineering for inclusion in the Ministerial Order. Oil Sands Engineering will issue the Ministerial Order to the operator. C&A completes a final reconciliation of Ministerial Order to the Final Notice of Determination and then issues the Final Notice of Determination to the operator. In some instances the Ministerial Order will be prepared with a reviewed PNCB amount while the audit continues resulting in the PNCB amount being subject to further adjustment. Subsequent to issuance of the Draft Notice of Determination: Once the operator agrees with the proposed adjustments and the audit is finalized, C&A notifies OS engineer the final PNCB amount. OS Engineer will issue the MO. C&A reconciles the final amount in the MO to the Final Notice of Determination and issues the final notice of determination to the operator. OSRR 2009 Section 16 does not allow for amendment of a PNCB once the Minister has concluded an audit of the PNCB unless fraud, misrepresentation, carelessness or willful default is present. In some instances the audit cannot be completed within the 9 month time frame. In a case like this C&A provides the OS engineer with a reviewed PNCB amount The MO will identify that the audit is on going The PNCB still subject to audit completion. During this time audit queries will continue and the operator will still have opportunity to provide additional information to the auditor for consideration.

After the Final Notice of Determination
If this Project application is for a new Project, the PNCB amount becomes the opening cumulative cost balance of the OSR Project The approved PNCB amount is reported in the monthly Oil Sands royalty reporting forms (MRC/GFE) in the month the Project application/amendment became effective E.g. If the effective date of the Project application is March 1, 2017 for a new OSR Project, the operator would report the PNCB amount in the March 2017 MRC royalty form (presuming the Project is in pre-payout status) Allowed costs included in the PNCB data for a Project amendment application should never be included in the Oil Sands Royalty reporting until the Project application is approved For new Project applications the PNCB amount becomes the opening unrecovered balance in the Oil Sands Projects 1st EOPS reporting. If this is a Project amendment, the amount of the PNCB is entered in the EOPS in the month the amendment becomes effective. GFE (Good Faith Estimate) for Post-payout Project MRC (Monthly Royalty Calculation) for Pre-payout Project Until the PNCB has been approved with a MO, the PNCB amount cannot be reported in the EOPS.

Other Information Bulletins/Letters
IB : Arm’s Length Costs Incurred and Cost Accruals Defines when allowed costs re incurred and included as allowed costs of a Project IB Change of Operatorship or Ownership: Clarification of Responsibilities and Entitlements The current operator must provide access to records for the Department to conduct an audit or examination The previous operator must maintain all records used to prepare any reports filed with the Department IB : Determination and Treatment of “Solely Dedicated” Employee Costs Provides clarity regarding the eligibility of “corporate overhead” expenses. The previous Standard of Evidence example elaborates on the supporting documentation the Department of Energy requires for expenses of this nature. Access to records – OSRR2009 Section 42 & Mines and Minerals Act Section 47 Records reside in Alberta Added slide to provide specific links to important IB relating to cost eligibility.

EOPS – End of Period Statements Audit Planning and Selection
The objective of Compliance and Assurance is to ensure that Crown Royalties are complete, accurate and fairly valued The audit selection process is conducted using various statistical and judgmental processes to ensure this standard is achieved Statistical analysis is conducted on the entire oil sands population for project selection to satisfy royalty coverage criteria

EOPS Audit Planning and Selection
Judgmental review on the remaining population is conducted as follows: Risk analysis Reporting outliers Reporting deficiencies (Prior Year Reviews) Project payout timeline Operator requested New reporter compliance New asset inclusion (cost of service) New reporting review (i.e. support service model) Internal requested PNCB auditor review Oil Sands Operations (Ministerial Amendment, Royalty reporting deficiencies, revocation orders etc.)

EOPS Audit Lifecycle Commencement Letter
Data requested that supports and reconciles to all costs and revenue claimed Electronic Format Vendor Name Invoice Number, Date and Paid Date Description of Transaction AFE Number and description Location Account Number and Description Document type See Section 50 of the MMA regarding confidentiality of records

EOPS Audit Lifecycle Project Orientation
Review prior years audit files/PNCB audits Ministerial Orders Engineering/Economic reports Project Briefings Cost Allocation Methodology Reports (CAMR)

EOPS Audit Lifecycle Data Analysis Auditor Assignment
Audit Commencement meeting may be required Initial Data Analysis Data Summaries Trend Analysis Area price comparisons Fair market value tests Duplicate testing Project boundary reviews

EOPS Audit Lifecycle Queries Background of issue in discussion
What information is being requested Reason for information request Regulatory authority (OSRR-09, OSACR, BVM Ministerial Order, IL, IB, etc.) Timeline for information receipt

SAP GL details are mostly likely not compliant to the Regulations.
Standard of Evidence Employees Performing Corporate Overhead Type Functions All costs/revenues submitted for royalty calculation purposes must be auditable, properly documented and supported by evidence. Evidence must be valid, relevant and impartial to be considered appropriate – IB The next three slides will examine the standard of evidence for employees performing corporate overhead type functions as per Item 58 of schedule 1.1 of OSACR 2009, that is effective January 1, 2017 Salaries for employees performing corporate overhead type functions are claimed on an employee level. SAP GL details are mostly likely not compliant to the Regulations.

Standard of Evidence Employees Performing Corporate Overhead Type Functions Specifically Included Specifically Excluded Salaries, wages, benefits, training, travel and accommodations for employees solely dedicated to carrying out Project operations Salaries, wages, benefits, training, travel and accommodations for employees or personnel performing the following functions and solely dedicated to operations of one or more Projects operated by the same operator: information technology accounts payable office administration and support capital and operating accounting Column continued on next slide Salaries, wages, benefits, training, travel and accommodations for executive or management employees not solely dedicated to carrying out Project operations Salaries, wages, benefits, training, travel and accommodations for employees or personnel performing the following functions and not solely dedicated to the operations of one or more Projects operated by the same operator:

Standard of Evidence Employees Performing Corporate Overhead Type Functions Specifically Included Salaries, wages, benefits, training, travel and accommodations, for employees to the extent those employees carry out Project operations in the following circumstances: legal counsel for matters integral to furthering Project operations providing production accounting and royalty accounting for oil sands products purchasing or disposing of assets, materials or supplies used in Project operations conducting employee classification or employee relations activities for employees carrying out Project operations engineers, geologists, geo-scientists or biologists carrying out engineering, geological, geo-physical or environmental activities for Project operations carrying out marketing activities for oil sands products

Standard of Evidence Employees Performing Corporate Overhead Type Functions (1) Salary must be actual amount incurred and paid Day rates, estimates, or industry averages should be replaced with actual salaries paid to employees (2) The allocation rate must be supported with verifiable evidence illustrating the relationship of the service the Project receives

Audit Lifecycle Proposed Adjustments Adjustment name
Description of the adjustment Regulatory authority Proposed dollar amount

Audit Lifecycle Pending Closure Notice of Pending Audit Closure Letter
Usually 30 days Draft Audit Adjustment Notes Request for any additional information for audit adjustments in dispute by operator Mines and Minerals Dispute Resolution Regulation Section 4(2), no additional information will be considered during the appeal process

Audit Lifecycle Audit Report Signed letter Appeal Process
Obligation to correct systemic errors – OSRR (5-6) Adjustment notes Adjusted EOPS/PNCB schedules

2014 and 2015 production years will close
Timelines Operators file their original EOPS within 3 months after the end of each period OSRR, 2009 Section 39(1) Amended MMA Section 38 Operators may file amended EOPS within 3 years after the end of the calendar year. Audits must be completed no later than 5 years after the end of the calendar year Audit adjustments are to be processed no later than 5 years and 6 months after the end of the calendar year. on December 31, 2018 both the 2014 and 2015 production years will close

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Compliance and Assurance PNCB+EOPS Audit Life Cycle

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