1. Royalty Adjustment Program for Deep Marginal Gas Wells (RAP)
February 19, 2007

2. Welcome to the RAP Presentation
Agenda
Introductions
Background
Key changes
Timeline
Implementation details
Illustrations
Reporting requirements
Informal and interactive
February 19, 2007

3. Background
The Auditor General requested a review of the Deep Gas Royalty Holiday Program (DGRHP) to determine if the program still represents good value for the Crown.
The review determined that the DGRHP is no longer necessary as the program met its original objective to accelerate the search for deeper gas reserves.
On August 22, 2006 the RAP was introduced to encourage the development of lower grade natural gas resources at deep depths. These changes are effective as of September 1, 2006.
It is designed to target wells that produce below established qualifying production rates (QPR).
February 19, 2007

4. Key Changes
A well includes all drilling occurrences that share a common surface location.
Royalty adjustments are limited to a maximum of $3,600,000 net royalty per well (gross up factor still applied)
Wells are subject to a maximum production threshold – the QPR.
Determination of the royalty adjustment is calculated using both vertical and non-vertical distances drilled.
Approved wells are subject to a minimum 5% royalty rate each month.
Adjustments will be revoked if the QPR is exceeded.
Oil and Oil Sands wells no longer qualify.
Sunset clause August 31, 2011.
February 19, 2007

5. DGRHP Timeline The following illustrates important dates for the DGRHP
June 1, 1985
Sept 1, 2006
April 1, 2010
April 1, 2012
Spudding or deepening of wells must occur between June 1, 1985 and before April 1, 2010.
The well must be drilled on a Crown Agreement with a term commencement date (date acquired) earlier than September 1, 2006.
Oil and Oil Sands wells spudded after September 1, 2006 are subject to new eligibility criteria.
Benefits remaining on April 1, 2012 are rolled into the new program and subject to a minimum 5% royalty rate.
February 19, 2007

6. RAP Timeline The following illustrates the important dates for the RAP
Sept 1, 2006
April 1, 2010
Aug 31, 2011
Spudding or commencement of deepening must occur on or after September 1, 2006 and before August 31, 2011.
April 1, 2010 DGRHP eligibility ends, deep wells assessed for RAP eligibility only.
February 19, 2007

7. Election of RAP
Wells that are eligible for the DGRHP may elect to receive adjustments under the RAP program rather than an exemption under DGRHP.
Elections must be made prior to spudding or commencement of drilling.
The Designated Representative (DR) or well licensee must make the election in writing to the department.
The department will determine the well’s eligibility for consideration under RAP and provide written notification to the well licensee or DR.
February 19, 2007

8. Qualifying Criteria Wells must:
Be spudded or deepened on or after September 1, 2006 or for DGRHP eligible wells (lands acquired prior to September 1, 2006) an election can be made,
Be producing from a pool that occurs greater than 2,500 meters TVD,
Be outside the pool boundaries as designated by the Alberta Energy and Utilities Board (EUB) as at June 1, 1985 (outside an existing G-order),
Have average daily production (ADP) that does not exceed the QPR.
February 19, 2007

9. Non Qualifying Criteria
Wells that do not qualify include:
Wells that are 100% freehold,
Wells that have received prior royalty exemptions under a previous program,
Off target wells where a penalty has been assessed,
Wells completed in a drilling spacing unit, where another well within the drilling spacing unit has received a royalty adjustment,
Bitumen wells,
Wells whose crude oil or oil sands production is exempt from royalty,
Wells that produce oil either alone or with gas at a gas-oil ratio of less than 1800:1.
February 19, 2007

10. Determination of Vertical, Measured and Non-Vertical depths
The vertical depth is determined by using the distance from the surface location Kelley bushing to the lesser of either the total vertical depth of the well or to the base of the natural gas producing interval of the deepest producing zone.
The measured depth is the longest distance in meters measured along the well bore from the Kelley bushing to the lesser of the total measured depth of the well or to the base of the natural gas producing interval of the deepest producing zone.
The non-vertical depth is the measured depth less the vertical depth of the well.
February 19, 2007

11. TVD, MD and Non-Vertical Depth
Kelley bushing
Surface
Total measured drill depth
Vertical depth
Measured depth
Total vertical drill depth
February 19, 2007

12. Determination of Average Daily Production
In conjunction with the EUB the department will determine all the drilling occurrences that share a common surface location.
The Average Daily Production (ADP) will include production from all zones within a multi-zone wellbore.
Calculation for ADP = total quantity of raw natural gas and field condensate from all zones produced from the well during the 12 month period DIVIDED BY the number of days in the reporting period.
Note: Field condensate volumes will be expressed as a gas equivalent using a conversion rate of 1,000 cubic meters of natural gas per cubic meter of condensate.
February 19, 2007

13. Diagram of a Well X common surface location Pool A 2,500 meters Pool B
Pool C
February 19, 2007

14. Calculation of Qualifying Production Rate
The qualifying production rate (QPR) approximates an economic threshold for a typical well at varying depths.
For the first 12 month reporting period the QPR is based on the following formula:
For wells drilled > 2,500 m but ≤ 3,500 m
For wells drilled > 3,500 m
February 19, 2007

15. QPR continued
Where:
QPR = the qualifying production rate for the well
MD = the measured depth of the well on the last day of the applicable period
The QPR for the second 12 month period will be 80% of the first period QPR and 68% of the first period QPR for the third and all subsequent 12 month periods.
February 19, 2007

16. Adjusted QPR
If a well has an acid gas content of more than 15% by volume, the QPR may be adjusted using the following formula.
Adjusted QPR = QPR / [100% - (H2S% + CO2% - 15%)]
Where:
QPR = the qualifying production rate for the well
H2S and CO2 = the % of hydrogen sulphide and carbon dioxide contained in the raw gas stream by volume, respectively.
If the well operator/licensee is seeking to have the adjusted QPR applied, it is their responsibility to provide documentation, for the department’s review, such as a gas analysis report signed by a professional engineer.
February 19, 2007

17. Vertical Well Figure 1 Surface Vertical depth 2,900 m
Measured depth = 2,900 m
Non-vertical depth = 0
Pool A
Vertical depth 2,900 m
February 19, 2007

18. Total Vertical Depth that Extends Past the Pool
Figure 2
Surface
Vertical depth = 2,700 m
Total Vertical depth = 2,900 m
Measured depth = 2,700 m
Total Measured depth = 2,900
Non-vertical depth = 0
Pool A
Pay base of pool 2,700 m
Vertical depth 2,900 m
February 19, 2007

19. Well with Non-Vertical Depth
Figure 3
Surface
Vertical depth = 3,500 m
Measured depth = 4,000 m
Non-vertical depth = 500 m
Measured depth m
Vertical depth 3,500 m
Pool A
February 19, 2007

20. Total Measured Depth that Extends Past the Pool
Figure 4
Surface
Vertical depth = 3,200 m
Total Vertical depth = 3,400 m
Measured depth =3,300 m
Total Measured depth = 4,000 m
Non-vertical depth = 100 m
Measured depth to pay base of pool 3,300 m
Pool A
Vertical depth to pay base of pool 3,200 m
Total vertical depth drilled 3,400 m
February 19, 2007

21. Determination of Royalty Adjustment
Figure 1
Vertical adjustment:
2,900 m (Cumulative value) = $400,000
Non-vertical depth:
2,900 m – 2,900 m = 0
Total net adjustment $400,000
Gross up factor
Total gross adjustment $689,568
February 19, 2007

22. Continued Figure 3 Vertical adjustment:
3,500 m (cumulative value) = $1,000,000
Non-vertical depth:
4,000 m – 3,500 m = 500 m
Non-vertical adjustment:
500 m X $1,000 (per meter) = $500,000
Total net adjustment $1,500,000
Gross up factor
Total gross adjustment $2,585,880
Ask Jeff – would this calculation be dependent upon which pool comes on production first. Need for him to explain the difference to me (and Kerr???)
February 19, 2007

23. Royalty Adjustment
Royalty adjustments begin on the first day of the month in which the royalty payable on gas production obtained from the well is due.
The entitlement period is 10 years following the finished drilling date of the well.
The adjustment terminates if the well is abandoned.
Limited to a maximum of $3,600,000 per well bore.
The adjustment will not reduce the royalty payable to 0% but rather wells are subject to a minimum 5% royalty rate.
February 19, 2007

24. Reporting requirements
The royalty adjustment amount is determined based on the Volumetric production, Stream Allocation Factor (SAF) and Owner Allocation Factor (OAF).
In order for an adjustment to be applied against a well’s production, the well must be reported as a single well.
If it is determined that the well is commingling production from different zones, some of which do not qualify for an adjustment, the department will advise how to report the eligible and non-eligible production.
February 19, 2007

25. Invoices & Statements
The department will automate the processes related to this program in the near future; however, until the system enhancement is completed the following processes will occur for all qualified wells:
All wells will be set up as if they are deep gas wells,
In the first month the adjustment will be 100% of the royalty payable,
In the following billing period the 5% royalty will be calculated and charged,
The current royalty exemption statement will be overstated by the 5% royalty charge,
Revised exemption statements will be issued to all participants in the well.
February 19, 2007

26. Revocation of Adjustments
Each 12 month reporting period the department will re-evaluate each well’s ADP and QPR.
If at any point during the QPR is exceeded, the entire royalty adjustment is revoked.
The effective date of the revocation will be the royalty adjustment commencement date, unless the well was deepened and the excess production is a result of the deepening, then the effective date with be the date the well was deepened.
February 19, 2007

27. Revocation continued
Any royalty adjustments, received by all working interest owners, will be reversed and royalty payable on the natural gas, gas products and field condensate will be calculated as if the adjustment never arose.
Interest will be charged/paid on all prior period amendments.
Once an adjustment is revoked the department will no longer monitor the well.
It is the responsibility of the royalty client to submit documentation that supports reinstatement of an adjustment.
February 19, 2007

28. Processing Time Lines
The processing of royalty adjustment applications will be similar to those currently followed in the DGRHP.
Clients can track the progress of their wells on the internet on the Natural Gas Royalty Related Information page.
February 19, 2007

29. Royalty Adjustment Program Process Flow
Web page updated
Web page updated
Royalty client submissions
Royalty Programs gathers data, performs preliminary determination on eligibility & prepares worksheets
AEUB performs technical evaluation
Royalty Programs reviews technical evaluation results.
If denied in the technical evaluation phase, the application is denied and no further review is under taken.
Web page updated
Qualified
Denied
February 19, 2007

30. Qualified Wells
Determination of all drilling occurrences' producing from the common surface location.
Using the first 6 months of production data the Royalty Programs Group calculates the average daily production (ADP) and qualifying production rate (QPR) for the well.
If it appears that the ADP is within a reasonable range of the QPR, the royalty adjustment will be implemented and the vertical and non-vertical adjustment calculated.
If it appears that the ADP will exceed or has exceeded the QPR, the adjustment will be with-held until a final determination can be made using 12 months of production data.
Web page updated
Well tentatively denied
Well tentatively approved
February 19, 2007

31. Re-evaluation of Tentative Wells
The tentatively approved and tentatively denied wells are re-evaluated using 12 months of production data for the ADP & QPR calculations.
Web page updated
Well denied and previous adjustments are revoked and royalties are recalculated.
Adjustment confirmed
Web page updated
Each subsequent 12 month reporting period the ADP & QPR are re-evaluated.
February 19, 2007

32. Thanks for coming!
February 19, 2007