With assistance from Deidra Garyk Emulsion Fees in a low price environment(or any environment) Using JP-05 and other methods PJVA Morning Session Sept 30, 2015 Rick Steffensen Tim Reimer With assistance from Deidra Garyk

Emulsion fees Formula based Rules of thumb Market based Disputes

Market Based Fees Emulsion, oil handling and water disposal fees have historically been market based: The processor will charge what the market will bear The producer can truck emulsion to another facility to obtain a better fee It can be difficult to determine “reasonableness”

Formula based fees Fees determined mathematically, and would usually include: A capital component, utilizing a defined capital cost and defined rate of return An operating cost component, either on a fixed basis or on a flow through basis with 13th month adjustments JP05 is a dispute resolution tool, but the formula can be used for any type of fee

JP-05 Economic Principles Fees for capacity involve returns reflecting investment risks The risk with unused capacity remains with the facility owners

JP05 Capital Fee Determination Cap fee = 20%ROR* Capital Rate Base Facility Capacity Note there is only 1 variable: Capital

JP05 To calculate emulsion fees, are companies revising any of the variables? Which ones? JP calculations are guidelines only. Too often companies won’t adjust or negotiate their fees because they used the JP-05 calculation Don’t use Lost GCA when calculating oil fees – it’s for GAS

JP05 Circumstances and risks determine relevant range for fees – this principle applies to both oil and gas Goal is not to get the highest fee; it’s to get the optimal amount of fee revenue – be careful of scaring away producers or having producers increase fees at their facilities in retaliation

Operating Costs Basic principle, operating fee is based on flow through of costs allocated to throughput, and will include: Direct Costs Overhead Working Capital Allowance (Operating costs+ overhead)/6*20% Turnaround costs in the year incurred. Some large facilities amortize the turnaround costs Fixed operating cost vs.13th month adjustment, which is better?

Operating Costs Do producers prefer to see T/A costs transparently separated out of opex or hidden within? Pipeline Opex includes: Cathodic protection Property taxes Surface rentals if there’s a riser, otherwise negligible costs

JP-05 Example Calculation Capital cost $ 2,000,000 Facility Capacity: 200 m3/day Owners throughput: 150 m3/day Third party throughput: 50 m3/day Operating days/year: 350 Rate of return: 20% Capital fee: $5.71/m3 Operating cost: $200,000 per year Operating fee: $2.85/m3 Total fee: $8.56/m3

JP-05 Example Calculation Simple battery: emulsion treating and storage tank Complex battery, with several functional units: treating, water disposal, clean oil terminal, vapor recovery with compression and gas pipeline Consider a separate calculation for each component The feed streams may have different water % and different solution gas content Consider basing fees on the emulsion volume, not just the oil volume: the water content will increase with time, and different streams can contain a water content that is very different the original design

Rules of Thumb Gas pipeline: When capital cost data is not known, use accepted distance fees $0.01-$0.015 /mcf mile. Or $0.20 to $0.35/e3m3 km This rule of thumb was developed using an average of historical actual fees. The number is a combination of calculated fees and negotiated fees This fee may need updating

Rules of Thumb Oil fees using an energy equivalent: using a conversion of 6 mcf equivalent to 1 barrel (1 barrel has approximately 6 mmbtu) This yields a fee of $0.056 per barrel per mile or $0.22 per m3 per km Oil fees using a volume equivalent For example: a gathering system operating at 150 psi (1000 kpa) 1 mile of pipe would contain the equivalent of 3.5 mcf of gas or 60 barrels of oil The gas fee of $.015 per mcf per mile would yield an equivalent of $0.00087 per barrel per mile or $0.003 per m3 per km

Rules of Thumb A rule of thumb works if the majority of producers accept it Would there be value in developing a rule of thumb based on actual fees? Would producers be willing to submit actual data to the PJVA to enable an average rule of thumb fee to be developed

Questions How to determine emulsion handling capacity: peak flow rate? Emulsion pipes that carry condensate and gas: are companies charging separate fees for the gas and condensate? In this low price environment some fees are apparently being charged only on the oil volume portion in a high water cut area. Is this a viable approach that some Operator’s are willing to use

Questions How are companies determining water disposal fees? Would some company be willing to pay for water that they needed for a water flood (assuming the water is compatible)