Ministry of Energy, Mines and Petroleum Resources Page 1. BC Royalty Programs June 2006

Ministry of Energy, Mines and Petroleum Resources Page 2. IntroductionIntroduction 1 st Royalty program st Royalty program 2002 – CBM royalty program OGDS 2003 OGDS 2003 – Deep, Marginal and Summer royalty programs OGDS 2006 OGDS 2006 – Ultra-marginal royalty program Currently working on Currently working on – Net profit program Last year 1427 wells drilled & 1Tcf row gas produced Last year 1427 wells drilled & 1Tcf row gas produced

Ministry of Energy, Mines and Petroleum Resources Page 3. BC Royalty Programs Overview BC Royalty Programs Summer Royalty Program Condition: Spud Date between April 01 & November 30 Deep Royalty Programs Deep Deep Discovery Deep Re-entry Conditions: Vertical Well Depth > 2500m Horizontal Well Depth > 2300m Marginal Royalty Program Conditions: 12 month average Rate < 80 mcf/d/100m Monthly Production below 880 mcf/d Ultra-Marginal Royalty Program Condition: 12 month average Rate < 40 mcf/d/100m Low Productivity Royalty Program Condition: Production < 175 mcf/d Coalbed Methane Condition: Production < 600 mcf/d Net Profit Royalty Program Condition: Under Construction

Ministry of Energy, Mines and Petroleum Resources Page 4. Summer Royalty Program Condition Condition – Spud date between April 01 and November 30 Royalty Credit Royalty Credit – 10% of the drilling and completion cost to a max. of $100,000 Application Application – BC 25 Form (Summer Drilling Credit Application)

Ministry of Energy, Mines and Petroleum Resources Page 5. Deep Royalty Program Mechanism: Mechanism: – Royalty Credit designed to recognize the increase costs Requirement Requirement – Applicable only for Wells deeper than True Vertical Depth 2500 m for vertical wells 2300 m for horizontal wells – Horizontal Well factor Implementation Implementation – Spud date after December 01, 2003 Application Application – BC - 11 Notice of Commencement or Suspension of Operations – OGC review – No transfer of royalty credits

Ministry of Energy, Mines and Petroleum Resources Page 6. Deep Vertical Well Calculation Calculations Calculations – Use tables (BHL east/west line & gas composition) – Royalty Credit = (CV + AD)* PS CV = Cumulative Value; AD = Incremental (Depth * $); PS = Interest Example Example – West special sour well at 3785m working interest 35% – CV at 3500m= $2.4 million – AD: ( )*$700 = $199,500 – Royalty Credit: – ($2,400,000+$199,500)*0.35 =$909,825

Ministry of Energy, Mines and Petroleum Resources Page 7. Deep Royalty

Ministry of Energy, Mines and Petroleum Resources Page 8. Deep Royalty Horizontal Well Depth Calculation Horizontal Well Depth Horizontal Well Depth – MDTP+HLF*(TMD-MDTP) Horizontal Length Factor (HLF) Calculation Horizontal Length Factor (HLF) Calculation – MDTP is between 2300m & 2875m – HLF=( *(MDTP- 2300))/100 – MDTP >2875m HLF= 0.1 Total Measured Depth (TMD) Calculation Total Measured Depth (TMD) Calculation – Depth reported from the End of Well report Example Example – MDTP = 2600m & TMD = 2800m – HLF: *( ))/100=0.195 – Horizontal Well depth: *( )=2639m

Ministry of Energy, Mines and Petroleum Resources Page 9. Deep Royalty Re-Entry Well Qualification Qualification – Application to Alter a Well must be submitted and approved before re- entry – TVD of the re-entry > 2300m – Re-entry date after December 01, 2003 Application Application – BC - 11 Notice of Commencement or Suspension of Operations – OGC review – No transfer of royalty credits to another well

Ministry of Energy, Mines and Petroleum Resources Page 10. Deep Re-Entry Well Calculation Calculation – Determine incremental distance – Use Tables – Formula (CV+AD)*SP Example Example – TMD old = 5000m; TMD new = 4550m & Well location is on the west – CV: 300m = $150,000 – IV: $500/m – AD: (450m-300m)*$500/m= $75,000 – Re-entry Credit $150,000+$75,000 = $225,000

Ministry of Energy, Mines and Petroleum Resources Page 11. Deep Discovery Well Exemption Qualifying Criteria Qualifying Criteria – New gas pool – TVD > 4000m – Rig release date after November 2003 – New well surface location must be at least 20km away from the location of any well in a recognized pool of the same formation Royalty Credit Royalty Credit – Three year royalty holiday or 283,000,000m3 (~10bcf) Application Application – No application necessary – OGC will determine if qualification are met

Ministry of Energy, Mines and Petroleum Resources Page 12. Marginal Royalty Program Qualifying for the Marginal Royalty Qualifying for the Marginal Royalty – Well Production Rate 1 st Qualifier – First 12 month average rate < 80 mcf/d/100m (23m 3 /d/m) 2 nd Qualifier – Average Monthly Production Rate < 880 mcf/d (25 e 3 m 3 /d) Royalty Calculations Royalty Calculations – Base 9 Royalty: (9 * SP + 40 * (RP – SP))/RP; Min 9% & Max 27% Select Price (SP) = 50 $/m 3 ; Reference Price 2006 (RP) = $/m 3 – Low Productivity Reduction Factor (LPRF) LPRF=((25-S)/25) 2 Units = e 3 m 3 /d – Calculation 27% * (1 – LPRF) Implementation Implementation – Production start after July 01, 2003 Application Application – BC - 08 Monthly Production Statement

Ministry of Energy, Mines and Petroleum Resources Page 13. Marginal Royalty Program Calculation Example Example – Total 12 month production (BC-S1): 7e 6 m 3 – Production hours over that same period: 4000hrs – Well depth 2300m Eligibility Calculation Eligibility Calculation (7,000,000/4000)*24/2300 = 18.26m 3 /d/m – The calculation is less than 23m 3 /d/m the well event qualifies as a marginal well event. Royalty Reduction Calculation Royalty Reduction Calculation – Average daily volume: 17,000 m 3 – Reference Price: $180/m 3 – Step 1 LPRF ((25,000-17,000)/25,000) 2 LPRF = – Step 2 Marginal Royalty Rate 27% * (1 – ) Marginal Rate = 24.24%

Ministry of Energy, Mines and Petroleum Resources Page 14. Ultra Marginal Royalty Program Qualifying for the Ultra-Marginal Royalty Qualifying for the Ultra-Marginal Royalty – Development & Exploration Outpost Wells 12 month average Rate < 40 mcf/d/100m (11m 3 /d/m) – Exploratory Wildcat Wells 12 month average Rate < 60 mcf/d/100m (17m 3 /d/m) – Shallow Wells Only Applicable only for Wells less than True Vertical Depth – 2300 m for horizontal wells – 2500 m for vertical wells Horizontal Well factor 100% of first 1000 meters and 50% of remainder Royalty Calculations Royalty Calculations – Base 9 Royalty: (9 * SP + 40 * (RP – SP))/RP (min 9% & max 27%) Select Price (SP) = 50 $/m 3 ; Reference Price 2005 (RP) = $/m 3 – Low Productivity Reduction Factor (LPRF) LPRF=((60-S)/60) 1.5 Unit = e3m3 – Calculation 27% * (1 – LPRF) Implementation Implementation – Spud date after January 01, Application Application – BC – 08 Monthly Production Statement

Ministry of Energy, Mines and Petroleum Resources Page 15. Ultra-Marginal Royalty Calculation Example Example Horizontal Exploratory Wildcat well, 2300m deep Total 12 month production (BC-S1): 5e 6 m 3 Production hours over that same period: 4000hrs Average daily volume: 20,000 m 3 Eligibility Calculation Eligibility Calculation – Step 1: Ultra-marginal well depth (UMD) Horizontal Length Calculation – TMD – MDTP = 2300 – 1200 = 1100m » Hz section > 1000m UMD = MDTP+1000+(TMD-(MDTP+1000)/2) – UMD: ((2300-( ))/2) = 2250m – Step 2: Check Eligibility (5,000,000/4000)*24/2250 = 13.3 m 3 /d/m The calculation is less than 17m 3 /d/m the well event qualifies as a ultra-marginal well event. Ultra-Marginal Royalty Calculation Ultra-Marginal Royalty Calculation – Step 3: Calculate Ultra-marginal Reduction Factor, URF URF: ((60,000-S)/60,000) 1.5 ((60,000-20,000)/60,000) 1.5 = – Step 4: Calculate the Ultra-marginal Royalty Rate, UMRR UMRR: 27% * (1 – 0.544) = 12.3%

Ministry of Energy, Mines and Petroleum Resources Page 16. Coalbed Methane Royalty Program Condition Condition – Coalbed methane wells only Royalty Credit Royalty Credit – $50,000 drilling credit – Produced water management allowance (PCOS) – Royalty bank transferable to other CBM wells – Royalty Reduction Low Productivity Reduction Factor – LPRF = ((17 – S)/17) 2 ; Units: e 3 m 3 Calculation – 27% * (1 – LPRF)

Ministry of Energy, Mines and Petroleum Resources Page 17. BC Oil & Gas Useful Links Related organizations : Oil and Gas Commission – Background: Oil and Gas Commission – Background: – Ministry of Energy, Mines and Petroleum Resources – Oil and Gas Division Responsibilities: Ministry of Energy, Mines and Petroleum Resources – Oil and Gas Division Responsibilities: – as/overview/ogd.htm as/overview/ogd.htm Ministry of Small Business and Revenue- Mineral, Oil and Gas Revenue Branch Ministry of Small Business and Revenue- Mineral, Oil and Gas Revenue Branch – alty_handbook.htm alty_handbook.htm Ministry of Energy, Mines and Petroleum Resources - Titles Division: Ministry of Energy, Mines and Petroleum Resources - Titles Division: – e/default.htm e/default.htm