Saskatchewan

Saskatchewan Industry and Resources

INFORMATION CIRCULAR PR - IC12

May 2002

ACTS:

The Crown Minerals Act The Freehold Oil and Gas Production Tax Act

REGULATIONS:

The Crown Oil and Gas Royalty Regulations The Freehold Oil and Gas Production Tax Regulations, 1995

TOPIC:

ROYALTY/TAX PROGRAM FOR HIGH WATER-CUT OIL WELLS EFFECTIVE AUGUST 24, 1999

This Information Circular has been prepared by Saskatchewan Industry and Resources (the department) to explain the policies and procedures which are used to administer the royalty/tax program for high water-cut oil wells under The Crown Oil and Gas Royalty Regulations and The Freehold Oil and Gas Production Tax Regulations, 1995 (collectively the "Regulations"). This information circular has no legal force or effect.

Note: This circular replaces EFA-IC12 and is available on the department's web site at www.gov.sk.ca/enermine/energy/engcirc.htm

PR - IC12

Program for High Water-Cut Oil Wells

I.

GENERAL PROGRAM DESCRIPTION

The royalty/tax program for high water-cut oil wells was announced and made effective on August 24, 1999. The program is designed to extend the producing lives and improve the recovery rates of high water-cut oil wells. Under the program, incremental high water-cut oil resulting from qualifying investments being made to rejuvenate eligible oil wells and/or associated facilities will receive "third tier oil" Crown royalty/freehold production tax rates with a Saskatchewan Resource Credit (SRC) of 2.5%. Briefly, eligible oil wells (vertical or horizontal) include: 1. Individual oil wells or a group of oil wells that are currently producing conventional oil (non-EOR oil) and have been producing at an average water-cut of 95% or greater during the last twelve producing calendar months immediately prior to making an application under the program. Wells that have been shut-in or suspended for twelve or more consecutive calendar months prior to making investments under the program and those wells produced at an average water-cut of 95% or greater during the last three producing months immediately prior to the time the well was shut-in or suspended.

2.

Operators are required to make significant investments on an eligible oil well or group of wells and/or associated facilities that would, in the opinion of the Minister, extend the life and increase the remaining recoverable reserves from the well or group of wells. In the case of shut-in or suspended oil wells, limited investments are required under the program. Normal repair and maintenance expenditures will not be considered as qualifying investments under the program. In order for investments to qualify under this program, an application must be submitted to the department and the department must approve an incremental oil factor. Companies are encouraged to commence investments after the department has reviewed the application and approved an incremental oil factor. THE REMAINING SECTIONS OF THIS CIRCULAR PROVIDE THE DETAILED DEFINITIONS AND PROCEDURES THAT RELATE TO THE ADMINISTRATION OF THE ROYALTY/TAX PROGRAM FOR HIGH WATER-CUT OIL WELLS.

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PR - IC12

Program for High Water-Cut Oil Wells

II.

DEFINITION OF TERMS
The following terms have been defined for purposes of this circular. Wherever one of these terms is referred to in the circular, it is "bolded". AVERAGE WATER-CUT means an amount, expressed as a percentage, determined in accordance with the following formula: Average Water-Cut = Where: (i) WP x 100 FP

in the case of an application associated with an individual oil well: WP is the total amount of water produced from the well during the wells evaluation period; and FP is the total amount of fluid (oil and water) produced from the well during the wells evaluation period; and

(ii)

in the case of an application associated with a group of oil wells: WP is the summation of the total amount of water produced from each well in the group during each wells respective evaluation period; and FP is the summation of the total amount of fluid produced from each well in the group during each wells respective evaluation period;

NOTE:

The attached Appendix shows an example of an average water-cut determination.

ELIGIBLE OIL WELL means: (i) an individual oil well that has an average water-cut of 95% or greater and benefits from a qualifying investment; or an oil well that has an average water-cut of 50% or greater and is part of a group of oil wells that produce oil at an average water-cut of 95% or greater and benefit from the same qualifying investment.

(ii)

EVALUATION PERIOD respecting an eligible oil well means: (i) for an oil well that has been shut-in or suspended for twelve or more consecutive calendar months prior to the qualifying investments being made, the last period of fifteen or more consecutive calendar months in which the well had three calendar months with hours on production; and

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PR - IC12 (ii)

Program for High Water-Cut Oil Wells for any other oil well, the last period of twelve or more consecutive calendar months in which the well had twelve calendar months with hours on production prior to the application under the program being received by the department.

HOURS ON PRODUCTION means the hours on production as reported or as required to be reported to the department on the EM-18 Production Report (Oil, Gas, Water). NOTE: This figure represents the number of hours during the month in which the well was actually pumping (with some exceptions related to the recovery of load oil or production of water and no oil upon initial completion).

INCREMENTAL HIGH WATER-CUT OIL means the quantity of conventional (non-EOR) oil determined by multiplying the total amount of conventional oil produced from an eligible oil well by the incremental oil factor applicable to the oil produced from that eligible oil well. INCREMENTAL OIL FACTOR (IOF) means the factor, expressed as a percentage, determined in accordance with the following formula:

Incremental Oil Factor = Where: (i)

AR 100 TR

in the case of an application associated with an individual oil well: AR is the additional recoverable reserves of conventional (non-EOR) oil respecting the eligible oil well, as determined by the minister, that are attributable to the qualifying investments; and TR is the total remaining recoverable reserves of conventional (non-EOR) oil respecting the eligible oil well, as determined by the minister, that include the additional recoverable reserves that are attributable to the qualifying investments. NOTE: In the case of an eligible oil well that has been shut-in or suspended for twelve or more consecutive months, the incremental oil factor will be 100% upon reactivation.

(ii)

in the case of an application associated with a group of oil wells: AR is the additional recoverable reserves of conventional (non-EOR) oil respecting the group of eligible oil wells, as determined by the minister, that are attributable to the qualifying investments; and TR is the total remaining recoverable reserves of conventional (non-EOR) oil respecting the group of eligible oil wells, as determined by the minister, that include the additional recoverable reserves that are attributable to the qualifying investments.

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PR - IC12

Program for High Water-Cut Oil Wells

QUALIFYING INVESTMENT means an investment, other than normal repair and maintenance, that is made in respect of an eligible oil well or associated facilities and that will, in the opinion of the Minister of Saskatchewan Industry and Resources, result in incremental high water-cut oil being produced from the well. Examples of investments which will be considered under the program include the following: expenditures related to re-completing and/or stimulating wells such as perforating, cementing, acidizing and fracturing; and expenditures related to higher volume or more efficient pumping, processing, water handling and disposal equipment.

Examples of investments which will not be considered under the program include the following: costs to replace items which have relatively short life-spans and form part of normal repair and maintenance; costs associated with the normal operation of the well including overhead or administration, chemicals, trucking, lease and road maintenance, fees, rentals, taxes, and royalties; In the case of oil wells that have been shut-in or suspended for twelve or more consecutive months, only limited investments are required.

NOTE:

III. APPLICATION PROCESS

An application under the program must be submitted to the department before an incremental oil factor can be approved. The application may be made for an individual oil well or a group of oil wells. Companies are encouraged to commence investments after the department has reviewed the application and approved an incremental oil factor. In most cases, companies will want to submit the application and receive prior approval from the minister before making any investments that may qualify under the program. However, where the operator prefers (for operational reasons) to make the investments before the required application is submitted to the department, a written notification must be submitted prior to making the investments. This written notification is not a substitute for the application. By providing written notification, the operator may delay submitting the required application until after the investments are completed. A written notification must include the following information: location of each eligible oil well affected by the planned investments; description of the planned investments; and expected commencement date of the planned investments.

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PR - IC12

Program for High Water-Cut Oil Wells

The application under the program should be in the form of a letter and must include the following information: location of each eligible oil well affected by the planned investments; description of planned investments and an estimate of the dollars to be spent; expected commencement and completion date of the planned investments; oil and water production from each eligible oil well for the last twelve calendar months during which hours on production have been reported; projected oil production profile for each eligible oil well or group of oil wells with and without the planned investments being made; and estimated incremental oil factor.

The notification/application letter may either be mailed or faxed to the department. Address: Saskatchewan Industry and Resources Petroleum Royalties Branch 7th Floor, 2101 Scarth Street Regina, Saskatchewan S4P 3V7 Fax Number: (306) 787-2478

IV. APPROVAL PROCESS

After the department has reviewed and processed the application, the operator of the eligible oil well(s) will be notified of the incremental oil factor that was approved by the minister and any other conditions that may apply. NOTE: Approval of an incremental oil factor under this program does not waive any ruling or orders by the department or minister (such as a maximum allowable rate of production (MARP)) that affect the status of the well.

There will be no further notification from the department unless the qualifying investments made are substantially different from those indicated on the application and a change in the incremental oil factor is required. In order to substantiate the qualifying investments, the operator must submit to the department, at the above address, a summary including a description of the investments, the amount of each investment and the date each investment was incurred. If there is more than one contractor or supplier, the investment information must be separated by contractor or supplier. In order to avoid department billing system variances, all investment information must be submitted within three months of completion of the work. NOTE: Individual invoices are not required.

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PR - IC12

Program for High Water-Cut Oil Wells

V.

EFFECTIVE DATE OF INCREMENTAL OIL FACTOR (IOF)

(i) For oil wells that have been shut-in or suspended for twelve or more consecutive months, the IOF is effective and will be implemented the later of: (a) (b) the first day of the month in which each well is brought back on production; and the first day of the month in which the application associated with each well is received by the department.

(ii)

For all other oil wells, the IOF is effective the later of: (a) the first day of the month in which the investments associated with each well are completed; and the first day of the month in which the application associated with each well is received by the department.

(b)

The department will implement the IOF within its billing system once the operator has submitted the investment summary described in Part IV and the department agrees the IOF is still appropriate.

VI. ROYALTY/TAX REGIME APPLICABLE TO INCREMENTAL HIGH WATER-CUT OIL

Incremental high water-cut oil qualifies for the "third tier oil" Crown royalty/freehold production tax rates and a Saskatchewan Resource Credit (SRC) equal to 2.5%. For further clarification, incremental high water-cut oil produced within the southwest area of the province will be classified as southwest designated oil and not non-heavy oil. The MOP (monthly oil production) factor used within the royalty/tax rate formula is based on the total oil produced from the well in a month, including the incremental high water-cut oil.

VII. ROYALTY/TAX REGIME APPLICABLE TO NON-INCREMENTAL OIL

The royalty/tax regime applicable to oil produced from an eligible oil well prior to the IOF being implemented will continue to apply to the portion of the oil that is not incremental high watercut oil.

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PR - IC12

Program for High Water-Cut Oil Wells APPENDIX

EXAMPLE OF AN AVERAGE WATER-CUT DETERMINATION

Assumptions: Application under the program is received by the department in October, 1999; Investments are being made on a battery facility that will enable more oil to be recovered from two wells associated with the facility. The two oil wells are located in the Lloydminster heavy oil area; September 1999 is the most recent month for which production information is available for each well. The wells production history for the last twelve months with hours on production is as follows: WELL #1 DATE
9806 9807 9808 9809 9810 9811 9812 9901 9902 9903 9904 9905 9906 9907 9908 9909 TOTAL

WELL #2 HRS. on PROD.

720 744 697 0 120 720 0 744 0 744 720 168 0 744 697 128 9810 9811 9812 9901 9902 9903 9904 9905 9906 9907 9908 9909 TOTAL 91.1 79.6 0.0 92.4 89.2 88.8 91.0 83.2 0.0 80.4 85.4 96.7 877.8 1637.4 0.0 1399.9 0.0 1472.5 1376.8 1665.0 1210.8 0.0 1510.8 1595.9 1200.4 13069.5 744 719 744 744 672 744 720 740 720 744 697 700

OIL
(m3) 0 22.1 25.6 30.3 20.9 25.2 0.0 18.3 26.1 25.0 20.4 18.0 0.0 20.7 17.5 27.8 297.9

WATER
(m3) 0 1021.3 965.1 0.0 855.0 900.6 1088.8 0.0 0.0 750.0 832.5 1201.1 0.0 609.5 800.9 451.7 9476.5

DATE

OIL
(m3)

WATER
(m3)

HRS. on PROD.

Where: The evaluation period starts in June 1998 and ends in September 1999. It consists of sixteen consecutive calendar months, twelve of which have hours on production;

Where: The evaluation period starts in October 1998 and ends in September 1999. It consists of twelve consecutive calendar months, all twelve of which have hours on production

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PR - IC12

Program for High Water-Cut Oil Wells

To calculate the average water-cut for the group of wells, sum the total water production from each well in the group during each wells respective evaluation period and divide by the sum of the total fluid production from each well in the group during each wells respective evaluation period. Average water-cut for the group of wells is:

(9476.5 + 13069.5) = 0.9504 = 95.04% [(297.0 + 9476.5) + (877.8 + 13069.5)]

Since the average water-cut for the group of wells is greater than 95%, an incremental oil factor will be established for the group of wells based on the additional recoverable reserves attributable to the qualifying investments.

FOR FURTHER INFORMATION, PLEASE CONTACT: Saskatchewan Industry and Resources Petroleum Royalties Branch 7th Floor, 2101 Scarth Street Regina, Saskatchewan S4P 3V7 Phone: (306) 787-2604 or: (306) 787-2612 Fax: (306) 787-2478

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