EXHIBIT 2
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PRIMEWEST GAS CORP.
ROYALTY AGREEMENT
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TABLE OF CONTENTS
ARTICLE 1
INTERPRETATION
1.1 Definitions.......................................................1
1.2 1990 CAPL Terms - Additional Definitions.........................14
1.3 Number and Gender................................................14
1.4 References.......................................................14
1.5 Choice of Law....................................................14
1.6 Attornment.......................................................14
1.7 Monetary Sums....................................................14
1.8 Amendments to Agreements and Laws................................14
1.9 Meaning of "accrued" and "incurred"..............................15
ARTICLE 2
ROYALTY
2.1 Grant of Royalty.................................................15
2.2 Payment for Royalty..............................................15
2.3 Deferred Purchase Price Obligation...............................16
2.4 Royalty..........................................................17
2.5 Right to Take In Kind............................................17
2.6 Royalty Share of Production not Taken in Kind....................19
2.7 Petroleum Substances Lost or Used in Operations..................19
2.8 Not an Interest In Land..........................................19
2.9 Reimbursement of Non-Deductible Crown Royalties..................19
ARTICLE 3
ACCOUNTING
3.1 Payments.........................................................19
3.2 Statements.......................................................19
3.3 Overpayments.....................................................20
3.4 Carry Forward of Deductible Production Costs.....................20
3.5 Collection of Production Revenues and Other Revenues.............21
3.6 Payment of Production Costs......................................21
ARTICLE 4
INSURANCE
4.1 Insurance........................................................21
(i)
ARTICLE 5
BOOKS AND RECORDS
5.1 Examination......................................................21
5.2 Audit............................................................22
5.3 Confidentiality..................................................22
ARTICLE 6
OPERATIONS
6.1 Generally........................................................22
6.2 No Obligation to Develop.........................................23
6.3 Compliance with and Maintenance of Properties Agreements.........23
6.4 Rights and Obligations...........................................24
6.5 Marketing........................................................24
6.6 Additional Title and Operating Documents.........................24
6.7 Restriction on Capital Expenditures..............................24
6.8 No Exploratory Operations........................................25
6.9 No Other Businesses..............................................25
6.10 Credit Facilities Unaffected.....................................25
6.11 Grant and Assignment of Security.................................26
6.12 Restrictions on Future Acquisitions..............................26
ARTICLE 7
RESERVES
7.1 Establishment....................................................26
7.2 Contributions to the Reserves....................................26
7.3 Use of the Reserves..............................................27
7.4 Termination of the Reserves......................................27
7.5 Reclamation Trust................................................28
ARTICLE 8
POOLING, UNITIZATION, SURRENDER AND ABANDONMENT
8.1 Pooling and Unitization..........................................29
8.2 Surrender........................................................29
8.3 Abandonment......................................................29
ARTICLE 9
ASSIGNMENT
9.1 Assignment.......................................................30
9.2 Multiple Royalty Owners..........................................30
9.3 Dispositions Subject to This Agreement...........................30
(ii)
ARTICLE 10
TERM OF AGREEMENT
10.1 Term.............................................................31
ARTICLE 11
DISPOSITIONS
11.1 Restrictions on Disposition of Properties........................31
11.2 Dispositions of Tangibles and Miscellaneous Assets...............31
11.3 Dispositions of Petroleum and Natural Gas Rights.................31
11.4 Concurrent Disposition Documentation.............................32
11.5 Merger on Concurrent Disposition.................................32
11.6 Proceeds of a Concurrent Disposition.............................32
11.7 Merger upon Farmout..............................................33
ARTICLE 12
NOTICES AND PAYMENTS
12.1 Addresses for Service and Payments...............................33
12.2 Giving and Deemed Receipt of Notices.............................33
12.3 Addresses........................................................34
12.4 Change of Address................................................34
ARTICLE 13
MISCELLANEOUS
13.1 Enurement........................................................35
13.2 Waivers in Writing...............................................35
13.3 Time of Essence..................................................35
13.4 No Partnership...................................................35
13.5 Severability.....................................................35
13.6 Amendments.......................................................35
ARTICLE 14
CONCERNING THE TRUST
14.1 Acknowledgement..................................................36
(iii)
ROYALTY AGREEMENT
This Agreement made this 24th day of January, 2003.
BETWEEN:
PRIMEWEST GAS CORP., a body corporate amalgamated
pursuant to the laws of Alberta (hereinafter
called the "GRANTOR")
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PRIMEWEST ENERGY INC., a body corporate amalgamated
pursuant to the laws of Alberta (hereinafter
called the "ROYALTY OWNER")
WHEREAS the Grantor has agreed to grant the Royalty to the Royalty
Owner and the Royalty Owner has agreed to purchase and accept the Royalty from
the Grantor, on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the covenants hereinafter set
forth, the Parties hereby agree as follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Agreement, including this Article, the following words and
expressions shall have the following meanings:
"ACQUISITION" means an acquisition by the Grantor of Petroleum and
Natural Gas Rights or interests therein, either by themselves or
together with interests in related Tangibles and Miscellaneous
Assets;
"ACQUISITION COSTS" means costs and expenses incurred by the Grantor
in making an Acquisition including, without limitation, the purchase
price paid pursuant thereto (net of all adjustments thereto), brokers
fees and commissions, costs of registration of conveyances of title
and fees and expenses of consultants (including lawyers, landmen and
engineering and other technical and financial advisors);
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"AFFILIATE" means, with respect to the relationship between
corporations, that one of them is controlled by the other or that
both of them are controlled by the same Person and for this purpose a
corporation shall be deemed to be controlled by the Person who owns
or effectively controls, other than by way of security only,
sufficient voting shares of the corporation (whether directly through
the ownership of shares of the corporation or indirectly through the
ownership of shares of another corporation or otherwise) to elect the
majority of its board of directors, provided that a partnership which
is comprised solely of corporations which are Affiliates, as
described above, shall be deemed to be an Affiliate of each such
corporation and its other Affiliates;
"AGREEMENT", "HEREIN", "HERETO", "HEREOF" and similar expressions
refer to this Royalty Agreement, and any agreement amending this
Royalty Agreement;
"ARTC" means credits or rebates in respect of Crown Royalties which
are paid or credited by the Crown, including those paid or credited
under the ALBERTA CORPORATE TAX ACT which are commonly known as
"Alberta Royalty Tax Credits";
"BUSINESS DAY" means a day other than a Saturday, Sunday or statutory
holiday in Alberta;
"CAPITAL EXPENDITURES" means:
(a) drilling costs, completion costs and equipping costs; and
(b) other costs relating to the Properties which would be
classified as capital costs in accordance with GAAP;
but does not include Acquisition Costs;
"COMMODITY PRICE SWAPS" means swap, hedging and other arrangements
made by the Grantor, from time to time, in respect of commodity
prices the purpose of which is to mitigate or eliminate exposure to
fluctuations in prices of commodities which affect Production Costs
or revenues attributable to the Properties;
"CONCURRENT DISPOSITION" has the meaning given to such term in
section 11.3;
"CREDIT FACILITIES" means the credit facilities made available to the
Grantor, from time to time, to fund the payment of or to refinance
the payment of Acquisition Costs, Production Costs and payment of the
Royalty and includes, in any event, the Initial Credit Facilities and
all amendments thereto, substitutions therefor and replacements
thereof;
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"CROWN" means Her Majesty the Queen in Right of Canada or a Province
thereof;
"CROWN ROYALTIES" means any amount paid or payable to or received or
receivable by the Crown by virtue of an obligation imposed by statute
or a contractual obligation substituted for an obligation imposed by
statute as a royalty, tax (other than a municipal or school tax),
lease rental or bonus or an amount in lieu thereof that may
reasonably be regarded as being in relation to the acquisition,
development or ownership of Petroleum and Natural Gas Rights or the
production of Petroleum Substances;
"CURRENCY SWAPS" means swap, hedging and other arrangements made by
the Grantor, from time to time, in respect of rates of exchange of
currencies the purpose of which is to mitigate or eliminate exposure
to fluctuations in prices of commodities which affect Production
Costs or revenues attributable to the Properties;
"DEBT SERVICE COSTS" means, in respect of a Month and without
duplication:
(a) all interest, penalties, fees, indemnities, legal costs, and
other costs, expenses and disbursements for which the
Grantor is liable pursuant to the Credit Facilities and
which, in each case, accrue during such Month;
(b) plus all amounts payable during such Month on account of
principal pursuant to the Credit Facilities including,
without limitation, scheduled, prepaid (voluntary or
mandatory) and accelerated principal and (subject to the
provisos below) amounts required to be paid on account of
banker's acceptances and letters of credit (other than fees
described in (a) above);
(c) plus (if there is a net loss) or minus (if there is a net
profit) the net profit or loss from Interest Rate Swaps
which accrues during such Month;
provided that the difference between the face amount of a banker's
acceptance which is issued and accepted pursuant to the Credit
Facilities and its discount proceeds (such difference being the
"imputed interest") shall be treated as interest accruing at the
times that it is considered to accrue in accordance with GAAP and
provided that when the Grantor becomes liable under the Credit
Facilities to pay the face amount of a banker's acceptance, the face
amount less the amount of imputed interest for such banker's
acceptance shall be included in the Debt Service Costs;
"DECLARATION OF TRUST" means the Amended and Restated Declaration of
Trust made as of August 2, 1996 and restated November 6, 2002 between
PrimeWest Energy Inc. and Computershare Trust Company of Canada
pursuant to which PrimeWest Energy Trust was formed, as amended from
time to time;
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"DEDUCTIBLE PRODUCTION COSTS" means, in respect of a Month and
without duplication:
(a) 99% of the aggregate of all Production Costs for that Month
excluding those paid with:
(i) the proceeds of sale from a Concurrent Disposition
that are allocated pursuant to section 11.6 to the
interests in the Royalty sold by the Trust;
(ii) the proceeds from the sale of all or substantially
all of Properties;
(iii) withdrawals from the Reserves;
(iv) advances made pursuant to the Credit Facilities; or
(v) the net proceeds of the issue of Trust Units paid
to the Grantor on account of the Deferred Purchase
Price Obligation pursuant to section 2.2(b); and
(b) Deductible Production Costs which are carried forward to
such Month pursuant to section 3.4;
"DEFERRED PURCHASE PRICE OBLIGATION" means an amount equal to 99% of
the aggregate of:
(a) that portion of Future Acquisition Costs which are
attributable to Canadian resource property (as defined in
the INCOME TAX ACT (Canada)); and
(b) the Capital Expenditures in respect of the Properties which
the Grantor designates as a Deferred Purchase Price
Obligation.
"EXCESS OTHER REVENUE RESERVE" has the meaning given to such term in
section 7.1;
"FACILITIES" means gas processing plants, gas compression facilities,
gas gathering facilities, crude oil batteries, crude oil pipelines
and similar facilities in which Petroleum Substances are compressed,
processed, gathered, transported, treated, measured or stored and
which are located near the oil or gas ▇▇▇▇▇ from which such Petroleum
Substances are produced;
"FUTURE ACQUISITION COSTS" means Acquisition Costs of Future
Properties;
"FUTURE PROPERTIES" means Properties acquired by the Grantor after
the date hereof;
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"GENERAL AND ADMINISTRATIVE EXPENSES" means all costs and expenses
incurred in the management and administration of the Grantor including,
without limitation:
(a) all reasonable costs and expenses related to the Grantor and
paid by or on behalf of the Grantor or its Affiliates;
(b) all reasonable costs and expenses incurred by the Grantor
including, without limitation, costs and expenses incurred
in respect of auditing, accounting, bookkeeping, rent and
other leasehold expenses, legal, land administration,
engineering, travel, telephone, data processing, reporting,
executive and management time and salaries; and
(c) all costs and expenses approved by the board of directors of
the Grantor either separately or as part of an approved
budget as General and Administrative Expenses;
"GAAP" means, as of any time, generally accepted accounting
principles in Canada as at such time;
"GRANTOR'S SHARE" means the share (determined as if the Royalty had
not been granted) which is attributable to the Properties for which
the Grantor is responsible or to which the Grantor is entitled;
"GRANTOR'S SHARE OF PRODUCTION" means the production of Petroleum
Substances from the Royalty Lands and lands pooled or unitized
therewith to which the Grantor is entitled by virtue of owning the
Properties, determined as if the Royalty had not been granted;
"INITIAL CREDIT FACILITIES" means the Cdn. $219,115,087 Secured
Credit Facility Agreement between the Grantor (as borrower) and
Royalty Owner (as lender) dated as of January 24, 2003 and all
amendments thereto, replacements thereof and substitutions therefor;
"INTEREST RATE SWAPS" means interest rate swaps, hedging and other
arrangements made by the Grantor, from time to time, the purpose of
which is to mitigate or eliminate exposure to fluctuations in
interest rates applicable to the Credit Facilities or other interest
rates which affect Production Costs;
"LEASES" means the Crown and freehold petroleum and natural gas
leases, licences, permits and similar instruments pursuant to which
the Grantor derives its interests in the Petroleum and Natural Gas
Rights comprised in the Properties;
"LENDER" means:
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(a) any lender that makes the Credit Facilities available to the
Grantor; and
(b) any Person with whom the Grantor makes Swap Arrangements;
"MISCELLANEOUS ASSETS" means all properties, assets and rights which
are related to Petroleum and Natural Gas Rights or Tangibles (other
than Petroleum and Natural Gas Rights and Tangibles), including,
without limitation:
(a) Title and Operating Documents;
(b) Surface Rights;
(c) books and records;
(d) well files, production records and similar data and
information;
(e) injection ▇▇▇▇▇;
(f) geological, seismic and similar data; and
(g) permits, licences and authorizations required to own or
operate ▇▇▇▇▇ or Tangibles;
"MONTH" means a period commencing at 8:00 a.m. Calgary time on the
first day of a calendar month and ending at 8:00 a.m. Calgary time on
the first day of the following calendar month;
"MONTHLY ROYALTY PAYMENT" means, in respect of a Month, the payment
for such Month to which the Royalty Owner is entitled pursuant to
section 2.4(b);
"NON-DEDUCTIBLE CROWN ROYALTIES" means Crown Royalties which are:
(a) required to be included in taxable income pursuant to
section 12(1)(o) of the INCOME TAX ACT (Canada) or any
replacement thereof or substitution therefor; or
(b) not permitted to be used as deductions in computing taxable
income pursuant to section 18(1)(m) of the INCOME TAX ACT
(Canada) or any replacement thereof or substitution
therefor;
"OTHER REVENUES" means, in respect of a Month, the Grantor's Share of
all revenues which accrue during such Month in respect of the
Properties, including, without limitation:
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(a) fees and similar payments made by third parties for the
processing, transportation, gathering or treatment of their
Petroleum Substances in, by or through Tangibles;
(b) proceeds from the sale of Tangibles and Miscellaneous
Interests;
(c) insurance proceeds paid to the Grantor, property damage
insurance and third party liability insurance;
(d) income from investing the Reserves;
(e) proceeds from the sale or licensing of geological, seismic
and similar data;
(f) inducements, incentives, rebates and credits in respect of
Production Costs;
(g) royalty and similar income received in respect of the
Properties which are not included in Production Revenues;
(h) take or pay and similar payments made to the Grantor in lieu
of a buyer purchasing some of the Grantor's Share of
Production or as compensation for a buyer not purchasing
some of the Grantor's Share of Production;
(i) overhead and other cost recoveries; and
(j) the net profit or loss (which will be a negative amount for
purposes of computing the Other Revenues if there is a net
loss) from Currency Swaps which accrue during such Month but
excluding any net losses which have been reimbursed to the
Grantor by the Royalty Owner pursuant to section 2.5(e);
but shall not include:
(k) any proceeds of sale from any Concurrent Disposition that
are allocated pursuant to section 11.6 to the interests in
the Royalty sold by the Trust or to the interest in
Petroleum and Natural Gas Rights sold by the Grantor;
(l) Production Revenues;
(m) funds reimbursed to the Grantor by the Trust on account of
any Non-Deductible Crown Royalties paid by the Grantor;
(n) funds paid to the Grantor by the Trust on account of the
Deferred Purchase Price Obligation;
(o) funds withdrawn by the Grantor from the Reserves;
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(p) any funds advanced to the Grantor under the Credit
Facilities;
(q) any proceeds from the sale of all or substantially all of
the Properties; or
(r) ARTC payable to the Royalty Owner in respect of
Non-Deductible Crown Royalties which the Royalty Owner
reimburses to the Grantor;
(s) provided that to the extent that take or pay or similar
payments which have been accounted for in Other Revenues are
thereafter credited or set off against or otherwise reduce
the proceeds of sale of the Grantor's Share of Production,
only the proceeds (if any) of such sale after taking such
reduction into account will be included in Production
Revenues;
"PARTY" means either the Royalty Owner or the Grantor and "PARTIES"
means both of them;
"PERSON" includes an individual, a body corporate, a partnership
(limited or general), a joint venture, a trust, a union, a pension
fund, a government and a governmental agency;
"PETROLEUM AND NATURAL GAS RIGHTS" means:
(a) rights to explore for, drill for, produce, save and market
Petroleum Substances, including fee simple interests in
Petroleum Substances and interests granted pursuant to
instruments commonly known as Crown or freehold petroleum
and/or natural gas leases;
(b) royalty interests, net profits interests and similar
interests pursuant to which the owner thereof is entitled to
a share of the production of Petroleum Substances from the
lands or ▇▇▇▇▇ to which the interests relate or to a payment
calculated by reference to the quantity of such production
or to a payment calculated by the proceeds, (whether gross
or net) received from the sale of such production; and
(c) rights to acquire the foregoing;
"PETROLEUM SUBSTANCES" means crude oil, petroleum, natural gas and
related hydrocarbons except coal, including condensate and natural
gas liquids and all other substances (including sulphur and its
compounds), whether liquid, solid or gaseous and whether hydrocarbons
or not, produced in association therewith;
"PROBABLE RESERVES" means those reserves which analysis of drilling,
geological, geophysical and engineering data does not demonstrate to
be proved, but where such analysis suggests the likelihood of their
existence and future recovery under current technology and existing
or anticipated economic conditions provided
-9-
that the Probable Reserves to be obtained by the application of
enhanced recovery processes will be the increased recovery over and
above that included in Proved Reserves which can be realistically
estimated for the pool on the basis of enhanced recovery processes
which can be reasonably expected to be instituted in the future;
"PRODUCTION COSTS" means, in respect of a Month and without
duplication, the following items:
(a) Debt Service Costs other than Debt Service Costs which have
been included in Production Costs for any previous Month;
(b) the Grantor's Share of all costs and expenses (including
both operating costs and capital costs) in respect of the
Properties incurred in such Month, including, without
limitation:
(i) costs and expenses of obtaining (other than
pursuant to an Acquisition), processing,
reprocessing and interpreting seismic, geological
and other data;
(ii) drilling costs, completion costs, equipping costs
and operating costs of ▇▇▇▇▇ (including, without
limitation, costs of redrilling, deepening,
plugging-back, side-tracking, fracing and acidizing
▇▇▇▇▇ and costs and expenses of work-overs);
(iii) costs and expenses of waterflood, miscible flood
and other secondary and tertiary recovery
operations,
(iv) costs and expenses of compressing, dehydrating,
gathering, treating and processing the Grantor's
Share of Production;
(v) costs and expenses of acquiring Tangibles
(including costs and expenses of constructing
Facilities), except when acquired pursuant to
Acquisitions, and costs and expenses of
maintaining, repairing and operating Tangibles;
(vi) amounts payable in respect of royalties and similar
burdens (including freehold lessors' royalties and
gross overriding royalties) to which the Properties
are subject, other than Non-Deductible Crown
Royalties;
(vii) amounts payable in respect of Surface Rights,
including bonuses and rentals;
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(viii) costs and expenses of acquiring Miscellaneous
Assets, except when acquired pursuant to
Acquisitions;
(ix) costs and expenses of transporting (whether by
pipelines, trucking or otherwise) the Grantor's
Share of Production;
(x) costs and expenses of delivery and sale of the
Grantor's Share of Production, including marketing
fees;
(xi) insurance premiums and other similar premiums and
charges;
(xii) costs and expenses of repairing, replacing or
remediating any loss or damage for which the
Grantor has received insurance proceeds in respect
thereof;
(xiii) property, municipal, production, AD VALOREM,
mineral and other taxes and assessments in respect
of the Properties or the operation thereof or the
production of Petroleum Substances therefrom;
(xiv) costs and expenses of generating Other Revenues;
(xv) costs and expenses (including settlement payments
and payments of judgements) payable in respect of
Third Party claims arising in connection with the
Properties;
(xvi) costs and expenses of abandonment of ▇▇▇▇▇ and
decommissioning of Facilities and other Tangibles
and of reclaiming and restoring the surface sites
thereof;
(xvii) costs and expenses of clean-up and remediation of
spills of hazardous substances and other
environmental damage;
(xviii) costs and expenses of drilling, equipping and
operating injection ▇▇▇▇▇; and
(xix) all other costs and expenses (including both
operating costs and capital costs) which are
payable pursuant to the Title and Operating
Documents;
(c) current income taxes, capital taxes and other direct taxes
of the Grantor which accrue during such Month;
(d) the cost of the disposition of any interest in the
Properties;
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(e) the portion (if any) of the Production Revenues and Other
Revenues which accrue during such Month and which are paid
to any of the Reserves;
(f) General and Administrative Expenses incurred by the Grantor
for the Month; and
(g) Acquisition Costs;
provided, however, that such costs and expenses do not include
Non-Deductible Crown Royalties, depreciation, depletion,
amortization, deferred taxes or losses from Commodity Price Swaps;
"PRODUCTION COSTS RESERVE" has the meaning given to such term in
section 7.1;
"PRODUCTION REVENUES" means, in respect of a Month, the aggregate of:
(a) the gross proceeds from the sale of the Grantor's Share of
Production which accrue during such Month;
(b) the net profit or loss (which will be a negative amount for
purposes of computing the Production Revenues if there is a
net loss) from Commodity Price Swaps which accrue during
such Month but excluding any net losses which have been
reimbursed to the Grantor by the Royalty Owner pursuant to
section 2.5(e); and
(c) rentals or royalties computed by reference to the amount or
value of production from a Canadian resource property (as
defined in the INCOME TAX ACT (Canada));
provided that Production Revenues do not include ARTC;
"PROPERTIES" means all interests in Petroleum and Natural Gas Rights
and in related Tangibles and Miscellaneous Assets beneficially owned
by the Grantor from time to time;
"PROVED RESERVES" means reserves estimated as recoverable with a high
degree of certainty under current technology and existing economic
conditions in the case of constant price and cost analyses and
anticipated economic conditions in the case of escalated price and
cost analyses, from that portion of a reservoir which can be
reasonably evaluated as economically productive on the basis of
analysis of drilling, geological, geophysical and engineering data,
including the reserves to be obtained by enhanced recovery processes
demonstrated to be economic and technically successful in the subject
reservoir;
"RECLAMATION FUND" has the meaning given to such term in section 7.1;
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"RESERVES" means collectively the Excess Other Revenue Reserve, the
Production Costs Reserve and the Reclamation Fund;
"RESERVE VALUE" means, in respect of a Property, the present worth of
all of the estimated pre-tax net cash flow from the Proved Reserves
and 50% of the estimated pre-tax net cash flow from the Probable
Reserves shown in the most recent engineering report relating to such
Property, discounted at 15% per annum and using escalating price and
cost assumptions;
"ROYALTY" means the royalty described herein;
"ROYALTY LANDS" means the lands to which the Petroleum and Natural
Gas Rights comprised in the Properties relate;
"ROYALTY REVENUES" means, in respect of a Month, 99% of the aggregate
of:
(a) the Production Revenues for such Month; and
(b) the Other Revenues for such Month;
provided that:
(c) if, pursuant to this Agreement, the Royalty Owner elects to
take the Royalty Share of Production in kind during a Month,
the Royalty Revenues for such Month shall not include any
Production Revenues from the sale of Petroleum Substances
taken in kind during the Month; and
(d) the portion of the Other Revenues for a Month in excess of
10% of the total of the Other Revenues for the Month and the
Production Revenues for the Month shall not be included in
the Royalty Revenues for the Month, but shall be deposited
to the Excess Other Revenue Reserve in accordance with
section 7.2(a) ;
"ROYALTY SHARE OF PRODUCTION" means, in respect of a Month, 99% of
the Grantor's Share of Production produced during such Month;
"SPECIAL RESOLUTION" has the meaning given to such term in the
Declaration of Trust;
"SURFACE RIGHTS" means interests in the surface of lands which are
used or held for use in connection with Petroleum and Natural Gas
Rights or Tangibles, including:
(a) rights to use the surface of lands for purposes of drilling
and operating oil and gas ▇▇▇▇▇ or injection ▇▇▇▇▇;
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(b) rights to use the surface of lands for the location of
Tangibles or in connection with the operation thereof; and
(c) rights to use the surface of lands to gain access to such
▇▇▇▇▇ or such Tangibles;
and including surface leases, licenses of occupation, roads, road use
agreements, pipeline easements and similar rights;
"SWAP ARRANGEMENTS" means Commodity Price Swaps, Currency Swaps and
Interest Rate Swaps;
"TANGIBLES" means all tangible property, apparatus, plant, equipment,
machinery and facilities used or held for use, from time to time, for
purposes of producing Petroleum Substances from the Royalty Lands or
lands pooled or unitized therewith or for storing, measuring,
compressing, treating, processing or collecting such Petroleum
Substances, including wellheads, wellhead equipment, tanks, pumps,
pump jacks, separators, dehydrators, flow lines and Facilities;
"THIRD PARTY" means any Person other than the Grantor or the Royalty
Owner or their Affiliates;
"TITLE AND OPERATING DOCUMENTS" means:
(a) the contracts and agreements pursuant to which the Grantor
derives its interest in the Properties, including Crown and
freehold petroleum and natural gas leases, agreements of
purchase and sale, farm-in agreements, unit agreements and
royalty agreements; and
(b) contracts and agreements entered into in the normal course
of the oil and gas business in connection with the
exploitation of Petroleum and Natural Gas Rights or the
operation of Facilities, including joint operating
agreements, unit operating agreements, farmout agreements,
pooling agreements, royalty agreements, common stream
agreements, gas processing agreements, gas gathering
agreements, agreements for the sale of Petroleum Substances,
agreements relating to Surface Rights, agreements for the
construction, ownership and operation of Facilities and
agreements for the transportation of Petroleum Substances;
"THE TRUST" means PrimeWest Energy Trust, a trust formed under to the
laws of Alberta pursuant to the Declaration of Trust;
"UNITHOLDERS" means holders, from time to time, of Units; and
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"UNITS" means fractional undivided interests in the Trust.
1.2 1990 CAPL TERMS - ADDITIONAL DEFINITIONS
Terms which are defined in section 101 of the 1990 Canadian
Association of Petroleum Landmen Operating Procedure to which a 1988 Petroleum
Accountants Society of Canada Accounting Procedure is attached and which are
not otherwise defined herein shall have the same meanings herein as are given
to them therein.
1.3 NUMBER AND GENDER
Words importing the singular number include the plural and vice versa
and words importing gender include the masculine, feminine and neuter genders.
1.4 REFERENCES
The table of contents and headings herein are for convenience of
reference only and shall not affect the construction or interpretation of this
Agreement. A reference herein to an Article without further reference shall be
a reference to an Article of this Agreement, and a reference to a section
without further reference shall be a reference to a section, subsection,
paragraph or clause of this Agreement, as applicable.
1.5 CHOICE OF LAW
This Agreement shall be governed by the laws of the Province of
Alberta and the laws of Canada applicable therein and shall be construed,
interpreted and performed in accordance therewith.
1.6 ATTORNMENT
Any legal action or proceedings with respect to this Agreement shall
be brought in the courts of the Province of Alberta and the courts of appeal
therefrom. Each Party hereby submits and attorns to and accepts for itself and
in respect of its assets, irrevocably and unconditionally, the jurisdiction of
such courts in respect of all matters arising out of this Agreement.
1.7 MONETARY SUMS
All references herein to dollar amounts or sums of money are to
lawful funds of Canada.
1.8 AMENDMENTS TO AGREEMENTS AND LAWS
References herein to any agreement or instrument, including this
Agreement, shall be deemed to be a reference to the agreement or instrument as
varied, amended, modified, supplemented, or replaced from time to time and any
specific reference
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herein to any enactment of law shall be deemed to include reference to such
enactment as the same may be amended or re-enacted from time to time and every
statute that may be substituted therefor, and in the case of any such
amendment, re-enactment and substitution, any reference to such enactment
should be read as referring to the amended, re-enacted or substituted
provisions therefor.
1.9 MEANING OF "ACCRUED" AND "INCURRED"
Except as otherwise expressed herein, for purposes hereof, amounts
shall accrue or be incurred when they are treated as having accrued or having
been incurred under GAAP, provided that:
(a) costs and expenses of goods supplied, work performed or
services provided will be treated as being incurred when the
goods are supplied, the work is performed or the services
are provided;
(b) rentals and similar payments in respect of Surface Rights
and Leases, insurance premiums, property taxes and
assessments and amounts payable in respect of Third Party
liability claims will be deemed to accrue when they are
paid;
(c) amounts payable on account of royalties and similar burdens
in respect of production of Petroleum Substances, other than
sulphur stored in pads, shall be deemed to accrue in the
calendar month in which the Petroleum Substances are
produced, provided that such amounts which are payable in
respect of sulphur stored in pads will be deemed to accrue
in accordance with GAAP; and
(d) abandonment and reclamation costs will be deemed to accrue
as and when the abandonment and reclamation work is done.
ARTICLE 2
ROYALTY
2.1 GRANT OF ROYALTY
The Grantor hereby grants and sets over the Royalty to the Royalty
Owner, on and subject to the terms and conditions hereof.
2.2 PAYMENT FOR ROYALTY
The Royalty Owner hereby covenants and agrees to pay to the Grantor
as consideration for the Royalty:
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(a) the amount of $27,115,375, payable by a reduction in the
indebtedness owing by the Grantor to the Royalty Owner by
that same amount; and
(b) the Deferred Purchase Price Obligation payable from time to
time upon notice from the Grantor to the Royalty Owner as
provided for in section 2.3.
2.3 DEFERRED PURCHASE PRICE OBLIGATION
The Royalty Owner shall be obligated to pay the Deferred Purchase
Price Obligation in respect of each Future Property to be acquired and
proposed Capital Expenditures provided that:
(a) in respect of such Future Property to be acquired, the
Grantor, by notice in writing to the Royalty Owner, has
advised the Royalty Owner that the Grantor proposes to make
an Acquisition of a Future Property in respect of which it
has elected to designate a portion of the Acquisition Costs
thereof as a Deferred Purchase Price Obligation or that the
Grantor has incurred indebtedness in respect of Future
Acquisition Costs not previously designated as a Deferred
Purchase Price Obligation which it has elected to designate
as a Deferred Purchase Price Obligation;
(b) in respect of proposed Capital Expenditures, the Grantor, by
notice in writing to the Royalty Owner, has advised the
Royalty Owner that the Grantor proposes to incur Capital
Expenditures which it has elected to designate as a Deferred
Purchase Price Obligation or that the Grantor has incurred
indebtedness in respect of Capital Expenditures not
previously designated as a Deferred Purchase Price
Obligation which it has elected to designate as a Deferred
Purchase Price Obligation;
(c) the notice referred to in section 2.3(a) or 2.3(b), as the
case may be, is received by the Royalty Owner at least ten
(10) days before such Acquisition Costs or Capital
Expenditures are to be incurred or such indebtedness in
respect of same is to be satisfied by the Grantor; and
(d) the Royalty Owner is able to fund the amount so designated
as a Deferred Purchase Price Obligation from:
(i) the net proceeds of the issuance by the Royalty
Owner of Units, if the Trust is the Royalty Owner
at that time;
(ii) the proceeds of any borrowings by the Royalty
Owner;
(iii) proceeds of disposition of any interest in the
Properties paid to the Royalty Owner; or
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(iv) the proceeds of disposition of any portion of the
Royalty sold in any Concurrent Disposition.
2.4 ROYALTY
Subject to the terms and conditions hereof, the Royalty Owner, by
virtue of being the owner of the Royalty, shall be entitled to the following:
(a) subject to compliance with section 2.5, the Royalty Share of
Production which the Royalty Owner elects to take in kind
pursuant to section 2.5; and
(b) a payment from the Grantor for each Month equal to the
amount by which:
(i) the Royalty Revenues for such Month; exceeds
(ii) the Deductible Production Costs for such Month,
other than those reimbursed to the Grantor by the
Royalty Owner pursuant to section 2.5(e).
2.5 RIGHT TO TAKE IN KIND
(a) Subject to the terms of the Title and Operating Documents
and compliance with section 2.5(e), if the Grantor is
insolvent, the Royalty Owner shall have the right to take
all (but not less than all) of the Royalty Share of
Production for a Month in kind and separately dispose of
them provided that:
(i) it has given not less than ninety (90) days' notice
of its intention to do so to the Grantor;
(ii) concurrently with such notice, it has supplied the
Grantor with an irrevocable, assignable documentary
letter of credit payable by one or more sight
drafts (with the only draw condition to be
certification by the beneficiary that the Royalty
Owner is in default of a reimbursement obligation
hereunder) and issued by one of the five largest
Canadian chartered banks to secure the Royalty
Owner's obligations to reimburse the Grantor for
the Deductible Production Costs paid by the Grantor
while the Royalty Owner takes the Royalty Share of
the Petroleum Substances in kind; and
(iii) it has provided evidence satisfactory to the
Grantor that the Royalty Owner has made
arrangements to take the Royalty Share
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of Production and dispose of that Royalty Share of
Production in compliance with the Title and
Operating Documents.
(b) Such letter of credit shall be in an amount equal to the
aggregate Deductible Production Costs for the previous four
Months as shown in the statement delivered to the Royalty
Owner pursuant to section 3.2, shall be for a term of at
least one year, and shall otherwise be on terms satisfactory
to the Grantor.
(c) An election by the Royalty Owner to take the Royalty Share
of Production in kind for a Month shall remain in effect for
subsequent Months unless and until revoked by at least
ninety (90) days' written notice by the Royalty Owner to the
Grantor, provided that if the Royalty Owner fails to comply
with section 2.5(e) or does not replace the letter of credit
which secures its obligations to reimburse the Grantor for
Production Costs with a letter of credit as described in
sections 2.5(a) and 2.5(b) (which shall be in an amount
equal to the Deductible Production Costs for the twelve
Months preceding the date upon which the new letter of
credit is supplied to the Grantor) on or before the end of
the Month immediately preceding the Month in which the
letter of credit which is to be replaced will expire, the
Royalty Owner will be deemed to have revoked its election to
take the Royalty Share of Production in kind effective at
the end of the Month in which such letter of credit will
expire.
(d) If the Royalty Owner elects to take the Royalty Share of
Production in kind, the Grantor shall cause such Petroleum
Substances to be delivered to the Royalty Owner at the
appropriate well-site.
(e) If the Royalty Owner elects to take the Royalty Share of
Production in kind, the Royalty Owner shall:
(i) subject to the Title and Operating Documents,
arrange for the sale of such Royalty Share of
Production and the transportation thereof from the
appropriate well-site; and
(ii) reimburse the Grantor for Deductible Production
Costs and 99% of the net losses from Commodity
Price Swaps and Currency Swaps for the period that
the Royalty Owner takes the Royalty Share of
Production in kind.
(f) If the Royalty Owner elects to take the Royalty Share of
Production in kind, the Royalty Owner shall be bound by,
observe and perform all contracts applicable to the
marketing and sale of such Petroleum Substances.
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2.6 ROYALTY SHARE OF PRODUCTION NOT TAKEN IN KIND
The Royalty Owner shall not own any of the Grantor's Share of
Production except the Royalty Share of Production which it elects to take in
kind pursuant to section 2.5.
2.7 PETROLEUM SUBSTANCES LOST OR USED IN OPERATIONS
The Royalty shall not apply to any of the Grantor's Share of
Production lost or consumed in operations.
2.8 NOT AN INTEREST IN LAND
Each Party agrees that the Royalty shall not:
(a) be a covenant attached to or running with the Royalty Lands;
(b) attach to or form part of the Leases; or
(c) constitute an interest in land or real property.
2.9 REIMBURSEMENT OF NON-DEDUCTIBLE CROWN ROYALTIES
The Royalty Owner shall reimburse to the Grantor 99% of all
Non-Deductible Crown Royalties paid by the Grantor in respect of the
Properties or the production of Petroleum Substances therefrom. The Grantor
shall be entitled to set off Monthly Royalty Payments against amounts
reimbursable to it pursuant to this Section 2.9. However, the Grantor may, in
its sole discretion, waive its right to reimbursement of any Non-Deductible
Crown Royalties to the extent of the amount of Non-Deductible Crown Royalties
payable by the Grantor.
ARTICLE 3
ACCOUNTING
3.1 PAYMENTS
On the fifteenth day of the Month following the end of a Month or the
next following Business Day, if such day is not a Business Day, the Grantor
shall pay the Monthly Royalty Payment for such Month to the Royalty Owner.
3.2 STATEMENTS
Within one Month after the payment of each Monthly Royalty Payment
the Grantor shall deliver to the Royalty Owner a statement setting forth:
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(a) the amount of the Monthly Royalty Payment for the
immediately preceding Month;
(b) all calculations used in determining the Monthly Royalty
Payment for the immediately preceding Month;
(c) the Grantor's Share of Production (itemized by product) sold
during the immediately preceding Month except the Royalty
Share of Production which the Royalty Owner takes in kind;
(d) the Production Revenues and Other Revenues for the
immediately preceding Month;
(e) an itemized list of the Production Costs and Deductible
Production Costs for the immediately preceding Month;
(f) the amount of Non-Deductible Royalties in respect of the
immediately preceding Month which the Royalty Owner is
required to reimburse to the Grantor pursuant to section 2.9
and whether or not such amounts have been set off against
the Monthly Royalty Payment for the immediately preceding
Month;
(g) the estimated ARTC receivable by the Royalty Owner in
respect of the immediately preceding Month; and
(h) the net proceeds realized in respect of any Concurrent
Disposition, if any, which were paid to the Royalty Owner in
the immediately preceding Month.
3.3 OVERPAYMENTS
If the payment made by the Grantor on account of the Royalty for a
Month is greater than the actual amount to which the Royalty Owner is entitled
pursuant to the terms of this Agreement, the Grantor will be entitled to
recover the overpayment by set off against Monthly Royalty Payments for
subsequent Months.
3.4 CARRY FORWARD OF DEDUCTIBLE PRODUCTION COSTS
If the Deductible Production Costs for a Month exceed the Royalty
Revenues for such Month, there shall be no Monthly Royalty Payment for such
Month and the amount of the excess Deductible Production Costs shall be
carried forward and treated as Deductible Production Costs for the following
Month.
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3.5 COLLECTION OF PRODUCTION REVENUES AND OTHER REVENUES
The Grantor will use all commercially reasonable efforts to obtain
the payment of Production Revenues and Other Revenues (excluding Production
Revenues from the Royalty Share of Production which the Royalty Owner takes in
kind) but shall not have any liability to the Royalty Owner to the extent that
it fails to collect them, provided it makes commercially reasonable efforts to
do so.
3.6 PAYMENT OF PRODUCTION COSTS
The Grantor covenants and agrees to use the Production Revenues and
the Other Revenues to pay Production Costs, in the following order of
priority:
(a) first, Debt Service Costs; and
(b) secondly, in payment of all other Production Costs.
ARTICLE 4
INSURANCE
4.1 INSURANCE
The Grantor shall obtain and maintain such property damage and Third
Party liability insurance to provide protection for the Properties which is at
or above industry standards and which, in any event, will cover property
damage, general liability and, where appropriate in the opinion of the
Grantor, business interruption. Such insurance will be maintained with
reputable insurers and in such amounts as the Grantor determines to be
appropriate, having regard to insurance maintained pursuant to the Title and
Operating Documents and normal oil and gas industry standards in Canada.
ARTICLE 5
BOOKS AND RECORDS
5.1 EXAMINATION
During the term hereof and for a period of two years thereafter the
Grantor shall maintain complete books and records pertaining to:
(a) the Royalty;
(b) the Grantor's Share of Production lost, consumed or sold by
the Grantor; and
(c) all calculations made by the Grantor to determine the amount
of payments on account of the Royalty.
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The Royalty Owner and its agents and advisors shall have the right at all
reasonable times during business hours to inspect and make copies of such
books and records to the extent reasonably necessary in order to verify the
amounts paid or payable hereunder in respect of the Royalty.
5.2 AUDIT
Upon notice to the Grantor, the Royalty Owner shall have the right to
audit the books and records referred to in section 5.1 within the 24 month
period next following the end of the calendar year to which they relate. The
costs of any such audit shall be borne by the Royalty Owner. Any claims of
discrepancies disclosed by such audit shall be made in writing to the Grantor
within two months of the completion of such audit. The Grantor shall respond
to any claims within six months of receipt of such claims. If the Grantor is
unable to respond to the claims during the six month period, one extension of
three months shall be allowed if requested in writing by the Grantor within
such six month period.
5.3 CONFIDENTIALITY
The Royalty Owner shall keep all information provided to it pursuant
to this Agreement (including, without limitation, information made available
to it in connection with the audits, examinations and inspections conducted by
it pursuant to the foregoing provisions of this Article 5) strictly
confidential, except for:
(a) information which is or becomes publicly available through
no act or omission of the Royalty Owner;
(b) information which becomes available to the Royalty Owner
from a source other than the Grantor, without
confidentiality restrictions; and
(c) information required to be disclosed by the Royalty Owner by
law, rule or regulation of any securities commission, stock
exchange or other public body having jurisdiction.
ARTICLE 6
OPERATIONS
6.1 GENERALLY
Having regard to and subject to the provisions of the Title and
Operating Documents and the Grantor's rights and obligations thereunder, the
Grantor covenants to and in favour of the Royalty Owner that the Grantor shall
use all reasonable commercial efforts so that:
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(a) operations on the Royalty Lands and lands pooled or unitized
therewith for the recovery of Petroleum Substances and the
operation of the Tangibles are conducted in a good and
workmanlike manner, in accordance with good oilfield and
engineering practice and in compliance with all applicable
statutes, regulations, permits and governmental approvals;
(b) all of its duties and obligations under the Title and
Operating Documents are diligently and promptly performed
and all amounts payable as rental, royalty or similar
charges from time to time due in respect of the Properties
are paid and all other actions as may be reasonably
necessary to maintain the Title and Operating Documents in
good standing at all times are taken, subject to the terms
and provisions hereof, including Article 8; and
(c) all Surface Rights needed for the proper operation of the
Properties and the Tangibles are acquired and maintained in
good standing and all taxes, rates, assessments and other
amounts from time to time payable in respect of the
Properties are promptly paid.
6.2 NO OBLIGATION TO DEVELOP
Nothing contained in this Agreement shall impose any obligation,
expressed or implied, on the Grantor to explore or develop the Royalty Lands.
6.3 COMPLIANCE WITH AND MAINTENANCE OF PROPERTIES AGREEMENTS
The Grantor covenants to and in favour of the Royalty Owner that the
Grantor will:
(a) observe and perform all of its duties and obligations under
the Title and Operating Documents; and
(b) not, without the written consent of the Royalty Owner which
will not be unreasonably withheld or delayed:
(i) agree to the amendment or termination of the Title
and Operating Documents; or
(ii) waive or consent to a departure from the
performance by any Person of any such Person's
obligations under the Title and Operating
Documents;
where such amendment, waiver or consent to departure could have a material,
adverse effect on the Royalty or the rights and obligations of the Royalty
Owner in respect of
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the Royalty, provided, however, that acts or omissions by Persons, including
operators, beyond the reasonable control of the Grantor without specific
authorization from the Grantor shall not constitute a breach of this section
6.3.
6.4 RIGHTS AND OBLIGATIONS
Except for the Royalty Owner's rights and obligations under section
2.5 with respect to the Royalty Share of Production which it elects to take in
kind, as between the Royalty Owner and the Grantor, the Grantor shall have
exclusive control and authority over development of, and recovery of Petroleum
Substances from, the Royalty Lands and lands pooled or unitized therewith,
including, without limitation, making all decisions respecting whether, when
and how to drill, complete, equip, produce, suspend, abandon and shut-in ▇▇▇▇▇
and whether to elect to convert royalties to working interests. The Royalty
Owner covenants to and in favour of the Grantor that, as owner of the Royalty,
it shall not be entitled to any interest in the Properties or the Title and
Operating Documents and the Grantor covenants to and in favour of the Royalty
Owner that the Royalty Owner, as owner of the Royalty, shall not be liable for
any of the duties or obligations arising under the Title and Operating
Documents or in connection with the Acquisition or operation of the Properties
except as set forth in section 2.5.
6.5 MARKETING
Subject to existing contracts for the sale of production and section
2.5, the Grantor shall arrange for the sale of the Grantor's Share of
Production for the best prices and on the best terms reasonably available,
provided that, so long as the Grantor acts bona fide and in good faith, it
shall have complete discretion as to the terms, conditions and length of all
contracts entered into for the sale of the Grantor's Share of Production and
shall not be responsible for any loss or any alleged loss which may occur by
reason of any change in economic or political circumstances or otherwise with
respect to any such sales contract, so long as it acts in good faith and is
not negligent. The Grantor shall be entitled to contract with a Third Party to
market the Grantor's Share of Production.
6.6 ADDITIONAL TITLE AND OPERATING DOCUMENTS
The Grantor shall, subject to section 6.3, have the right to enter
into and amend Title and Operating Documents, from time to time, on such terms
and conditions as it considers appropriate in its sole discretion, provided
that it acts in accordance with prudent oil and gas industry practices and in
good faith in connection therewith.
6.7 RESTRICTION ON CAPITAL EXPENDITURES
The Grantor covenants in favour of the Royalty Owner that the
Grantor's Share of Capital Expenditures incurred in respect of the Properties
during a calendar year will
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not exceed 10% of the Grantor's Share of the net cash flow from the Properties
(determined in accordance with GAAP, but on the basis that the Royalty did not
exist) for the immediately preceding calendar year, except to the extent that:
(a) the excess is funded from the net proceeds of a public
offering of units in the Trust, borrowings by the Trust or
pursuant to the Credit Facilities or the proceeds of a
Concurrent Disposition or a combination thereof; or
(b) the Grantor is obligated by the terms of a Title and
Operating Document to pay such Capital Expenditures
notwithstanding that it did not specifically authorize or
approve them.
6.8 NO EXPLORATORY OPERATIONS
The Grantor covenants in favour of the Royalty Owner that the Grantor
will only expend funds on exploration activities if such undertaking is, in
the opinion of the Grantor, in the best interests of the Trust or the Grantor
is obligated by the terms of a Title and Operating Document to expend funds on
such undertakings notwithstanding that it did not specifically authorize or
approve them.
6.9 NO OTHER BUSINESSES
The Grantor covenants in favour of the Royalty Owner that the Grantor
will not engage in any business or make any investments, either directly or
through a subsidiary, a partnership or other vehicle other than business or
investments which relate to the acquisition, development, exploitation,
ownership and disposition of petroleum and natural gas properties and the
other activities contemplated by this Agreement.
6.10 CREDIT FACILITIES UNAFFECTED
Each Party covenants with the other that:
(a) any liability or obligation of the Grantor or the Royalty
Owner to a Lender in respect of a borrowing that contravenes
the borrowing limitations set out in the Declaration of
Trust shall not be affected, reduced or impaired by such
contravention; and
(b) the priority, validity, effectiveness and enforceability of
any security interest granted by the Grantor or the Royalty
Owner to any Lender and which contravenes the borrowing
limitations set out in the Declaration of Trust, shall not
be affected, prejudiced or impaired by such contravention.
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6.11 GRANT AND ASSIGNMENT OF SECURITY
Notwithstanding sections 9.1 and 11.1, and subject to the borrowing
limitations contained in the Declaration of Trust as qualified by section
6.10, the Grantor shall be entitled now or in the future to mortgage, pledge,
charge, grant a security interest in or otherwise encumber any interest in the
Properties, to secure any present or future obligation or liability of the
Grantor that may arise pursuant to the Credit Facilities or Swap Arrangements
and such encumbrance may be in priority to or subordinate to the Royalty.
Royalty Owner shall from time to time acknowledge the priority of any security
provided under the Credit Facilities over the Royalty.
6.12 RESTRICTIONS ON FUTURE ACQUISITIONS
The Grantor will not make a Future Acquisition unless, in the opinion
of the Grantor, it would be in the best interests of the Trust to do so.
ARTICLE 7
RESERVES
7.1 ESTABLISHMENT
The Grantor shall establish the following reserves:
(a) a reserve to fund the payment of future Production Costs
(the "PRODUCTION COSTS RESERVE");
(b) a reserve to fund future well bore and facility abandonment
and environmental and reclamation obligations and
liabilities (the "RECLAMATION FUND"); and
(c) a reserve to hold certain excess Other Revenues (the "EXCESS
OTHER REVENUE RESERVE").
The Reserves shall be owned by the Grantor and the Royalty Owner shall have no
interest therein. Interest and other amounts earned by investing the funds in
the Reserves shall be included in Other Income but will not form part of any
of the Reserves except to the extent paid into the Excess Other Revenue
Reserve pursuant to section 7.2(a).
7.2 CONTRIBUTIONS TO THE RESERVES
(a) If the Other Revenues for a Month exceed 10% of the total of
the Other Revenues for the Month and the Production Revenues
for the Month, the Grantor shall pay the excess into the
Excess Other Revenue Reserve prior to the fifteenth day of
the second Month following the end of that Month.
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(b) The Grantor shall pay an amount per barrel of oil equivalent
produced determined from time to time by the board of
directors of PrimeWest Energy Inc., less current year well
bore and facility abandonment and environmental and
reclamation obligations and liabilities, out of the
Production Revenues and Other Revenues for a calendar year
into the Reclamation Fund, in equal Monthly payments, for
purposes of funding the Grantor's future well bore and
facility abandonment and environmental and reclamation
obligations; and
(c) The Grantor shall pay such amounts of Production Revenues
and Other Revenues into the Production Costs Reserve if, as
and when the Grantor determines, in its reasonable
discretion, that it is prudent to do so in accordance with
prudent business practices to provide for payment of future
Production Costs.
7.3 USE OF THE RESERVES
From time to time when, in the reasonable opinion of the Grantor, it
is prudent to do so, the Grantor may pay Production Costs with funds in the
Production Costs Reserve or where the Grantor is of the opinion that any
portion of the funds in the Production Costs Reserve are no longer necessary
to fund future Production Costs, the Grantor may pay 99% of such amounts to
the Royalty Owner. The Grantor shall only use the Reclamation Fund for
purposes of funding the Grantor's well bore and facility abandonment and
environmental and reclamation obligations. The Grantor may pay Production
Costs with funds in the Excess Other Revenue Reserve, but only if in the
opinion of the Grantor such payment will not have any adverse income tax
consequences for the Grantor or the Royalty Owner. The Grantor may:
(a) hold the Reserves in one or more bank accounts;
(b) invest the Reserves as it considers prudent from time to
time; and
(c) commingle funds in the Reserves with any other funds.
The Grantor will not use the Reserves for any other purposes.
7.4 TERMINATION OF THE RESERVES
When the term of this Agreement expires pursuant to section 10.1:
(a) the Reclamation Fund will be used to pay all well bore and
facility abandonment and environmental and reclamation costs
and liabilities of the Grantor;
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(b) the Excess Other Revenue Reserve and the Production Costs
Reserve will be used to pay:
(i) first, all obligations and liabilities of the
Grantor in respect of the Credit Facilities and
Swap Arrangements entered into by the Grantor with
the Lender;
(ii) secondly, all liabilities and obligations of the
Grantor in respect of other Credit Facilities and
Swap Arrangements; and
(iii) thirdly, all other Production Costs, and
(c) when in the reasonable opinion of the Grantor, all well bore
and facility abandonment and environmental and reclamation
costs and liabilities of the Grantor have been satisfied and
all Production Costs have been paid, the Reserves will be
collapsed and 99% of the remainder in the Reserves, if any,
shall be paid to the Royalty Owner and the balance of the
funds in the Reserves, if any, shall be retained by the
Grantor; provided that any amounts remaining in the Excess
Other Revenue Reserve will not be paid to the Royalty Owner
unless, in the opinion of the Grantor there would be no
adverse tax consequences to the Royalty Owner or the Grantor
as a result of such payment. Any amounts in the Excess Other
Revenue Reserve that cannot be paid to the Royalty Owner
shall be retained by the Grantor.
7.5 RECLAMATION TRUST
Subject to the terms of the Credit Facilities, the Grantor and the
Royalty Owner agree that if changes are made to the INCOME TAX ACT (Canada) so
as to permit the formation of a trust or other fund which:
(a) has characteristics similar to a mining reclamation trust as
defined in the INCOME TAX ACT (Canada);
(b) may be used to secure or otherwise provide funding for
environmental and/or reclamation obligations relating to the
Properties for which the Grantor may be liable; and
(c) would have beneficial income tax consequences for the
Grantor as determined by the Grantor, acting reasonably;
then:
(d) the Grantor shall establish such a trust or other fund;
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(e) the amount then contained in the Reclamation Fund shall be
paid to such trust or other fund;
(f) thereafter, amounts which would otherwise have been paid
into the Reclamation Fund will, instead, be paid to such
trust or other fund; and
(g) thereafter, for purposes of computing Production Costs and
Deductible Production Costs, payments to or from such trust
or other fund shall be deemed to be payments to or from the
Reclamation Fund.
ARTICLE 8
POOLING, UNITIZATION, SURRENDER AND ABANDONMENT
8.1 POOLING AND UNITIZATION
The Grantor shall have full right, power and authority to pool or
unitize any of the Petroleum and Natural Gas Rights comprised in the
Properties, from time to time, with other Petroleum and Natural Gas Rights
provided that, in the Grantor's sole discretion, the pooling or unitization is
prudent and the terms thereof are in accordance with normal oil and gas
industry practices.
8.2 SURRENDER
Subject to the Title and Operating Documents, the Grantor may
surrender a Lease, in whole or in part, to the lessor thereunder without the
prior consent of the Royalty Owner if, the Grantor, acting reasonably and in
accordance with prudent oil and gas industry practices, determines that none
of the ▇▇▇▇▇ located on the lands covered by such Lease are capable of
producing Petroleum Substances in paying quantities and it is prudent that
such Lease be surrendered. From and after any such surrender, this Agreement
and the Royalty shall cease to apply to the Royalty Lands surrendered except
as to matters which occurred prior to the surrender.
8.3 ABANDONMENT
The Grantor shall have full right, power and authority without the
prior consent of the Royalty Owner to authorize the abandonment of any well
comprised in the Properties if the Grantor, acting reasonably and in
accordance with prudent oil and gas industry practices, determines that such
well is not capable of producing Petroleum Substances in paying quantities.
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ARTICLE 9
ASSIGNMENT
9.1 ASSIGNMENT
Except as expressly permitted in this Agreement, neither the Grantor
nor the Royalty Owner shall assign, sell, mortgage, pledge, charge, grant a
security interest in or otherwise encumber or dispose of any interest in this
Agreement without first notifying the other of its intention to do so and
obtaining the written consent of the other Party, which consent shall not be
unreasonably withheld or delayed. In any event no such assignment, sale,
mortgage, pledge, charge, grant of a security interest, encumbrance or
disposition shall be effective as against any other Party until the Person in
whose favour it is made or granted shall have executed and delivered a written
undertaking, in favour of and enforceable by, such other Party, agreeing to be
bound by and perform all of the terms and provisions of this Agreement
attributable to the interest acquired by it.
9.2 MULTIPLE ROYALTY OWNERS
If the Royalty shall be owned by more than one Person, such owners
shall designate one Person to receive all payments, statements and
communications in respect of the Royalty on their behalf by written notice to
the Grantor executed by all of them and, until the Grantor receives such
written notice, the Grantor shall be entitled to make all payments on account
of the Royalty, deliver all statements and communications hereunder and
otherwise deal in all matters pertaining hereto with the last Person who was
the sole owner of the Royalty.
9.3 DISPOSITIONS SUBJECT TO THIS AGREEMENT
If either Party assigns, sells, mortgages, pledges, charges,
transfers, conveys, grants any security interest in, or otherwise disposes of
or encumbers any interest in this Agreement, then subject to that Party
complying with the provisions of section 9.1 each Party thereto shall adopt
the position in any matter arising pursuant to this Agreement, that the Person
that is the grantee of such disposition or encumbrance is subject to the terms
and conditions of this Agreement which are applicable to any interest
transferred by such disposition or encumbrance.
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ARTICLE 10
TERM OF AGREEMENT
10.1 TERM
Subject to Article 11, this Agreement shall continue in full force
and effect for so long as there are Petroleum and Natural Gas Rights to which
the Royalty applies. Thereafter, this Agreement shall nevertheless remain in
full force and effect:
(a) in respect of any accrued and unfulfilled obligations of
either Party; and
(b) as to sections 5.1, 5.3, 7.4 and Article 11.
ARTICLE 11
DISPOSITIONS
11.1 RESTRICTIONS ON DISPOSITION OF PROPERTIES
The Grantor will not sell, transfer, assign, exchange, mortgage,
pledge, charge or otherwise dispose of or encumber the Properties except as
permitted in this Agreement, unless the written consent to any such
disposition or encumbrance is first obtained from the Royalty Owner, which
consent shall not be unreasonably withheld.
11.2 DISPOSITIONS OF TANGIBLES AND MISCELLANEOUS ASSETS
The Grantor shall have the right and be permitted to:
(a) dispose of Tangibles and Miscellaneous Assets which, in the
reasonable opinion of the Grantor, are not required to
exploit the Petroleum and Natural Gas Rights comprised in
the Properties in accordance with good oilfield practices;
and
(b) license seismic and other data comprised in the Properties
on such terms and conditions as the Grantor considers
appropriate, in its sole discretion.
11.3 DISPOSITIONS OF PETROLEUM AND NATURAL GAS RIGHTS
The Grantor shall have the right and be permitted to sell interests
in Petroleum and Natural Gas Rights comprised in the Properties, either by
themselves or together with interests in related Tangibles and Miscellaneous
Interests, and the Royalty Owner shall concurrently sell the Royalty to the
extent it relates to such interests only if each of the following criteria is
satisfied by such sale:
(a) if the Reserve Value of the interests in the Properties to
be sold pursuant to such sale is greater than 25% of the
Reserve Value of all of the
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aggregate of all Properties and all properties owned by
PrimeWest Energy Inc. and its subsidiaries and the
subsidiaries of the Grantor, the sale has been approved by a
Special Resolution of the Unitholders;
(b) the consideration for such sale is comprised of cash or
other Petroleum and Natural Gas Rights and related Tangibles
and Miscellaneous Assets, or a combination thereof; and
(c) the Grantor is of the reasonable opinion that such sale is
in the best interests of the Unitholders.
A sale which satisfies the criteria set forth in this section 11.3, other than
a sale which the Grantor is permitted to make under another provision of this
Agreement, is referred to herein as a "CONCURRENT DISPOSITION".
11.4 CONCURRENT DISPOSITION DOCUMENTATION
If a Concurrent Disposition is made, the Royalty Owner shall execute
and deliver all such instruments, documents, transfers, conveyances and
acknowledgments as the Grantor may reasonably request in connection with such
Concurrent Disposition in order to effect the disposition of any interest
comprised in such Concurrent Disposition.
11.5 MERGER ON CONCURRENT DISPOSITION
Upon the completion of a Concurrent Disposition, the interest in the
Royalty sold in such Concurrent Disposition shall merge in the interest in the
Properties sold in such Concurrent Disposition and the interest in the Royalty
shall thereupon terminate.
11.6 PROCEEDS OF A CONCURRENT DISPOSITION
(a) If a sale of Properties involves a sale of Petroleum and
Natural Gas Rights comprised therein and constitutes a
Concurrent Disposition, ninety-nine percent (99%) of the net
proceeds allocated to such Petroleum and Natural Gas Rights
under the purchase agreement in respect of such Concurrent
Disposition shall be allocated to the interests in the
Royalty sold by the Trust in such Concurrent Disposition,
one percent (1%) of the net proceeds allocated to such
Petroleum and Natural Gas Rights under the purchase
agreement in respect of such Concurrent Disposition shall be
allocated to the interests in Petroleum and Natural Gas
Rights sold by the Grantor in such Concurrent Disposition
and all amounts allocated to Tangibles and Miscellaneous
Interests under the purchase agreement in respect of such
Concurrent Disposition shall be allocated to the interests
of the Grantor in the Tangibles and Miscellaneous Interests
sold by the Grantor in such Concurrent Disposition and shall
be included in Other Income;
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(b) Subject to the rights of a Lender, the Grantor shall hold
the net proceeds of sale allocated to the interests in the
Royalty pursuant to section 11.6(a) in trust for the Trust,
shall invest such proceeds of sale in Permitted Investments
and shall, unless such proceeds are first used to pay any
Deferred Purchase Price Obligation or any Production Costs,
pay such proceeds of sale, and all interest and other income
received in respect thereof to the Royalty Owner, with the
last Monthly Royalty Payment due in respect of the calendar
year during which such Concurrent Disposition was completed.
11.7 MERGER UPON FARMOUT
The Grantor shall be entitled to enter into farmout agreements with
any Person in respect of the Petroleum and Natural Gas Rights comprised in the
Properties, whereby such Person may acquire an interest in such Petroleum and
Natural Gas Rights in exchange for the payment of Capital Expenditures, or
other consideration, incurred with a view to exploit such Petroleum and
Natural Gas Rights. Upon the date on which any Person earns any interest in
the Petroleum and Natural Gas Rights comprised in the Properties pursuant to
such a farmout agreement, the interest in the Royalty to the extent it relates
to the interest in such Petroleum and Natural Gas Rights earned by such Person
shall merge in the interest of such Petroleum and Natural Gas Rights and such
interest in the Royalty shall thereupon terminate. Any interest retained by or
acquired by the Grantor pursuant to such farmout agreements shall form part of
the Properties and remain or become subject to the Royalty.
ARTICLE 12
NOTICES AND PAYMENTS
12.1 ADDRESSES FOR SERVICE AND PAYMENTS
All payments hereunder in respect of the Royalty shall be paid or
tendered to the Royalty Owner at its address for notices hereunder or such
other place or depository as the Royalty Owner may request by written notice
to the Grantor, provided that no change in the place at which payments on
account of the Royalty are to be paid or tendered shall be effective until 30
days after written notice thereof has been provided to the Grantor by the
Royalty Owner.
12.2 GIVING AND DEEMED RECEIPT OF NOTICES
Whether or not so stipulated herein, each notice, communication or
statement (herein called a "NOTICE") required or permitted hereunder shall be
in writing. A notice may be served:
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(a) by delivering it to the Party to whom it is being given at
that Party's address for notices hereunder, provided such
delivery shall be during normal business hours of the
addressee. Such notice shall be deemed received by the
addressee when actually delivered as aforesaid; or
(b) by telecopier (or by any other like method by which a
written and recorded message may be sent) directed to the
Party to whom it is being given at that Party's telecopy
number for notices hereunder. Such notices shall be deemed
received by the addressee thereof (i) when actually received
by it if sent within the normal working hours of a Business
Day, or (ii) otherwise at the commencement of the next
ensuing Business Day following transmission thereof.
12.3 ADDRESSES
The address and telecopy number for notices hereunder of the Grantor
and the Royalty Owner shall be as follows:
Grantor:
PrimeWest Gas Corp.
▇▇▇▇, ▇▇▇ - ▇▇▇ ▇▇▇▇▇▇ ▇.▇.
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇
▇▇▇ ▇▇▇
Attention: Chief Executive Officer
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Royalty Owner:
PrimeWest Energy Inc.
▇▇▇▇, ▇▇▇ - ▇▇▇ ▇▇▇▇▇▇ ▇.▇.
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇
▇▇▇ ▇▇▇
Attention: Chief Executive Officer
Telecopy No: (▇▇▇) ▇▇▇-▇▇▇▇
12.4 CHANGE OF ADDRESS
A Party may change its address or telecopy number for notices
hereunder by notice to the other Party.
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ARTICLE 13
MISCELLANEOUS
13.1 ENUREMENT
This Agreement shall enure to the benefit of and be binding upon the
Parties and their respective successors and permitted assigns.
13.2 WAIVERS IN WRITING
No waiver by any Party of any breach of any of the covenants,
conditions and provisions herein contained shall be effective or be binding on
any other Party unless such waiver is expressed in writing and any waiver so
expressed shall not limit or affect its rights with respect to any other or
future breach.
13.3 TIME OF ESSENCE
Time is of the essence of this Agreement.
13.4 NO PARTNERSHIP
Nothing herein shall be construed as creating a partnership and no
Party shall have any partnership rights or liabilities hereunder or in
connection herewith.
13.5 SEVERABILITY
The terms and provisions of this Agreement are severable. In the
event of the unenforceability or invalidity of any one or more of the terms or
provisions of this Agreement under applicable law, such unenforceability or
invalidity shall not render any of other terms or provisions hereof
unenforceable or invalid and the Parties agree that this Agreement shall be
construed as if such unenforceable or invalid term or provision was never
contained herein.
13.6 AMENDMENTS
No amendment, alteration or variation of this Agreement or any of its
terms or provision shall be binding upon the Parties unless made in writing
and signed by the duly authorized representatives of each of the Parties.
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ARTICLE 14
CONCERNING THE TRUST
14.1 ACKNOWLEDGEMENT
The Parties hereto acknowledge that: (a) the Royalty Owner may assign
this Agreement to the Trust; and (b) the obligations of the Trust shall not be
personally binding upon the Trustee or any of the Unitholders and that any
recourse against the Trust, or any Unitholder in any manner in respect of any
indebtedness, obligation or liability of the Trust arising hereunder or
arising in connection herewith or from the matters to which this Agreement
relates, if any, including without limitation, claims based on negligence or
otherwise tortious behaviour, shall be limited to, and satisfied only out of,
the Trust Fund as defined in the Declaration of Trust.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed on the 24th day of January, 2003.
PRIMEWEST GAS CORP. PRIMEWEST ENERGY INC.
Per: ___________________________ Per: ___________________________