This document compares the generic royalty regime typically applied to offshore oil projects in Newfoundland and Labrador with the customized royalty regime negotiated for the Hebron oil field. The generic regime starts at 1% royalty in early years, increasing over time to 7.5% after simple payout is achieved. In contrast, the Hebron regime maintains a flat 1% royalty until simple payout, after which further details of the multi-tiered post-payout structure are not publicly available. Scenario analyses considering different oil price and production assumptions suggest the generic regime would generate greater revenue for the provincial treasury over time compared to the flat 1% Hebron royalty. More information is needed to fully assess the

1. Hebron: Generic Royalty v. Williams’ Royalty A comparison of pre-simple payout phase August 2007

2. Outline Hebron Background Resource Ownership Generic + Williams (Hebron) Royalty Regime Scenario Assessment Conclusion

3. Hebron Background Discovered 1981 Complex geology; 75% of resource is heavy oil Costly to develop Commercially non-viable Fallow field = Red Herring Lower market price compared with light, sweet 400 to 700 million bbls possible Outside chance may be higher

4. Resource Ownership In Canada, 100% owned by government 1985 Atlantic Accord gave province de facto ownership powers on revenues “ Equity” is not ownership Royalty is rent to owner paid by developer for right to develop commercially Royalty = 100% to province Other revenues to province and feds

5. Royalty Regimes Generic Hibernia, Terra Nova, White Rose regimes similar One size does NOT fit all, although generic was supposed to or be basis for Basic = 1% rising to 7.5% based on cumulative prod + time to simple payout Net royalty after payout in 2 tiers, with return allowance for operators Williams (Hebron) = 1% basic

6. Basic Information Sources: provincial news release, CNLOPB, Natural Resources (royalty regime), news media, Sproule Assoc price forecast 150 thousand bpd = 50 mmbbl annual Think Hibernia, but lower due to heavy oil Deals solely with resource owner royalty – does NOT include energy corp

7. Generic Basic Royalty Applies to gross revenue Based on triggers, for Hebron: Y1,2 = 1% Y3,4 = 2.5% Y5,6 = 5% Y7-10 = 7.5%

8. Williams (Hebron) Basic Flat 1% until simple payout Details of royalty regime after that point not publicly available yet Tier 1,2 with new Tier 3 Presumably still retain return allowances on net royalty period but specifics unknown

9. Scenario 1 All heavy oil First oil 2017 Oil price = US$45 per barrel (Heavy oil discount) Sproule forecast c. $38-40 per barrel Total annual prod. = 50 million bbls Simple payout in 10 + years (Hibernia likely in 14 years, comparable)

10. Scenario 1: All heavy; US$45 per bbl

11. Totals Comparison

12. Scenario 2 All light, sweet (200 million bbls) Price = US$53 (Sproule WTI forecast) Annual production = 50 million bbls Asset exhausted in 4 years Conversion to heavy oil, Y5 and beyond No payout on light only

13. Scenario 2: All light; US$53

14. Totals Comparison

15. Scenario 3: 25/75; 53/45 Blended production, based on estimates 25% light, sweet + 75% heavy Total annual prod = 50 million bbls Payout in 10 + Price = US$53/US$45

16. Scenario 1: All heavy; US$45 per bbl

17. Totals Comparison

18. Assessment $ values not key point Analysis shows value to treasury of progressive royalty regime v. flat tax All scenarios, value of generic shown by Y3, increasing over time Government/Public price numbers are misleading (assumes light price for heavy) Decision on project issues like cost, interests of parties 100% provincial decision

19. Assessment (cont’d) Trade guaranteed cash at front for possible cash at back (Dunderdale) - Tier 3 Royalty tied to WTI but paid at real i.e discounted - prices (may be negligible/zero) Tier 3 bets on prices in 2027 and beyond Tier 3 bets on there being more oil Tier 3 assessment needed (More info, more detailed analysis)

20. More information/discussion needed Tier 3 royalty structure Other royalty changes, if any (e.g. Dunderdale’s 5% basic from Telegram interview) How much recoverable oil? Heavy price post 2017 and post simple payout

21. A good project ? Yes. Good to get project underway. Both parties consider it good. For provincial treasury, cash value depends on unknowns (unknown to public + unknown until happens) Industrial benefits package/conditions “ Give-away” = simplistic assessment as with Voisey’s Bay

22. Contact Sir Robert Bond Papers http://bondpapers.blogspot.com [email_address] [email_address]