Royalty Administration

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Indian Oil and Gas Canada (IOGC) is responsible for collecting oil and gas royalties on behalf of First Nations for all oil and gas produced from First Nation reserve lands. IOGC manages royalties under the authority of the Indian Act, the Indian Oil and Gas Act, 2009 the Indian Oil and Gas Regulations, 2019 ("Regulations') and the Financial Administration Act.

Royalty moneys collected by IOGC are deposited into First Nation trust fund accounts, typically held by the Government of Canada and administered by regional offices of Indian Oil and Gas Regulations, 2019 . All royalty payments are made on the basis of a royalty entity, which defines a unique combination of company, First Nation reserve and production entity.

The business objective of royalty administration is to verify receipt of the net royalty payable for any production of oil, gas or associated products where an interest in production is attributable to First Nation oil and gas rights from reserve lands in Canada.

Allocation of Royalty Obligation to a Lessee

The responsibility to pay royalty rests with the lessee(s) in accordance with the Indian Oil and Gas Act, the Regulations and the corresponding contract. Where there are two or more contract holders in respect of an undivided interest in a contract, their duties and obligations are joint and several.

Lessees may delegate the duty of calculating and paying royalties to other companies. If these other companies default on royalty payments, the lessees are responsible to pay the royalties.

Delegation of Royalty Obligation to a Royalty Payor

Oil and gas companies that pay royalties, or royalty Payors, are responsible to accurately self-assess and pay royalty due under the terms of the contracts. If a royalty Payor that is not a lessee defaults on royalty payments, the lessee(s) is responsible to pay the royalties.

Obtaining and Modifying a Royalty Entity

The royalty entity is the basis on which all royalty payments are made. The royalty entity defines the company, reserve and production entity combination. Lessees must obtain a royalty entity prior to submission of royalty data and payments to IOGC.

The lessee retains control over which companies are royalty Payors, or have working interest ownership for royalty payment purposes. The lessee is responsible for completing the New Royalty Entity Request Form or the Notification of Change to Royalty Entity Form as needed.

The New Royalty Entity Request Form provides IOGC with the names and contact information for all royalty Payors associated to a particular well. It is required when there is a new production entity or when an additional royalty Payor is needed.

The Notification of Change to Royalty Entity Form documents changes to an existing royalty entity as a result of an amalgamation, authorization for royalty submissions or change in working interest ownership. Completion of this form in a timely manner is essential to ensure accurate royalty submissions. Changes to working interest ownership can be submitted at any time; however, they will only take effect on a go forward basis. Retroactive changes to working interest ownership are not permitted.

Reporting and Electronic Submission Requirements

Royalty Payors are required to submit validated royalty information through IOGC's electronic submission system. As soon as it becomes available, but no later than the third (3rd) month following the month in which the oil or gas was produced. This deadline allows enough time for royalty Payors to finalize all data elements prior to making their data submissions.

The submitted information is validated against a set of business rules. Within 2 hours, a report will appear in the royalty Payor's "Submission History" table in the electronic submission system. It is the royalty Payor's responsibility to review the status of its submissions to determine if the data has been accepted. If the data is accepted, IOGC's Resource Information Management System is automatically updated. If the data is rejected, the royalty Payor must correct and resubmit it.

The business rules used in the validation process are described in detail in the Electronic Royalty Data Submission - User Manual, along with troubleshooting instructions.

Royalty Payors are required to make submissions for royalty entities that have a production volume of zero.

Gas prices are to be reported in dollars per gigajoule ($/GJ), not dollars per thousand cubic metres ($/103m3). Reporting of gas prices using the wrong unit results in assessed results that are dramatically higher than the true royalty payable.

Payment of royalties is made separately from the submission of royalty information. Royalty payments must be made by cheque and are due by the 25th day of the third (3rd) month following the month of production pursuant to the Regulations (unless otherwise specified in the contract). Companies are expected to be diligent in their submission for royalties so that there will be minimal differences between the amount paid and the amount assessed by IOGC using the actual data submitted.

Royalty Payors are responsible for providing First Nations with hardcopies of the same royalty information that is provided to IOGC on a monthly basis.

Royalty Payors are responsible for creating and maintaining the users having access to IOGC's electronic submission system under the royalty Payor's id. Each royalty Payor will designate one person as its administrator for the system, to create, update and delete authorized users.

Gas Cost Allowance (GCA)

For all stakeholders that require a current copy of IOGC's Royalty Reporting Guidelines — GCA section; please contact

The Indian Oil and Gas Regulations, (SOR/2019-196)Section 33, Schedule 1, Clause (2)(1) provide for an allowance for gathering, dehydrating, compressing and processing gas and associated products produced from Indian lands.

GCA is a facility-specific deduction to recognize the costs associated with transporting raw gas and converting it to marketable gas. GCA is provided as a dollar rate per unit of marketable sales gas for costs such as gathering, dehydrating, compressing and processing the royalty share of natural gas and its marketable components.

Where a producer gathers, dehydrates, compresses and/or processes First Nation gas through one or more facilities in which it is not an owner, the producer may be allowed a custom processing fee deduction rate approved by IOGC. The custom processing rate is applied to First Nation volumes in the same manner as a GCA facility rate.

The GCA rate for a royalty entity is the sum of the rates for all the facilities through which the marketable (residue) gas for that royalty entity is gathered, dehydrated, compressed and processed.

GCA is determined on the gross gas royalty volume in a month and recovered against the gross royalty of the total gas and products sold, up to a maximum of 50% of the monthly gross gas and products royalty.

Three components are recognized in GCA calculations: allowed operating costs, amortized capital cost, and return on average capital. These components are derived from gas cost allowance as per IOGC's regulations as updated from time to time.

A company must submit an annual GCA application on or before May 31 of the year following production. IOGC applications are submitted through the IOGC – GCA module in Petrinex.

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