O.C. 63/2012



O.C. 63/2012

February 23, 2012

The Lieutenant Governor in Council authorizes the Minister of Energy, on behalf of the Crown in right of Alberta, to enter into the Alberta Reita Lake III Crown Agreement with Baytex Energy Ltd. in the form attached.

For Information only

Recommended by: Minister of Energy

Authority: Mines and Minerals Act

(section 9)

ALBERTA REITA LAKE III

CROWN AGREEMENT

THIS AGREEMENT IS DATED the _____ day of _____, 2011,

BETWEEN:

HER MAJESTY THE QUEEN IN RIGHT OF

ALBERTA, as represented by the Minister of Energy

(herein called “Her Majesty”)

-and-

BAYTEX ENERGY LTD.,

having an office in the City of Calgary,

in the Province of Alberta (herein called “Baytex”)

WHEREAS the Oil Sands Project once formed part of the project that was the subject of the Alberta Reita Lake (Phases I to IV) Transition Crown Agreement, dated April 22, 1999, between Koch Exploration Canada, Ltd. ("Koch") and Her Majesty, and the Alberta Reita Lake (Phases I to IV) Transition Crown Agreement Amendment No. 1 between Koch Exploration Canada G/P Ltd. And Her Majesty which incorporated by reference the provisions of the Alberta Reita Lake (Phase II) Crown Agreement, dated February 17, 1995, between Koch and Her Majesty (collectively, the "Koch Reita Lake Crown Agreement");

 

AND WHEREAS Baytex Energy Partnership, by its managing partner Baytex Energy Ltd., purchased the Oil Sands Project from Koch as of the Effective Date, but did not purchase the entire project that was the subject matter of the Koch Reita Lake Crown Agreement;

AND WHEREAS by way of Distribution of Assets and Assumptions of Liabilities Agreements dated September 2, 2003, the existing Baytex Energy Partnership was dissolved and all of the property of Baytex Energy Partnership was transferred to Baytex Energy Ltd. and Baytex Exploration Ltd., its constituent partners.

AND WHEREAS Baytex Exploration Ltd. was then dissolved and all of its property was transferred to Baytex Energy Ltd.;

AND WHEREAS Baytex and Her Majesty have agreed to allocate ten (10%) percent of the Koch Costs to the Oil Sands Project;

AND WHEREAS Her Majesty and Baytex wish for their mutual benefit to enter into this Alberta Reita Lake III Crown Agreement (the “Agreement”) to evidence their agreement concerning Leased Substances and on the royalty to be received by Her Majesty on each oil sands product recovered or obtained from the Leases;

AND WHEREAS this Agreement is made pursuant to section 9(a) of the Mines and Minerals Act;

AND WHEREAS pursuant to Order in Council Number ________________ the Minister of Energy is authorized, on behalf of Her Majesty, to enter into this Agreement.

NOW THEREFORE the parties agree as follows:

ARTICLE 1 - DEFINITIONS

101 In this Agreement

a) “Affiliate” means any Person, or association directly or indirectly controlling, controlled by or under common control with any party. For the purposes of this definition “control” (including “controlling”, “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, or association whether through the ownership of voting securities or by contract or otherwise;

b) “Allowed Capital Costs” means costs that are Allowed Capital Costs under Schedule “C”;

c) “Allowed Cumulative Project Cost”, as of the day that is the Date of Project Payout or any earlier day, means the aggregate of

(i) the following costs incurred by the Lessees and which costs are directly attributable to the Oil Sands Project:

(A) ten (10%) percent of the Koch Costs,

provided:

(B) the Lessees provide Her Majesty, within thirty (30) days following the Execution Date, with a statement of the costs under (A) above, including sufficient documentation to substantiate the calculation of such costs. Subject to section 302, Her Majesty reserves the right to audit and amend, to reflect the results of such audit, the Lessees’ statement of the costs under (A), above, and the Lessees shall provide Her Majesty with access to the Lessees’ Records for such purposes. Eligibility of such costs will be determined using the schedule of allowable and non-allowable costs used in the Koch Reita Lake Crown Agreement. Notwithstanding the generality of the foregoing, in no event shall the amount under (A), above, exceed eight million ($8,000,000) dollars even after such audit;

(ii) total Allowed Capital Costs and total Allowed Operating Costs incurred to that day on or after the Effective Date, and

iii) total royalty paid to Her Majesty in respect of Leased Substances to that day on or after the Effective Date, excluding any royalty included as an Allowed Operating Cost pursuant to section 4(1)(k) of Schedule “C”;

d) “Allowed Operating Costs” means costs that are Allowed Operating Costs under Schedule “C”;

e) “Blended Bitumen” means Crude Bitumen blended with Diluent and suitable for transport;

f) “Board” means the Alberta Energy and Utilities Board or any successors thereto;

g) “Crude Bitumen” means Leased Substances that are hydrocarbon substances the Board has, by order pursuant to section 7(2) of the Oil Sands Conservation Act, declared to be oil sands;

h) “Cumulative Deemed Gross Revenue” as of the day that is the Date of Project Payout or any earlier day, means Deemed Gross Revenue to that day on or after the Effective Date;

i) “Cumulative Return Allowance” means as of any day, the aggregate of all Return Allowances for the Months preceding the month in which that day occurs;

j) “Date of Project Payout” means, initially, the first day on which Cumulative Deemed Gross Revenue to that day is equal to the sum of the Allowed Cumulative Project Cost and the Cumulative Return Allowance to that day, and thereafter may change as a result of audits conducted by the Minister under section 302, until such date is finally and conclusively determined to be the Date of Project Payout following the last audit by the Minister required to confirm same;

k) “Deemed Gross Revenue” means the aggregate of

(i) Product Revenue,

(ii) proceeds received or receivable on or after the Effective Date from the sale, lease, licence or other disposition of any other substances or assets of the Oil Sands Project, the costs of which have been included as Allowed Cumulative Project Cost, Allowed Capital Costs or Allowed Operating Costs, but not including any consideration received or receivable for a sale of a Participating Interest, an overriding royalty interest, a carried interest, a net profit interest or an interest similar to a Participating Interest, an overriding royalty interest, a carried interest, or a net profit interest, in the Oil Sands Project,

(iii) proceeds received or receivable on or after the Effective Date from the sale, lease, licence or other disposition of technology of the Oil Sands Project, to the extent that any costs of that technology have been included as an Allowed Cumulative Project Cost, Allowed Capital Costs or Allowed Operating Costs,

(iv) proceeds received or receivable on or after the Effective Date under a policy of insurance if the insurance premiums have been included as an Allowed Operating Cost, and

(v) subject to paragraph (iv), any other “other net proceeds”, as defined in the Regulation, relating to the Oil Sands Project, received or receivable on or after the Effective Date, and which have not already been included in subsections (i) to (iv);

l) “Department” means the Department under the administration of the Minister;

m) “Diluent” means hydrocarbon substances used to dilute Crude Bitumen for the purpose of transport from the Location Boundary;

n) “Effective Date” means October 1, 2002;

o) “Execution Date” means the date the last of the parties hereto signs this Agreement;

p) “Her Majesty’s Royalty Share” as it relates to any Leased Substance, means the share of that Leased Substance recovered or obtained from the Oil Sands Project which Her Majesty is entitled to receive as royalty under this Agreement;

(q) “Koch Costs” means the amount, calculated effective September 30, 2002, by which the aggregate of

(i) the “Allowed Cumulative Project Cost” as defined in, and calculated pursuant to, the Koch Reita Lake Crown Agreement, and

(ii) the “Cumulative Return Allowance”, as defined in, and calculated pursuant to, the Koch Reita Lake Crown Agreement,

exceeds the “Cumulative Deemed Gross Revenue” as defined in, and calculated pursuant to, the Koch Reita Lake Crown Agreement as such revenues relate to operations conducted on the Koch Reita Lake Leases/Lands;

(r) “Leased Substances” means all substances which the Lessees have the right to recover pursuant to the Leases, and each of those substances together with all products and by-products obtained by processing or reprocessing those substances within or at the Location Boundary;

(s) “Leases” means all Government of Alberta oil sands agreements issued pursuant to the Mines and Minerals Act covering or relating to, from time to time, the lands included in the Oil Sands Project together with documents of title issued in substitution for those agreements, and as of the Effective Date, only includes those Alberta Oil Sands Leases listed in Schedule “B”;

(t) “Lessees” means the registered lessees, from time to time, of the Leases under the Mines and Minerals Act, as recorded in the records of the Department;

(u) “Location Boundary” means the final point of measurement of Leased Substances recovered from the Oil Sands Project before delivery of those substances from the location of the Leases and, in the case of Crude Bitumen that forms part of the Blended Bitumen, means the final point of measurement of Blended Bitumen before delivery of that Blended Bitumen from that location;

(v) “Minister” means the Minister responsible for the Mines and Minerals Act as set forth in the Designation and Transfer of Responsibility Regulation, as amended or replaced from time to time;

(w) “Month” means the period from 8 A.M. local time in Alberta on the first day of the calendar month to 8 A.M. local time in Alberta on the first day of the succeeding calendar month;

(x) “Oil Sands Project” means:

i) the primary recovery scheme and facilities for the recovery and production of Crude Bitumen from the Cold Lake Grand Rapids Oil Sands Deposits in the Cold Lake Area, more particularly described in Schedule “B”, and

ii) any expansion to that scheme:

A) that is approved in writing by the Minister as forming part of the Oil Sands Project during the Term;

B) that is approved by the Board during the Term, under the Oil Sands Conservation Act, and

C) in respect of which field work, such as road building, lease preparation or site development, has been specifically undertaken during the Term;

(y) “Operator” means Baytex, or such other Person as may from time to time, with the approval of Her Majesty, be appointed by the Lessees as Operator, such approval not to be unreasonably withheld;

(z) “Participating Interest” means, when used in relation to a Lessee, the specified undivided interest in the Leases held by that Lessee and registered under the Mines and Minerals Act as recorded in the records of the Department;

(aa) “Period” means a Year, except that in the Year that includes the Date of Project Payout, the time from the beginning of the Year to and including the Month preceding the Month in which the Date of Project Payout occurs, and the time commencing with the Month in which the Date of Project Payout occurs to the end of that Year, shall each be considered a separate Period;

(bb) “Person” means a natural person, firm, trust, partnership, association, corporation, government or government agency;

(cc) “Product Revenue” means the aggregate of

i) the amount obtained when the volume of all Blended Bitumen obtained from the Oil Sands Project on or after the Effective Date that is delivered at the Location Boundary (including Her Majesty’s Royalty Share of Crude Bitumen contained in the Blended Bitumen), is multiplied by the applicable Unit Price, and

ii) the amount obtained when the volume of all other Leased Substances recovered from the Oil Sands Project on or after the Effective Date that are delivered at the Location Boundary, (including Her Majesty’s Royalty Share of the other Leased Substances), is multiplied by the applicable Unit Price;

(dd) “Records” means “Records” as defined, from time to time, in the Financial Administration Act;

(ee) “Regulation” means the Oil Sands Royalty Regulation, 1997 (Alta. Reg. 185/97, as amended);

(ff) “Return Allowance” in respect of any Month

i) commencing with the Month containing the Effective Date,

ii) up to and including the Month immediately preceding the Month containing the Date of Project Payout, and

iii) in respect of which the Minister does not, whether before, during or after that Month, notify the Lessees in writing that the Minister is of the opinion that operation of the Oil Sands Project was, is or will be suspended,

means the product of

iv) 0.007974 (zero, decimal, zero, zero, seven, nine, seven, four), and

(v) the amount by which the aggregate of

(A) the Allowed Cumulative Project Cost to the end of that Month, and

(B) the Cumulative Return Allowance, as of the first day of that Month

exceeds the Cumulative Deemed Gross Revenue to the end of that Month;

(gg) “Term” means the period commencing the Effective Date and ending with the last day of the Month immediately preceding the Month the Date of Project Payout is initially determined by Baytex acting in good faith;

(hh) “Unit Price” means the price of each of the Leased Substances or Blended Bitumen at the Location Boundary as agreed to from time to time between the Lessees and Her Majesty, or failing agreement for a particular time, means the price as determined by arbitration or by Her Majesty as provided in section 409. The Unit Price determined by agreement or arbitration shall:

i) in the case of Leased Substances or Blended Bitumen that are the subject of disposition, reflect the greater of the proceeds of disposition or the fair market value of the Leased Substances or Blended Bitumen at the point of disposition less all handling charges, export charges, pipeline tariff charge and charges of a similar nature that

(A) are not included in Allowed Cumulative Project Cost, Allowed Operating Costs or Allowed Capital Costs, and

(B) are paid to facilitate the movement of the Leased Substances or Blended Bitumen from the Location Boundary to the point of disposition,

ii) in the case of both Leased Substances and Blended Bitumen, that are not subject of disposition but are consumed or used by a Lessee at a point beyond the Location Boundary, reflect the fair market value of the Leased Substance or Blended Bitumen at the Location Boundary,

iii) in the case of both Leased Substances and Blended Bitumen, reflect any supplement or other payment received from a government or government agency in relation to the Leased Substance or Blended Bitumen, and

iv) in the case of Crude Bitumen that forms part of Blended Bitumen for any Month, be determined in accordance with the following formula:

Unit Price of Crude Bitumen =

Revenue from Blended Bitumen – Cost of Diluent

Volume of Blended Bitumen – Volume of Diluent

where

A) Revenue from Blended Bitumen is the Product Revenue for the Month in respect of Blended Bitumen as determined under clause (cc)(i),

B) Cost of Diluent is the laid down cost of Diluent received for the Oil Sands Project at the Location Boundary during the Month adjusted for any increase or decrease in Diluent inventories during the Month using a first in, first out inventory calculation method,

C) Volume of Blended Bitumen is the volume of Blended Bitumen from the Oil Sands Project that has been delivered at the Location Boundary during the Month,

D) Volume of Diluent is the volume of Diluent received for the Oil Sands Project at the Location Boundary during the Month adjusted for any increase or decrease in inventories of Diluent during the Month;

PROVIDED ALWAYS HOWEVER, marketing costs, brokerage fees and other like charges shall be excluded from the determination of Unit Price; and

(ii) “Year” means calendar year.

ARTICLE 2 – INTERPRETATION

201 (1) For the purpose of this Agreement, a cost will be considered to have been incurred

a) in the Month in which the obligation to pay first arose, if payment is made no more than sixty (60) days after the obligation to pay first arose, and

b) in the Month in which payment is made, if payment is made more than sixty (60) days after the obligation to pay first arose.

(2) Notwithstanding subsection (1), if services or materials have been supplied to or in respect of the Oil Sands Project by a Lessee, the Operator or an Affiliate of either, and no invoice for those services or materials is subsequently sent by the Lessee, Operator or Affiliate, the cost of the services or materials shall be considered to be incurred in the Month in which the services were rendered or the materials were received at the location of the Leases.

202 (1) Except as otherwise expressly provided in this Agreement, where a cost or charge arises in relation to a Lessee, the Operator or an Affiliate of either, the lesser of the fair market value or the amount of the actual cost or charge shall be used in determining the amount of the cost or charge to be included in Allowed Cumulative Project Cost, Allowed Operating Costs, Allowed Capital Costs or the calculation of Unit Price, as the case may be. Notwithstanding the generality of the foregoing, the amount determined pursuant to subsection 101(c)(i) shall be determined in accordance with the provisions of the Koch Reita Lake Crown Agreement.

1) For the purposes of section 101(k)(ii), (iii) and (iv)

a) when payment other than in the form of money is received or receivable, such payment shall be included in Deemed Gross Revenue at the greater of its fair market value or the value agreed to by the Person providing and the Person receiving the payment,

b) when payment is received or receivable from a Lessee, the Operator, or an Affiliate of a Lessee or of the Operator, the payment shall be included in Deemed Gross Revenue at the greater of its fair market value or the amount of the payment received or receivable, and

c) when no consideration is received or receivable under a transaction referred to in section 101(k)(ii), (iii) or (iv), consideration shall be deemed to have been received and shall be included in Deemed Gross Revenue at the fair market value of the item or matter sold, leased, licensed or otherwise disposed of, of the service provided or of the right granted, as the case may be.

203. The headings of the Articles of this Agreement are inserted for convenience of reference only and do not affect the meaning or construction of this Agreement.

204. Terms defined in the Mines and Minerals Act and in the Regulation have the same meaning in this Agreement, unless otherwise required by the context in which they have been used.

205. The recitals to this Agreement are hereby incorporated into and made part of this Agreement. Any reference to “Agreement” shall be deemed to include the recitals to this Agreement.

206. Whenever the singular, masculine, or neuter is used in this Agreement, the same shall be construed as meaning plural or body corporate and vice versa, where the context so requires.

207. The provisions of this Agreement supplement the provisions of the Leases and shall be deemed to be incorporated into the Leases, but in the event of any conflict between the provisions of this Agreement and of the Leases, the provisions of this Agreement shall prevail to the extent of the conflict.

208 (1) Schedules “A”, “B” and “C” are attached to and form part of this Agreement.

(2) In the event of any conflict between the provisions of this Agreement and of Schedules “A”, “B” and “C”, the provisions of this Agreement shall prevail to the extent of the conflict.

209 (1) All measurements of Leased Substances and Blended Bitumen shall be in accordance with the legislation and regulations from time to time administered by the Minister.

(2) To the extent that the legislation and regulations referred to in subsection (1) do not provide for the manner of measuring Leased Substances or Blended Bitumen in any particular situation, measurement of those Leased Substances or Blended Bitumen shall be in a manner acceptable to the Minister.

210. In this Agreement, references to statutes are, unless otherwise indicated, references to statutes of the Province of Alberta.

211. For the purposes of determining the total royalty referred to in section 101(c)(iii) where Her Majesty’s Royalty Share of Leased Substances has been delivered to Her Majesty in kind, the royalty paid to Her Majesty in respect of which the royalty share has been delivered in kind, shall be deemed to be equal to the product of the volume of Her Majesty’s Royalty Share of Leased Substances that has been delivered and the applicable Unit Price at the time of delivery.

212. (a) This Agreement commences on the Effective Date, and subject to section 411, shall thereafter be in effect during the Term.

(b) Notwithstanding section 212(a), this Agreement may be terminated by the Minister if the Board’s approval of the scheme described in section 101(x)(i) and approval of each amendment referred to in section 101 (x) that has also been approved by the Minister under section 101(x)(ii)(A) ceases to be in effect. The Board’s approval and any amendment thereof as referred to above shall include a substitution or replacement of the approval of the scheme described in section 101(x)(i) or a substitution or replacement of any such amendment, provided that in the opinion of Minister, acting reasonably, there is no substantive amendment to the scheme described in section 101(x)(i) contained in such substitution or replacement.

ARTICLE 3 - OPENING BALANCE

301. As of the Execution Date, the Allowed Cumulative Project Cost of the Oil Sands Project is estimated to be seven million eight hundred thirty two thousand six hundred thirty ($7,832,630) dollars on the Effective Date, which amount is subject to audit pursuant to the provisions of this Agreement, and in no event be increased to an amount greater than eight million ($8,000,000) dollars.

302 (a) Subject to sections 302(c), 303, 304, and 305, the Minister may audit all amounts included in the calculation of the Allowed Cumulative Project Cost and Deemed Gross Revenue of the Oil Sands Project incurred, received or receivable from the Effective Date to December 31, 2007, inclusive, provided such audit is completed prior to December 31, 2012, however Her Majesty may request such a change at any time after such date in the event of fraud or misrepresentation relating to that cost or revenue item.

(b) Subject to sections 303, 304, and 305, the Minister may audit all amounts included in the calculation of the Allowed Cumulative Project Cost and Deemed Gross Revenue of the Oil Sands Project incurred, received or receivable on or after January 1, 2008, pursuant to the provisions of the Mines and Minerals Act.

c) As the final Date of Project Payout cannot be ascertained until the last of the audits in respect thereto have been completed, sections 302(a) and (b), 303, 304 and 305 shall apply, mutatis mutandis, to the audit of costs and revenues calculated under the Regulation in respect of the “Project” referred to in Section 602.

303 The Lessees shall cooperate in good faith to allow the Minister to conduct the audits described in section 302.

304 Notwithstanding any provisions of the Regulation, or the Mines and Minerals Act to the contrary, however subject to section 302, the Minister shall be entitled to audit the Allowed Cumulative Project Cost and Deemed Gross Revenue of the Oil Sands Project incurred, received or receivable from the Effective Date to December 31, 2007, even though the time allowed to the Minister to conduct such an audit may have expired, as well as the costs, revenues and royalties payable to the Crown in respect of that Project referred to in Article 6 paid or incurred as the case may be prior to December 31, 2007.

305. Subject to sections 302 and 304, the provisions of the Mines and Minerals Act will be used by the Minister in conducting his audit of the amounts referred to in section 302.

ARTICLE 4 - ROYALTY PROVISIONS

401 (1) Subject to sections 411, 412 and 603, the royalty reserved to Her Majesty under the Leases in respect of the Leased Substances recovered or obtained from the Oil Sands Project and payable to Her Majesty shall be as follows:

the royalty payable for each Month from the Effective Date to the end of the Month immediately preceding the Month in which the Date of Project Payout occurs shall be five (5%) percent of such Leased Substances where two thousand two hundred seventy-two (2,272 m3) cubic metres or less of such Leased Substances are delivered or deemed to be delivered at the Location Boundary during a Month; plus one (1%) percent of such Leased Substances in excess of the first two thousand two hundred seventy-two (2,272 m3) cubic metres, where more than two thousand two hundred seventy-two (2,272 m3) cubic metres are delivered or deemed to be delivered at the Location Boundary during a Month.

(2) If Blended Bitumen is delivered at the Location Boundary in a Month from the Effective Date to the end of the Month immediately preceding the Month in which the Date of Project Payout occurs, the volume of Crude Bitumen forming part of the Blended Bitumen, that shall be deemed to have been delivered at the Location Boundary in that Month, shall for the purposes of this section, be determined in accordance with the following formula:

Volume of Crude Bitumen = Volume of - Volume of Diluent

Blended Bitumen

as those terms are defined in section 101(hh)(iv).

(3) The Date of Project Payout may change from time to time as a result of audits conducted by the Minister under section 302, and will only be finalized following the Minister’s audit of Records for the Year in which the Date of Project Payout actually occurs. Notwithstanding the Term of this Agreement, royalty payable to Her Majesty may be adjusted for any period before or after the Term, to ensure that royalty payable to Her Majesty up to and including the last day of the Month immediately preceding the Month in which the final Date of Project Payout occurs is calculated pursuant to Article 4 hereof, and that royalty payable thereafter is calculated pursuant to the Regulation.

402 (1) Subject to sections 403 and 405, the Lessees shall deliver in kind to Her Majesty at the Location Boundary, in each Month in which section 401(1) applies, Her Majesty’s Royalty Share of Leased Substances.

(2) If, at any time, the Lessees are delivering Blended Bitumen at the Location Boundary and are required under subsection (1) to deliver Her Majesty’s Royalty Share of Leased Substances to Her Majesty, the Lessees shall, in satisfaction of their obligation to deliver Crude Bitumen to Her Majesty, deliver a volume of Blended Bitumen determined in accordance with the following formula:

|Volume of Blended | |Her Majesty’s |

|Bitumen required = |Unit Price of Crude Bitumen x |Royalty Share of |

|to be delivered |Unit Price of Blended Bitumen |Crude Bitumen at |

| | |time of delivery |

403. Until otherwise notified by Her Majesty pursuant to section 404, the Lessees shall dispose of Her Majesty’s Royalty Share of Leased Substances on behalf of Her Majesty.

404 (1) If, at any time, the Lessees are disposing of Her Majesty’s Royalty Share of Leased Substances pursuant to sections 403 or 405, Her Majesty may give the Lessees a written notice (herein called a “Notice to Deliver in Kind”), advising them of Her Majesty’s intention to take delivery in kind of Her Majesty’s Royalty Share of Leased Substances of one or more kinds, commencing on a date specified in the Notice to Deliver in Kind.

(2) The date specified in the Notice to Deliver in Kind shall be the first day of the Month and shall not be less than six months from the date on which the Notice to Deliver in Kind was given.

(3) Subject to subsection (4), if Her Majesty gives a Notice to Deliver in Kind, the Lessees shall deliver in kind to her, Her Majesty’s Royalty Share of Leased Substances referred to in the Notice to Deliver in Kind, commencing on the date specified therein.

(4) If any part of Her Majesty’s Royalty Share of Leased Substances referred to in the Notice to Deliver in Kind is being disposed of under section 403 or 405 by the Lessees pursuant to a contract and the Lessees cannot terminate deliveries under the contract of that part by the date specified in the Notice to Deliver in Kind, the Lessees shall, when it is possible to terminate deliveries of that part, commence delivering to Her Majesty in kind that part of Her Majesty’s Royalty Share of Leased Substances.

(5) If Her Majesty gives a Notice to Deliver in Kind, Her Majesty shall provide, at her own expense and risk, all tanks and other storage facilities required for her to take delivery in kind.

405 (1) If, at any time, Her Majesty is taking delivery of any part of Her Majesty’s Royalty Share of Leased Substances pursuant to section 404, Her Majesty may give the Lessees a written notice (herein called a “Disposition Notice”), advising them that Her Majesty requires that they dispose of that part on her behalf, commencing on a date specified in the Disposition Notice.

(2) The date specified in the Disposition Notice shall be the first day of a Month and shall not be less than six months from the date on which the Disposition Notice was given.

(3) If Her Majesty gives a Disposition Notice, the Lessees shall dispose of the part of Her Majesty’s Royalty Share of Leased Substances referred to in the Disposition Notice on behalf of Her Majesty.

406 (1) If any part of Her Majesty’s Royalty Share of Leased Substances is disposed of on behalf of Her Majesty pursuant to section 403 and 405, the Lessees shall, not later than thirty (30) days following the Month of disposition, remit to Her Majesty an amount equal to the product of the volume of Leased Substances disposed of on behalf of Her Majesty and the applicable Unit Price at the time of disposition.

(2) Any amount that is due under subsection (1) but which remains unpaid shall bear simple interest calculated daily on the outstanding principal balance from time to time from the date on which it is due.

(3) For the purpose of subsection (2), if interest is payable in respect of any day, the rate of interest that is payable is the yearly rate that is one per cent greater than the rate of interest that is established, from time to time, by the Province of Alberta Treasury Branches as its prime lending rate on loans payable in Canadian dollars and that is in effect on the first day of the Month in which that day occurs.

407 (1) Subject to subsection (2), each contract entered into by the Lessees for the disposition of Her Majesty’s Royalty Share of Leased Substances pursuant to section 403 or 405 shall be terminable on six months notice or less.

(2) The Lessees may enter into a contract terminable on more than six months notice if

(a) the Lessees give Her Majesty thirty (30) days prior notice in writing of its intention to enter into the contract, together with a copy of the proposed contract,

(b) Her Majesty does not elect within that thirty-day (30-day) period to take delivery of the part of Her Majesty’s Royalty Share of Leased Substances proposed to be disposed of under that contract,

(c) the Lessees enter into the proposed contract within sixty (60) days after the end of that thirty (30) day period, and

(d) the contract, in so far as it involves any part of Her Majesty’s Royalty Share of Leased Substances, is terminable by the Lessees at any time on six months notice or less after the fifth (5th) anniversary of the date on which commencement of deliveries under the contract occurs.

408 (1) In this section,

(a) “Due Date” means

(i) in the case of a payment by Her Majesty, thirty (30) days after receipt by Her Majesty of the statements required to be provided to Her Majesty under subsection (2) or (3), and

(ii) in the case of a payment by the Lessees, on hundred twenty (120) days after the end of the Period;

(b) “Officer” means the President, a Vice-President or the Chief Financial Officer of the Operator, or any other officer of the Operator agreed to in writing by the Minister.

(2) In each Period in which royalty is payable pursuant to section 401(1), the Lessees shall cause the Operator to provide to Her Majesty, not later than ninety (90) days after the end of the Period,

(a) a statement, in a form prescribed by the Minister, indicating when the Date of Project Payout is expected to occur, and

(b) a statement, in a form prescribed by the Minister, which is certified by any two Officers containing the following information:

i) the costs and royalty that have been included in the Allowed Cumulative Project Cost to the end of that Period,

(ii) the detailed calculation of Return Allowance to the end of the Period,

(iii) the revenues that have been included in the Cumulative Deemed Gross Revenue to the end of that Period,

(iv) if requested by the Minister the detailed calculations to the end of the Period, associated with determining when the Date of Project Payout is expected to occur,

(v) the total volume of Leased Substances and Blended Bitumen delivered at the Location Boundary during the Period, and the total volume of Leased Substances and Blended Bitumen delivered to Her Majesty during the Period or disposed of on her behalf, and

(vi) the proceeds of disposition of Her Majesty’s Royalty Share of Leased Substances during the Period.

(3) If the Lessees have, in any Period, delivered to Her Majesty or disposed of on her behalf a share of Leased Substances greater or less than that to which she is entitled, the over-delivery or over-disposition, or under-delivery or under-disposition, shall be adjusted by subtracting from or adding to the Leased Substances to be delivered to Her Majesty, or disposed of on her behalf, in the Month, or if necessary the Months, immediately following the Month in which it is determined that an adjustment is necessary.

(4) Notwithstanding subsection (3), if the Lessees have in any Period, delivered to, or disposed of, on behalf of Her Majesty, a share of Leased Substances greater or less than that to which she is entitled for that Period, after taking into account any adjustments under subsection (3), and it cannot reasonably be assumed that the over-delivery or over-disposition, or under-delivery or under-disposition, will be recovered by adjusting the quantity of Leased Substances to be delivered to Her Majesty, or disposed of on her behalf by the Lessees, in the Period immediately following the Period involved

a) Her Majesty shall pay to the Operator on behalf of the Lessees, on or before the Due Date, an amount in cash equal to the value of the over-delivery or over-disposition, or

(b) the Lessees shall pay to Her Majesty, on or before the Due Date, an amount in cash equal to the value of the under-delivery or under-disposition,

as the case may be.

(5) The amount of any payment under subsection (4) (a) or (b) shall be equal to the product of the over-delivery or over-disposition, or under-delivery or under-disposition, as the case may be, of Leased Substances and the applicable Unit Price in effect on the last day of the Period in which such over-delivery or over-disposition, or under-delivery or under-disposition, took place.

(6) Any amount that is due under subsection (4), but which remains unpaid, shall bear simple interest calculated daily on the outstanding principal balance from time to time from the Due Date until paid.

(7) For the purposes of subsection (6), if interest is payable in respect of any day, the rate of interest that is payable is the yearly rate that is one percent greater than the rate of interest that is established, from time to time, by the Province of Alberta Treasury Branches as its prime lending rate on loans payable in Canadian dollars and that is in effect on the first day of the Month in which that day occurs.

(8) If an under-delivery or under-disposition described in subsection (3) arises by virtue of Her Majesty’s Royalty Share of Leased Substances for a Period exceeding the quantity of Leased Substances delivered to the Location Boundary for that Period, the under-delivery or under-disposition shall be adjusted and delivered to Her Majesty, disposed of on her behalf, or paid in cash equal to the value of the under-delivery or under-disposition, pursuant to subsections (3), (4), and (5).

409 (1) A Unit Price for a particular Leased Substance or for Blended Bitumen determined by agreement between Her Majesty and the Operator on behalf of the Lessees, or by arbitration, is effective until Her Majesty, or the Operator on behalf of the Lessees, gives written notice to the other that it considers a different price should apply from the date specified in the notice. The date specified in the notice shall be the first day of a Month and shall not be more than three (3) Months prior to the first day of the Month in which the notice is given.

(2) If for any particular time there is no agreement between Her Majesty and the Operator on behalf of the Lessees, as to the Unit Price for a particular Leased Substance or for Blended Bitumen, the Unit Price shall, for that time, be fixed on a binding basis by arbitration. During any time when no Unit Price, as determined by agreement or arbitration, exists for a particular Leased Substance or for Blended Bitumen, the Unit Price for the particular Leased Substance or for Blended Bitumen shall be the price designated by Her Majesty from time to time, and any price so designated shall be an interim price to be adjusted when a Unit Price for that time is determined by agreement between the Operator and Her Majesty, or by arbitration.

410 The Lessees shall cause the Operator to furnish to the Minister by December 15 of each Year a report that contains the operator’s forecast of the information regarding the Oil Sands Project called for by the form of the report as prescribed by the Minister and relating to

(1) the Periods that occur during the Year and that may occur during the following four Years, and

(2) when the Date of Project Payout is expected to occur.

411 (1) Notwithstanding anything herein contained or implied to the contrary, in the event of

a) unfavourable technical or economic circumstances, or

b) changes in the policy or laws of the Government of Canada, which materially adversely affect the position in the Oil Sands Project of any of the parties (including Her Majesty) to this Agreement, or the viability of the Oil Sands Project,

the Lessees collectively upon unanimous agreement, or Her Majesty, shall have the right to terminate this Agreement by giving notice in writing to that effect to each of the other parties and the termination shall be effective from the date specified in the notice, which shall not be earlier than the date on which the notice is given.

412 (1) In the event of termination of this Agreement pursuant to section 411, Her Majesty may from time to time, subject to section 413, prescribe a royalty to be paid under the Leases pursuant to the provisions of the Mines and Minerals Act with respect to the Leased Substances recovered or obtained from the Oil Sands Project, and thereafter the royalty so prescribed from time to time shall be applicable under the Leases in respect of such Leased Substances.

(2) In the event of termination of this Agreement pursuant to section 411 and until a royalty is prescribed in accordance with subsection (1) and section 413, the royalty payable under the regulations under the Mines and Minerals Act shall apply to the Leased Substances recovered or obtained from the Oil Sands Project.

413 Any royalty prescribed pursuant to section 412(1) shall be prescribed only after consultation in good faith between Her Majesty and the Lessees and shall not apply to any Leased Substances which have been recovered prior to the termination of this Agreement and in respect of which royalty has been paid pursuant to this Agreement within sixty (60) days after the effective date of termination.

414 (1) In the event of a dispute from time to time between Her Majesty and the Lessees as to:

(a) whether a particular cost or part thereof, is or would have been an Allowed Operating Cost or an Allowed Capital Cost,

(b) the determination of Allowed Cumulative Project Cost or Unit Price,

(c) the calculation of Return Allowance or any component of Return Allowance, or

(d) the calculation of Deemed Gross Revenue or any component of Deemed Gross Revenue,

subsection (2) shall apply.

(2) The following provisions apply for the purpose of subsection (1):

a) either Her Majesty or the Operator on behalf of the Lessees may, by written notice to the other (the “Arbitration Notice”), require that the matter in dispute or disagreement be submitted to arbitration in accordance with these provisions;

b) within fifteen (15) days after receipt of the Arbitration Notice or such other time agreed to by Her Majesty or the Operator on behalf of the Lessees, Her Majesty and the Operator on behalf of the Lessees shall agree upon the appointment of a single arbitrator;

c) if Her Majesty and the Operator on behalf of the Lessees cannot agree upon an arbitrator within the time specified in clause (b), the arbitrator shall, upon the application of Her Majesty or the Operator, be appointed by a Justice of the Court of Queen’s Bench of Alberta;

d) the arbitrator appointed under clause (b) or (c), (the “Arbitrator”), shall proceed immediately to hear and determine the matter in dispute or disagreement. The award of the arbitrator shall be made within fifteen (15) days from the date of completion of argument, subject to any reasonable delay due to unforeseen circumstances. If notice is given by the Arbitrator as to the day on which the arbitration is to commence, the Arbitrator may proceed, hear and determine the matter notwithstanding the absence or non-appearance of either party;

e) the award of the Arbitrator shall be drawn up in writing and signed by the Arbitrator and shall be final and binding upon Her Majesty and the Lessees, and Her Majesty and the Lessees shall abide by the award and perform the terms and conditions thereof;

f) the fees and expenses of the Arbitrator shall be borne in the manner set forth in the award of the Arbitrator. Her Majesty and the Lessees shall pay their own fees and expenses of counsel and any consultants retained for the arbitration;

g) except where inconsistent with the aforesaid provisions, the Arbitration Act shall apply to any arbitration under this section.

ARTICLE 5 – RECORDS, SYSTEMS, ACCESS & INFORMATION TO ALBERTA

501 (1) The Lessees shall maintain as of the Effective Date and shall cause the Operator and the Operator’s Affiliates to maintain:

a) Records satisfactory to the Minister pertaining to the Oil Sands Project and any matter under this Agreement, in accordance with this Agreement and generally accepted accounting principles,

b) Records satisfactory to the Minister pertaining to the components of the Koch Costs, as referred in section 101(q), in accordance with this Agreement and generally accepted accounting principles, and

(c) such related accounting, financial and quantitative reporting systems as the Minister may reasonably require.

(2) Each Lessee shall cause its Affiliates to maintain

a) Records satisfactory to the Minister pertaining to any transaction or other matter concerning the Affiliate that relates to the Oil Sands Project and any matter under this Agreement, in accordance with this Agreement and generally accepted accounting principles, and

b) Records satisfactory to the Minister pertaining to any transaction or other matter concerning the affiliates of Koch that relates to the components of the Koch Costs, as referred to in section 101(q), in accordance with this Agreement and generally accepted accounting principles, and

(c) such related accounting, financial and quantitative reporting systems as the Minister may reasonably require.

(3) The Lessees shall maintain or cause to be maintained,

(a) the Records and reporting systems in respect of Allowed Cumulative Project Cost and Deemed Gross Revenue of the Oil Sands Project incurred, received or receivable from the Effective Date to December 31, 2007, until December 31, 2013, or for such longer period as the Minister may specify;

(b) the Records and reporting systems in respect of Allowed Cumulative Project Cost and Deemed Gross Revenue of the Oil Sands Project incurred, received or receivable on or after January 1, 2008, for six (6) years following the end of the Period to which the information contained in the Records and reporting systems related or for such longer period as the Minister may specify.

(4) Except where otherwise provided in this Agreement or as otherwise agreed to by the parties, Canadian generally accepted accounting principles shall be adhered to in the determination of Deemed Gross Revenue, including Allowed Operating Costs and Allowed Capital Costs. The accounting principles adopted shall be applied on a consistent basis from Period to Period unless otherwise mutually agreed between Her Majesty and the Lessees.

502. The Lessees shall provide, and cause the Operator and the Affiliates of the Lessee and of the Operator to provide, to representatives of Her Majesty, access during all normal business hours, to all Records and reporting systems required to be maintained or caused to be maintained under section 501 and any other Records and reporting systems relating to the Oil Sands Project or any matter under this Agreement maintained by any of such Persons.

503. Her Majesty shall at all times keep secret and confidential all Records and submissions obtained by her pursuant to this Agreement, which if disclosed would have an adverse effect on the Lessees or the Operator, but this confidentiality requirement shall not apply to any Records:

a) during such time as they are required for the enforcement by Her Majesty, by litigation or arbitration, of the provisions of this Agreement,

b) that are in the public domain at the time they are obtained,

c) that come into the public domain after they have been obtained,

d) that are obtained by Her Majesty from any Person who is not under an obligation to keep them confidential, or

(e) that are permitted or compelled by law to be disclosed provided that the parties shall cooperate in taking all reasonable steps to prevent or limit any disclosure of Records which would otherwise be subject to confidentiality.

504 Her Majesty shall have the right from time to time during normal business hours, to audit at Her Majesty’s sole cost, all Records and reporting systems referred to in section 502 as the Minister may consider necessary.

505 Royalty reserved and to be rendered to Her Majesty shall not be subject to set-off of any kind other than claims for adjustments in amounts as contemplated in Article 4.

506 The Deputy Minister of the Department, or such person or persons as he may designate, are Her Majesty’s representatives for the purposes of this Agreement and are authorized to act on behalf of Her Majesty or the Minister for the purpose of this Agreement. The Deputy Minister of the Department shall have the right from time to time to appoint additional representatives and to change those representatives by notice in writing to the Operator on behalf of the Lessees.

507 Sections 501(3)(a) and (b), 502, 503, 504, 505, and 506 shall apply, mutatis mutandis, to all records and reporting systems required to be kept under the Regulation in respect of costs and revenues of the “Project” referred to in Section 602 for the same timeframes set forth Sections 501(3)(a) and (b).

ARTICLE 6 - OIL SANDS ROYALTY REGULATION, 1997

601 This Agreement shall terminate and cease to have any force or effect after the last day of the Term for the purposes of royalty to be received by Her Majesty on Leased Substances recovered or obtained from the Oil Sands Project; subject to any outstanding liabilities and obligations and any accounting, adjustment or audit in respect of any matter under this Agreement which arose prior to the end of the Term and which is done in accordance with the terms of this Agreement, and provided that notwithstanding anything to the contrary contained herein, the terms and provisions of this Agreement shall be deemed to survive the Term of this Agreement to the extent necessary to fulfil such purpose.

602 For the purposes of sections 603 and 604 of this Agreement and for the purposes of the Regulation:

(a) the description of the Project for the purposes of section 16(2)(a)(i) of the Regulation will be determined by the Minister and shall be the same as the description of the Oil Sands Project found in Schedule “B”, updated to reflect the expansions to the Oil Sands Project during the Term, which expansions are permitted pursuant to section 1(x)(ii) of this Agreement;

(b) the effective date of the Project for the purposes of section 16(2)(a)(ii) of the Regulation will be the day immediately following the last day of the Term;

(c) on the effective date of the Project, a post-payout Period shall commence;

(d) the Project will not be a Qualifying Joint Venture;

(e) the initial operator of the Project will be Baytex;

(f) as of the effective date of the Project there shall be an allowed cost in the amount equal to the aggregate of

(i) the Allowed Cumulative Project Cost to the end of the Term, and

(ii) the Cumulative Return Allowance to the end of the Term

less the Cumulative Deemed Gross Revenue to the end of the Term.

603 (a) On the day immediately following the last day of the Term the Regulation shall apply to the Project described in subsection 602(a) of this Agreement as if:

(i) that Project described in subsection 602(a) was a Project approved by the Minister under section 16 of the Regulation, and

(ii) the matters described in subsections 602(a), (b), (c), (d) and (e) of this Agreement were contained in an approval by the Minister under section 16 of the Regulation.

(b) The “Term” of this Agreement is based on the Month in which the Date of Project Payout is initially determined to occur by Baytex acting in good faith notwithstanding that the actual Date of Project Payout may change as a result of audits performed by the Minister, and for the purposes of this Agreement, will not be subject to amendment.

604 Notwithstanding the generality of subsections 602(a), (b), (c), (d) and (e) and section 603 of this Agreement, the Minister shall, at his option, following receipt of the notice referred to in section 606, elect to either issue an “approval” for the Project under section 16 of the Regulation, or issue a description of the Project as at the effective date of the Project, as set forth in section 602(b), above. The documentation evidencing the application of the provisions of the Regulation to the Project, whether by way of an approval under section 16 thereof or by way of a project description, as the case may be, shall specify that royalty payable to Her Majesty up to and including the end of the Month preceding the Month in which the final Date of Project Payout is finally determined as a result of audits performed by the Minister, shall be calculated pursuant to Article 4 hereof, and that thereafter royalty payable to Her Majesty shall be calculated in accordance with the Regulation. Such documentation shall be issued within one hundred and eighty (180) days following the later of:

(a) the Execution Date; or

(b) the Date of Project Payout initially determined by Baytex acting in good faith.

605 Despite section 603 of this Agreement, and in addition to any report required under Article 5 of this Agreement, section 27 of the Regulation will apply to the Lessees during the Term; provided however that the first deadline for providing a report required by section 27 shall be December 15, 2002.

606 Within ninety days of the end of the Month in which the Date of Project Payout is initially determined to occur by Baytex acting in good faith, the Lessees shall notify the Minister of the Date of Project Payout, and shall request that the Minister issue, pursuant to section 604, either an approval under the Regulation or a project description in the form prescribed in the Regulation.

ARTICLE 7 - NOTICES

701 All notices, consents, requests and other documents authorized or required to be given pursuant to this Agreement shall be in writing and either delivered by hand, mailed by registered or certified first class air mail, postage prepaid, or sent by facsimile transmission as follows:

In the case of Her Majesty

Alberta Department of Energy Fax: (780) 422-0692

Oil Sands Strategy and Operations Division

6th Floor, Petroleum Plaza North

9945 – 108 Street

Edmonton, Alberta T5K 2G6

Attention: Chief, Oil Sands Strategy & Operations Division

In the case of Baytex

Baytex Energy Ltd. Fax: (587) 952-3024

2800, 520 – 3rd Avenue S.W.

Calgary, Alberta T2P 0R3

Attention: Vice President, Land

and any notice, consent, request or other document shall be deemed to have been given and received, if delivered, on the day on which it was delivered, and, if mailed, on the fourth business day following the day it was mailed, and, if sent by facsimile transmission, on the first business day following the day it was successfully transmitted. No party shall mail any notice, consent, request or other document hereunder during any period in which Canadian postal workers are on strike or if any such strike is imminent and may be anticipated to affect normal delivery thereof. A party may change its address for the receipt of notices, consents, requests and other documents at any time by giving notice of that change to the other parties.

Notwithstanding the requirements of this section as to the use of registered first class air mail, any routine reports required by this Agreement to be submitted by one party to the other party at specified times may be sent by first class mail and if the party which should have received such reports pursuant to this Agreement fails to receive such reports on time, it shall so notify the sending party, in which event another copy of those reports shall be sent promptly by registered first class air mail. Notwithstanding anything to the contrary contained herein, notices may not be given by Internet e-mail.

ARTICLE 8 - ASSIGNMENTS

801 (1) A Lessee that is not in default of any of its duties and obligations under this Agreement may, upon a sale, transfer or assignment of all or part of its right, title, estate or interest in the Oil Sands Project to any Person, assign a percentage of its Participating Interest, not exceeding the percentage of its right, title, or interest in the Oil Sands Project that has been assigned, together with its rights and obligations under this Agreement, to that Person.

(2) A Lessee who assigns all or part of its Participating Interest pursuant to subsection (1) remains liable for the performance of its duties and obligations in respect of that Participating Interest, under this Agreement and the Leases, until Her Majesty approves the assignment in writing, with or without conditions, which approval shall not be unreasonably withheld and in any event until an assumption in writing by the assignee, in a form satisfactory to Her Majesty, of the duties and obligations hereunder in respect of the assigned interest, has been obtained by Her Majesty.

2) Upon receiving the approval of Her Majesty under subsection (2) and providing Her Majesty with the assumption referred to in that subsection, the Lessee shall be released of its duties and obligations under this Agreement and the Leases with respect to the portion of its Participating Interest that has been assigned, but shall remain liable for the performance of any unfulfilled duties and obligations in respect of the portion of its Participating Interest that has been assigned, which have arisen in respect of the Oil Sands Project prior to the assignment.

802 (1) Notwithstanding section 801, but subject to subsection (2), if a Lessee assigns an interest in the Oil Sands Project to an Affiliate, each of the assignor and the assignee shall be jointly and severally liable for the obligations relating to the assigned interest.

(2) Her Majesty may, in relation to a particular assignment, agree in writing to release an assignor from its liability under subsection (1).

ARTICLE 9 - GENERAL

901 (1) The Lessees shall jointly and severally indemnify and save harmless Her Majesty from any and all actions, suits, proceedings, claims, costs, and demands which may be bought against or suffered by Her Majesty, or which Her Majesty may sustain, pay or incur, by reason of

(a) any matter or thing arising out of or in any way attributable to the Oil Sands Project, or

(b) the operations conducted by the Lessees or their servants, agents, employees or contractors with respect to the Oil Sands Project,

but nothing in this section shall require any Lessee to indemnify Her Majesty in respect of any and all actions as enumerated as aforesaid that are occasioned by, or result from, any act or omission of Her Majesty, or any agent, employee, servant or contractor of Her Majesty, other than a Lessee.

(2) The foregoing indemnification shall survive termination of this Agreement.

902 The Lessees shall obtain and maintain all regulatory approvals required for the Oil Sands Project.

903 Each of the parties shall from time to time and at all times do all further acts and execute and deliver all further documents as are reasonably required to fully perform this Agreement.

904 Subject to section 207, the terms of this Agreement and the Schedules express and constitute the entire agreement among the parties and no implied covenant or liability of any kind on any party’s part is created or shall arise.

905 This Agreement shall be construed and interpreted in accordance with the laws of the Province of Alberta.

906 This Agreement shall ensure to the benefit of and be binding upon each of the parties and their respective successors and permitted assigns.

907 This Agreement is subject to the satisfaction of the condition precedent, which shall be a condition precedent solely for the benefit of Her Majesty, that the Lieutenant Governor in Council, pursuant to section 9 of the Mines and Minerals Act, authorizes the Minister to execute this Agreement.

910 The following provisions shall survive the Term or earlier expiry of this Agreement:

(a) Article 1

(b) Article 2

(c) Section 302(c)

(d) Section 503

(e) Section 507

(f) Article 6

(g) Article 7

(h) Article 8

(i) Section 901

(j) Section 910

(k) Article 10

ARTICLE 10 - ASSURANCES BY HER MAJESTY

1001 Her Majesty confirms neither she nor Her agencies will apply market related pro-rationing policies to the Oil Sands Project.

ARTICLE 11 - GOODS AND SERVICE TAX

1101 The amount of any taxes paid, payable or collected under Part IX of the Excise Tax Act (Canada) in respect of the costs and revenues of the Oil Sands Project shall for the purposes of the Agreement be excluded from the determination of Allowed Cumulative Project Cost, Allowed Operating Costs, Allowed Capital Costs, Deemed Gross Revenue, and Unit Price.

IN WITNESS WHEREOF the parties hereto have duly executed this Agreement.

| |HER MAJESTY THE QUEEN IN RIGHT OF ALBERTA, as represented by the Minister of |

| |Energy |

| | |

| | |

| | |

| |____________________________________________ |

| |Minister of Energy |

| | |

| |Date: _______________________________________ |

| | |

| | |

| |BAYTEX ENERGY LTD. |

| | |

| |____________________________________________ |

| | |

| | |

| |Date:_______________________________________ |

| | |

| |Title or position held:__________________________ |

| | |

| | |

| |____________________________________________ |

| | |

| | |

| |Date: _______________________________________ |

| | |

| |Title or position held:__________________________ |

| | |

THIS IS SCHEDULE “A”

to the Alberta Reita Lake III Crown Agreement

dated the _____ day of _____________, 2011, between

Her Majesty the Queen in right of Alberta and

Baytex Energy Ltd.

Koch Reita Lake Leases/Lands

i) Portions of Crown oil sands agreement 7182110242, granting the rights to oil sands from Top Grand Rapids to Base Lower Grand Rapids, underlying the following lands:

Sections 17, 18, and south half and northwest quarter of Section 21 in Township 61, Range 3 West of the 4th Meridian;

North half and southeast quarter of Section 12 in Township 61, Range 4 West of the 4th Meridian;

ii) Portions of Crown oil sands agreement 7183070252, granting the rights to oil sands in Upper Grand Rapids, underlying the following lands:

Section 19, north half and southwest quarter of Section 20, Sections 21, 22, and 25, 28 through 30, south half of Section 31, and Sections 32, 33 and 36 in Township 61, Range 5 West of the 4th Meridian;

iii) Crown oil sands agreement 7595040069, granting the rights to oil sands from Top Lower Colony to Top McMurray, underlying the following lands:

South half of Section 3 and south half of Section 4 in Township 60, Range 3 West of the 4th Meridian;

Sections 3 and 4 in Township 60, Range 4 West of the 4th Meridian

iv) Crown oil sands agreement 759504D069, granting the rights to oil sands from Top Lower Colony to Top McMurray, underlying the following lands:

South half and northeast quarter of Section 19, Section 20, Sections 29 through 32, and south half and northwest quarter of Section 33 in Township 61, Range 3 West of the 4th Meridian;

Sections 24 and 25, and the northwest quarter of Section 36 in Township 61, Range 4 West of the 4th Meridian;

Sections 4, 5, south half and northeast quarter of Section 6, Section 7, north half and southwest quarter of Section 8, 14, 18, southwest quarter Section 23, and west half of Section 26 in Township 62, Range 3 West of the 4th Meridian;

South half of Section 1, south half of Section 2, Section 3, north half and southwest quarter of Section 4, Section 9, south half of Section 10, Section 11, and north half and southeast quarter of Section 12 in Township 62, Range 4 West of the 4th Meridian;

v) Crown oil sands agreement 7597110997, granting the rights to oil sands in the Mannville, underlying the following lands:

North half of Section 19, and Section 30 in Township 62, Range 2 West of the 4th Meridian:

Sections 13 and 24 in Township 62, Range 3 West of the 4th Meridian;

vi) Portions of Crown oil sands agreement 7290120056, granting the rights to oil sands in Sub-Colony Cretaceous, underlying the following lands:

Sections 9, 15 through 17, Sections 19 through 21, south half and northwest quarter of Section 22, Section 27, legal subdivisions 9, 10, and 16, south half and northwest quarter of Section 28, south half and northeast quarter of Section 29, and Section 30 in Township 62, Range 3 West of the 4th Meridian;

vii) Crown oil sands agreement 7492020377, granting the rights to oil sands in Mannville, underlying the following lands:

Section 28 in Township 61, Range 3 West of the 4th Meridian;

viii) Portions of Crown oil sands agreement 7492020381, granting the rights to oil sands in Manville, underlying the following lands;

Section 6 in Township 62, Range 4 West of the 4th Meridian;

ix) Portions of Crown oil sands agreement 749202A381, granting the rights to oil sands in Mannville, underlying the following lands:

North half and southwest quarter of Section 31 in Township 61, Range 4 West of the 4th Meridian;

x) Portions of Crown oil sands agreement 7182070239, granting the rights to oil sands in Grand Rapids, underlying the following lands:

Sections 27 and 28, Legal 9, 10, 11, 12 and south half of Section 29 and Sections 33 through 35 in Township 60, Range 3 West of the 4th Meridian;

East half of Section 4 in Township 61, Range 3 West of the 4th Meridian;

xi) Crown oil sands agreement 7290120057, granting the rights to oil sands in Sub-Colony Cretaceous, underlying the following lands:

Sections 5 through 8, Sections 17 and 18 in Township 60, Range 3 West of the 4th Meridian;

Sections 1, 2, and 12 in Township 60, Range 4 West of the 4th Meridian;

xii) Crown oil sands agreement 7492020363, granting the rights to oil sands in Mannville, underlying the following lands:

Sections 31 and 32 in Township 59, Range 2 West of the 4th Meridian;

Sections 35 and 36 in Township 59, Range 3 West of the 4th Meridian;

Section 6 in Township 60, Range 2 West of the 4th Meridian;

Sections 1 and 2 in Township 60, Range 3 West of the 4th Meridian;

xiii) Crown oil sands agreement 7492020372, granting the rights to oil sands in Mannville, underlying the following lands:

Section 9 in Township 60, Range 3 West of the 4th Meridian;

xiv) Crown oil sands agreement 7492020378, granting the rights to oil sands in Mannville, underlying the following lands:

North half of Section 13 in Township 61, Range 4 West of the 4th Meridian;

xv) Crown oil sands agreement 7492100399, granting the rights to oil sands in Mannville, underlying the following lands:

Sections 5, 7, 8, 18, 19, north half and southwest quarter of Section 30, and Section 31 in Township 62, Range 4 West of the 4th Meridian;

xvi) Crown oil sands agreement 7288080034, granting the rights to oil sands in Mannville, underlying the following lands:

Sections 33 through 36 in Township 58, Range 2 West of the 4th Meridian;

xvii) Crown oil sands agreement 7494110466, granting the rights to oil sands in Manville (excepting oil sands in the Sub-Colony Cretaceous), underlying the following lands:

Sections 5 through 8 in Township 60, Range 3 West of the 4th Meridian;

Sections 1, 2, and 12 in Township 60, Range 4 West of the 4th Meridian

xviii) Crown oil sands agreement 7492020373, granting the rights to oil sands in Mannville, underlying the following lands:

East half of Section 23 in Township 60, Range 3 West of the 4th Meridian;

xix) Crown oil sands agreement 7492020371, granting the rights to oil sands in Mannville, underlying the following lands:

Section 26 in Township 60, Range 3 West of the 4th Meridian;

xx) Crown oil sands agreement 7492100398, granting the rights to oil sands in Mannville, underlying the following lands:

Section 12 in Township 60, Range 2 West of the 4th Meridian;

xxi) Crown oil sands agreement 7493040417, granting the rights to oil sands in Mannville, underlying the following lands:

Section 34 in Township 59, Range 3 West of the 4th Meridian;

THIS IS SCHEDULE “B”

to the Alberta Reita Lake III Crown Agreement

dated the _____ day of _____________, 2011, between

Her Majesty the Queen in right of Alberta and

Baytex Energy Ltd.

OIL SANDS PROJECT

PART 1 - Inclusions

1. The Reita Lake III Project occupies the following development areas and is referred to as the “Project Leases”:

i) Portions of Crown oil sands agreement 7182110242, granting the rights to oil sands from Top Grand Rapids to Base Lower Grand Rapids, underlying the following lands:

Sections 17, 18, and south half and northwest quarter of Section 21 in Township 61, Range 3 West of the 4th Meridian;

North half and southeast quarter of Section 12 in Township 61, Range 4 West of the 4th Meridian;

ii) Portions of Crown oil sands agreement 7183070252, granting the rights to oil sands in Upper Grand Rapids, underlying the following lands:

Section 19, north half and southwest quarter of Section 20, Sections 21, 22, and 25, 28 through 30, south half of Section 31, and Sections 32, 33 and 36 in Township 61, Range 5 West of the 4th Meridian;

iii) Crown oil sands agreement 759504D069, granting the rights to oil sands from Top Lower Colony to Top McMurray, underlying the following lands:

South half and northeast quarter of Section 19, Section 20, Sections 29 through 32, and south half and northwest quarter of Section 33 in Township 61, Range 3 West of the 4th Meridian;

Sections 24 and 25, and the northwest quarter of Section 36 in Township 61, Range 4 West of the 4th Meridian;

Sections 4, 5, south half and northeast quarter of Section 6, Section 7, north half and southwest quarter of Section 8, 14, 18, southwest quarter Section 23, and west half of Section 26 in Township 62, Range 3 West of the 4th Meridian;

South half of Section 1, south half of Section 2, Section 3, north half and southwest quarter of Section 4, Section 9, south half of Section 10, Section 11, and north half and southeast quarter of Section 12 in Township 62, Range 4 West of the 4th Meridian;

iv) Crown oil sands agreement 7597110997, granting the rights to oil sands in the Mannville, underlying the following lands:

North half of Section 19, and Section 30 in Township 62, Range 2 West of the 4th Meridian:

Sections 13 and 24 in Township 62, Range 3 West of the 4th Meridian;

v) Portions of Crown oil sands agreement 7290120056, granting the rights to oil sands in Sub-Colony Cretaceous, underlying the following lands:

Sections 9, 15 through 17, Sections 19 through 21, south half and northwest quarter of Section 22, Section 27, legal subdivisions 9, 10, and 16, south half and northwest quarter of Section 28, south half and northeast quarter of Section 29, and Section 30 in Township 62, Range 3 West of the 4th Meridian;

vi) Crown oil sands agreement 7492020377, granting the rights to oil sands in Mannville, underlying the following lands:

Section 28 in Township 61, Range 3 West of the 4th Meridian;

vii) Portions of Crown oil sands agreement 7492020381, granting the rights to oil sands in Manville, underlying the following lands;

Section 6 in Township 62, Range 4 West of the 4th Meridian;

viii) Portions of Crown oil sands agreement 749202A381, granting the rights to oil sands in Mannville, underlying the following lands:

North half and southwest quarter of Section 31 in Township 61, Range 4 West of the 4th Meridian;

ix) Crown oil sands agreement 7492020378, granting the rights to oil sands in Mannville, underlying the following lands:

North half of Section 13 in Township 61, Range 4 West of the 4th Meridian;

x) Crown oil sands agreement 7492100399, granting the rights to oil sands in Mannville, underlying the following lands:

Sections 5, 7, 8, 18, 19, north half and southwest quarter of Section 30, and Section 31 in Township 62, Range 4 West of the 4th Meridian;

2. The Reita Lake III Project occupies the following surface areas and is referred to as the “Project Lands”:

i) Sections 17, 18, south half and northeast quarter of Section 19, Section 20, south half and northwest quarter of Section 21, Sections 28 through 32, and south half and northwest quarter of Section 33 in Township 61, Range 3 West of the 4th Meridian;

ii) North half and southeast quarter of Section 12, north half of Section 13, Sections 24 and 25, north half and southwest quarter of Section 31, and northwest quarter of Section 36 in Township 61, Range 4 West of the 4th Meridian;

iii) Section 19, north half and southwest quarter of Section 20, Sections 21, 22, and 25, Sections 28 through 30, south half of Section 31, and Sections 32, 33 and 36 in Township 61, Range 5 West of the 4th Meridian;

iv) North half of Section 19 and Section 30 in Township 62, Range 2 West of the 4th Meridian;

v) Sections 4 and 5, south half and northeast quarter of Section 6, Section 7, north half and southwest quarter of Section 8, Section 9, Sections 13 through 21, south half and northwest quarter of Section 22, southwest quarter of Section 23, Section 24, west half of Section 26, Section 27, legal subdivisions 9, 10 and 16, south half and northwest quarter and of Section 28, south half and northeast quarter of Section 29, and Section 30 in Township 62, Range 3 West of the 4th Meridian;

vi) South half of Section 1, south half of Section 2, Section 3, north half and southwest quarter of Section 4, Sections 5 through 9, south half of Section 10, Section 11, north half and southeast quarter of Section 12, Sections 18 and 19, north half and southwest quarter of Section 30, and Section 31 in Township 62, Range 4 West of the 4th Meridian;

3. The Reita Lake III Project is limited to the following activities, identified in the Operator’s applications to the Alberta Energy and Utilities Board (“AEUB”) under the Oil Sands Conservation Act, and referred to here as the “Project Operations”:

i) recovering project substances from Project Leases through primary recovery methods, using vertical or horizontal or directional production wells but without the assistance of thermal energy, waterflooding or gaseous, liquid or chemical solvents;

ii) obtaining cleaned crude bitumen from the produced crude bitumen at oil treatment and storage facilities which may be located both on and off Project Lands and, as required, blending the cleaned crude bitumen with a diluent;

iii) disposing of produced water and sand generated from the processing of project substances at facilities which may be located both on and off Project Lands;

iv) conserving gas from Project crude bitumen production wells in accordance with AEUB guidelines;

v) providing the cleaned crude bitumen to the royalty calculation point.

4. The Reita Lake III Project will operate under the following Approvals, granted by the AEUB pursuant to the Oil Sands Conservation Act, for the primary recovery of crude bitumen from the Grand Rapids Deposits in the Cold Lake Sector of the Cold Lake Oil Sands Area:

AEUB Approval No. 7306, dated September 27, 1993;

Amendment A to AEUB Approval No. 7306, dated August 31, 1994;

Amendment B to AEUB Approval No. 7306, dated August 1, 1995;

Amendment C to AEUB Approval No. 7306, dated July 24, 1996;

Amendment D to AEUB Approval No. 7306, dated March 19, 1997;

Amendment E to AEUB Approval No. 7306, dated October 20, 1997;

5. The Oil Sands Project includes the crude bitumen production wells and their associated well pads, located on Project Lands and Project Leases. The Oil Sands Project also includes any subsequent crude bitumen production wells, and their associated well pads, if any, which:

i) were drilled, completed, or recompleted after October 1, 2002;

ii) reside entirely on and under the Project Lands;

iii) produce entirely from Project Leases; and

iv) are undertaken solely in pursuance of Project Operations.

6. The Reita Lake III Project includes the delineation wells, observation wells and effluent disposal wells and associated well pads, located on Project Lands and Project Leases. The Oil Sands Project also includes any subsequent wells, other than crude bitumen wells, and their associated well pads, if any, which:

i) were drilled or recompleted after October 1, 2002;

ii) reside entirely on and under the Project Lands; and

iii) are undertaken solely in pursuance of Project Operations

7. The Reita Lake III Project includes the following facilities, identified in the Operator’s applications to the AEUB under the Oil Sands Conservation Act, and referred to here as the “Project Facilities”:

(i) For greater clarity and certainty, the following facilities are specifically listed as

being part of the Project.

Facility ID Facility Name

|ABBT0044156 |KOCH 2 BEAVERDAM 7-25 |

|ABBT0045077 |KOCH ET AL BEAVERDAM 10C-9-62-3 |

|ABBT0045594 |KOCH BEAVERDAM 14C-5 |

|ABBT0045596 |KOCH BEAVERDAM 5C-31 |

|ABBT0045731 |KOCH BEAVDM 10D-18-62-3 |

|ABBT0045884 |KOCH BEAVDM 7-5 |

|ABBT0045900 |KOCH CHARLOTTE LK 14-31 |

|ABBT0046625 |KOCH CHARLOTTE LAKE 12-25 |

|ABBT0048260 |KOCH CHARLOTTE LAKE 10-25 |

|ABBT0057727 |KOCH BEAVER CROSSING 14-26 |

|ABBT0061203 |ARDMORE 3-18-062-04 W4 |

|ABBT0061879 |KOCH ARDMORE 10-12 |

|ABBT0061880 |KOCH ARDMORE 04-30 |

|ABBT0061881 |KOCH ARDMORE 12-31 |

|ABBT0061882 |KOCH ARDMORE 16-25 |

|ABBT0062869 |KOCH 5A FORT KENT 5-11 |

|ABBT0062870 |KOCH 7D FORT KENT 7-11 |

|ABBT0062871 |KOCH 13C KENT 13-30 |

|ABBT0062885 |KOCH 12C BEAVDM 12-19-62-2 |

|ABBT0062917 |KOCH IC FORT KENT 1-12 |

|ABBT0062918 |KOCH 16C FORT KENT 16-03 |

|ABBT0062928 |KOCH 7C BEAVER DAM 7-31 |

|ABBT0063199 |KOCH 3C BEAVERDAM 3-31 |

|ABBT0063200 |KOCH 4C BEAVERDAM 4-31 |

|ABBT0063201 |KOCH 6C BEAVERDAM 6-31 |

|ABBT0063202 |KOCH 9C BEAVERDAM 9-31 |

|ABBT0063317 |KOCH 16 BEAVERDAM 16-11 |

|ABBT0063378 |KOCH 15C BEAVERDAME 15-31 |

|ABBT0063587 |KOCH 14C BEAVERDAM 14-30 |

|ABBT0063588 |KOCH 8C BEAVERDAM 8-31 |

|ABBT0063589 |KOCH 2C BEAVERDAM 2-31 |

|ABBT0063590 |KOCH 12D FT KENT 12-11 |

|ABBT0063591 |KOCH 9D BEAVERDAM 9-25 |

|ABBT0063592 |KOCH 4C BEAVERDAM 4-2 |

|ABBT0063593 |KOCH 5C FORT KENT 5-2 |

|ABBT0063601 |KOCH 14A BEAVERDAM 14-12 |

|ABBT0063605 |KOCH 10C BEAVERDAM 10-31 |

|ABBT0063707 |KOCH 11C BEAVERDAM 11-31 |

|ABBT0063708 |KOCH 5C BEAVERDAM 5-6 |

|ABBT0063709 |KOCH 4D BEAVERDAM 4-6 |

|ABBT0063710 |KOCH 3C BEAVERDAM 3-6 |

|ABBT0063848 |KOCH 1C BEAVERDAM 1-10 |

|ABBT0063849 |KOCH 13C BEAVERDAM 13-31 |

|ABBT0063882 |KOCH 1D FT KENT 1-11-062-04 W4 |

|ABBT0063883 |KOCH 13C FORT KENT 13-12 |

|ABBT0065469 |KOCH 8C BEAVERDAM 8-12 |

|ABBT0065470 |KOCH 8D BEAVERDAM 8-10 |

|ABBT0065680 |KOCH 2C FORT KENT 02-06 |

|ABBT0066837 |KOCH ARDMORE 16D-06 |

|ABBT0067192 |KOCH 12C BEAVERDAM 12-30 |

|ABBT0067193 |KOCH 10B2 BEAVEREDAM 10-12 |

|ABBT0067194 |KOCH 10A BEAVERDAM 10-05 |

|ABBT0067195 |KOCH 11C BEAVERDAM 11-06 |

|ABBT0067196 |KOCH 14C2 BEAVERDAM 14-31 |

|ABBT0067973 |KOCH 6 BEAVERDAM 6-6-62-3 |

|ABBT0067974 |KOCH 2C BEAVERDAM 2-5-62-3 |

|ABBT0067975 |KOCH 1C2 BEAVERDAM 1-12-62-4 |

|ABBT0067976 |KOCH 16C BEAVERDAM 16-3-62-4 |

|ABBT0067977 |KOCH 11C BEAVERDAM 11-22-62-3 |

|ABBT0068114 |KOCH 13C BEAVERDAM 13-32 |

|ABBT0068138 |KOCH 11A BEAVERDAM 11-7 |

|ABIF0009517 |KOCH PETROLEUM CANADA L.P. |

(ii) the field facilities, including well pads and pad facilities, all production treatment equipment, production storage tanks, water disposal facilities, produced gas systems and casing gas gathering systems and production gathering systems, all of which reside on Project Lands and are undertaken solely in pursuance of Project Operations; and

(iii) all other project infrastructure, including all access roads, buildings, bridges, electricity transmission lines and data transmission lines and fuel gas gathering systems, all of which reside on Project Lands and undertaken solely in pursuance of Project Operations;

and, subject to the limitations in Section 3 of this Schedule A, any facilities such as those described above that are constructed or installed on the Project Lands after October 1, 2002, and which are undertaken solely in pursuance of Project Operations.

PART 2 – Exclusions

1. Any wells, facilities or infrastructure residing off the Project Lands, unless specifically included in Part 1 as being part of the Project.

Exhibit A of Schedule A

to Alberta Reita Lake III Crown Agreement

Project Leases and Project Lands

This exhibit includes a map displaying the location of the Project Leases and Project Lands. This map is included for the purpose of illustration only. In the event of a discrepancy between this map and the written legal descriptions of the Project Leases or Project Lands or Project Wells in Schedule A, the written legal descriptions in Schedule A will take precedence.

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MAP ON NEXT PAGE

Alberta Reita Lake III Crown Agreement

[pic]

|  |Project Leases and Project Lands |

THIS IS SCHEDULE “C”

to the Alberta Reita Lake III Crown Agreement

dated the _____ day of _____________, 2011, between

Her Majesty the Queen in right of Alberta and

Baytex Energy Ltd.

ALLOWED COSTS

1 (1) A cost will be allowed as an Allowed Capital Cost or an Allowed Operating Cost only to the extent that:

a) it falls within a category of Allowed Capital Cost or Allowed Operating Cost identified in section 3 or 4 of this Schedule, or as agreed upon by the Minister and the Lessees,

b) it is directly attributable to the Oil Sands Project, or in respect of a cost included in section 3(1)(f) of this Schedule,

c) it is reasonable in relation to the circumstances under which it is incurred,

d) it is incurred by or on behalf of the Lessees in respect of the Oil Sands Project or in respect of a cost included in section 3(1)(f) of this Schedule, on or after the Effective Date, and

e) it is incurred in connection with the production or delivery to the Location Boundary of Crude Bitumen, other Leased Substances, or Blended Bitumen, recovered or obtained from the Oil Sands Project, or to provide related field, office, administrative or other services.

(2) A cost will not be allowed as an Allowed Capital Cost or an Allowed Operating Cost if,

a) except to the extent that section 3 or 4 of this Schedule otherwise specifically provides, it is in respect of overhead or an administrative expense, including internal audit, “in-house” legal and other like expenses, of the Operator, a Lessee or an Affiliate of either,

b) it is on account of, in lieu of, or in satisfaction of, interest or any other borrowing or financing cost or any penalty or charge imposed for late or deficient payment,

(c) it is in respect of an overriding royalty interest, a carried interest, a net profit interest, or an interest similar to an overriding royalty interest, a carried interest or a net profit interest,

(d) it is in respect of depletion or depreciation,

(e) it is a cost resulting from any act or omission which is a breach of any applicable laws, rules or regulations of a government or government agency, or

(f) it is a cost or charge deducted from the fair market value of a Leased Substance or Blended Bitumen in determining the Unit Price of a Leased Substance or Blended Bitumen.

(3) A cost in relation to rent or other lease payments which in respect of an item exceeds one hundred thousand ($100,000) dollars in a Period, will be allowed as an Allowed Operating Cost until such time as the aggregate allowable costs, resulting from the rental or lease of that item, equal the costs that would have been allowable in respect of that item if the item had been purchased and treated as an Allowed Capital Cost.

2 (1) Allowed Capital Costs and Allowed Operating Costs shall be reduced by:

(a) any credits or discounts actually received whether by the Operator, a Lessee, or an Affiliate of either, and

c) any economic assistance, including grants, subsidies or credits, given, whether to the Operator, a Lessee, or an Affiliate of either, by the Province of Alberta, any agency of the Province of Alberta, the Government of Alberta or any agency of the Government of Canada, which are attributable to the costs involved,

but no reduction shall be made in respect of any economic assistance in the form of a reduction of income tax payable.

(2) Subject to section 3(2) of this Schedule, if a cost can be considered to be both an Allowed Capital Cost and an Allowed Operating Cost, it shall be deemed to be an Allowed Capital Cost and not an Allowed Operating Cost.

(3) An amount included in Allowed Operating Costs shall not be included in Allowed Capital Costs and an amount included in Allowed Capital Costs shall not be included in Allowed Operating Costs.

3 (1) Subject to sections 1 and 2 of this Schedule, the following are the categories of Allowed Capital Costs:

(a) costs to drill and complete wells or to acquire or construct property, plant and equipment that are:

(i) costs of equipment, materials and supplies before installation or assembly;

iii) cost of drilling, completing, re-completing, testing, capping, plugging and abandoning, deepening, plugging back or re-drilling of a well, or converting a well to a source, input, observation or producing well or costs of a similar nature;

ii) costs of purchasing land and buildings; or

(iv) costs of constructing, installing, assembling or erecting plant, equipment and support facilities, including costs of direct labour, benefits and construction overhead costs. Construction overhead costs are costs which are contractually required to be paid to a Person other than the Operator, a Lessee, or an Affiliate of either, and directly related to constructing, installing, assembling or erecting plant and equipment and which cannot be identified with specific plant and equipment,

c) repair and maintenance costs of an asset if those costs equal or exceed fifty (50%) percent of the cost of an equivalent new asset,

d) costs of salaries, wages, benefits, training and travel of the Operator’s, Lessees’ and their respective Affiliates’ employees whose work is directly attributable and charged to capital programs of the Oil Sands Project,

e) costs of municipal and regional improvements which are required by a government or government agency and which are directly attributable and charged to capital programs of the Oil Sands Project,

f) costs of licensed or purchased technology (including patents and other proprietary rights), if

(i) the costs are payable to a Person other than a Lessee or an Affiliate of a Lessee or of the Operator, or

(ii) the costs are payable to a Lessee or an Affiliate of a Lessee or of the Operator, and Her Majesty has approved of the costs,

(f) costs of planning the expansions described in sections 101(y)(ii) (A) and (B) of the main body of this Agreement, including engineering, scheduling, and contract preparation and review, and

(g) an allowance of one (1%) percent of the costs referred to in clauses (a) to (f).

(2) Where the total capital cost of an asset is less than one thousand ($1,000) dollars, the cost of the asset shall be considered an Allowed Operating Cost rather than an Allowed Capital Cost and only in the Period in which the cost is incurred.

(3) For the purpose of this section an asset is a unit of plant or equipment that performs or is capable of performing a complete operating function.

4 (1) Subject to sections 1 and 2 of this Schedule, the following are the categories of Allowed Operating Costs:

(a) costs of salaries, wages, benefits, training, travel and relocation of the Operator’s, Lessees’ and Affiliates’ employees whose work is directly attributable to the Oil Sands Project, to the extent of the portion of the labour of those employees that is attributable and charged to the Oil Sands Project, but which are not included as Allowed Capital Costs,

(b) costs of employee safety equipment, safety training, preparation and implementation of Oil Sands Project safety manuals and emergency procedures,

(c) costs of contract labour, materials, supplies, chemicals, catalysts, and services, including professional services, but not including costs referred to in section 3 of this Schedule,

(d) cost of rent or other lease payments in respect of equipment, plant and buildings,

(e) costs of telecommunications, power, water, sewage disposal, and utility construction contribution payments,

(f) capital costs of less than one thousand ($1,000) dollars for each asset, that would be an Allowed Capital Cost if it were one thousand ($1,000) dollars or more,

(g) cost of insurance,

h) cost of municipal land taxes,

i) cost of Diluent

j) cost of fuel, other than fuel described in clause (k),

k) royalty paid by the Lessees to Her Majesty in respect of fuel that is

(i) a Leased Substance recovered or obtained from the Oil Sands Project, or

(ii) not a Leased Substance but that is a substance recovered or obtained from a well that is part of the Oil Sands Project,

(l) costs of municipal and regional improvements which are required by a government or government authority and which are directly attributable and charged to the Oil Sands Project, but which are not included as Allowed Capital Costs,

(m) cost of surface lease rentals and costs of rentals under mineral agreements granting the right to recover Leased Substances,

(n) repairs and maintenance costs of an asset including costs to replace material of the same kind or of a different kind without a change in operations, if those costs are less than fifty (50%) percent of the cost of an equivalent new asset, and

(o) an allowance of ten (10%) percent of the costs referred to in this subsection other than those referred to in clause (i) and (k).

(2) For the purpose of this section, an asset is a unit of plant or equipment that performs or is capable of performing a complete operating function.

5 The Parties acknowledge that the allowances referred to in sections 3(1)(g) and 4(1)(o) of this Schedule are in lieu of all costs not specified in sections 3(1) and 4(1) of this Schedule that would, other than for section 1(1)(a) of this Schedule, have been allowed under section 1(1) of this Schedule and not disallowed under section 1(2) of this Schedule.

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