Frontier Lands Petroleum Royalty Regulations (SOR/92-26)

• 1 (1) Subject to sections 2 to 5, allowed capital costs of a project are costs or expenses that are reasonably related to the project and that are

  • (a) incurred in drilling or completing a discovery well, a delineation well or a development well located on the project lands;

  • (b) incurred in building an access road to or preparing a site in respect of a discovery well, a delineation well or a development well, where the well is located on the project lands;

  • (c) incurred, after the drilling of a discovery well, in respect of the collection in the field of basic geological, geophysical and geochemical information for the purpose of delineating the significant discovery indicated by the discovery well located on the project lands;

  • (d) a geological, geophysical or geochemical expense incurred in respect of logging, coring or testing conducted in the course of the drilling of a well referred to in paragraph (a);

  • (e) incurred in drilling or converting a well for

    • (i) the disposal of waste liquids from a well located on the project lands,

    • (ii) the injection of water, gas or any other substance into a petroleum formation to assist in the recovery of petroleum from another well located on the project lands, or

    • (iii) the purposes of monitoring fluid levels, pressure changes or other phenomena in an accumulation of petroleum located on the project lands;

  • (f) incurred in drilling for water or gas on the project lands for injection into a petroleum formation located on the project lands;

  • (g) incurred in drilling or recompleting a petroleum well located on the project lands after the commencement of production from the well;

  • (h) incurred in respect of abandonment and restoration;

  • (i) incurred in acquiring or constructing production infrastructure that is to be located on the project lands or installing production infrastructure on the project lands;

  • (j) incurred in order to licence or purchase technology for the project, including any royalty or other cost paid in respect of letters patent;

  • (k) incurred to repair or maintain production infrastructure that is located on the project lands when the cost of those repairs or that maintenance is equal to or greater than 50% of the cost of equivalent new production infrastructure;

  • (l) incurred in conducting a study of some aspect of the project that is required by or under law before the project or the relevant part of the project is allowed to proceed; or

  • (m) expressly incurred as a cost under paragraph (i) or (k) but, for economic, environmental or logistical reasons, is for production infrastructure that is not located on project lands.

• (2) Subject to sections 2 to 5, allowed operating costs of a project are costs or expenses, other than allowed capital costs, that are reasonably related to the project and that are

  • (a) incurred on account of the salary, wages or other remuneration or related benefits of persons employed by the operator of production infrastructure that is located on the project lands;

  • (b) incurred

    • (i) in respect of the repair or maintenance of production infrastructure that is located on the project lands, when the cost of those repairs or that maintenance is less than 50% of the cost of equivalent new production infrastructure,

    • (ii) on account of taxes in respect of production infrastructure that is located on the project lands, or

    • (iii) on account of the rental or leasing of production infrastructure that is located on the project lands;

  • (c) incurred on account of premiums payable in respect of a policy of insurance, other than a policy of insurance for loss of revenue;

  • (d) incurred on account of

    • (i) the use of or the right to use any property located on the project lands,

    • (ii) compensation for a service performed on the project lands,

    • (iii) the acquisition of materials, parts or supplies for use on the project lands, or

    • (iv) the transportation of supplies or personnel to or from the project lands;

  • (e) incurred on account of telecommunications, power, water or fuel used on the project lands;

  • (f) incurred on account of the disposal of waste materials, including sewage, from the project lands; or

  • (g) incurred on account of any production infrastructure whose cost is an allowed capital cost under paragraph (1)(m) that otherwise would be an allowed operating cost under paragraphs (a) to (f) if incurred in respect of production infrastructure that is located on project lands.

2 Subject to section 4, the following are not allowed capital costs or allowed operating costs of a project:

• (a) the part of a cost that is subject to reimbursement, compensation or other payment, including any amount of assistance or benefit from a government, municipality or other public authority, whether as a grant, subsidy, forgivable loan, deduction from royalty or tax, investment allowance or any other form of assistance or benefit where, at the time the cost is incurred, the interest holder who incurs the cost has received or has an absolute right to receive that payment;

• (b) an amount on account of interest, including an amount or expense described in paragraph 20(1)(c), (d) or (e) of the Income Tax Act, as amended from time to time;

• (c) a payment to a person who does not deal at arm’s length with the interest holder making the payment, to the extent that the payment exceeds the fair market value of the property, the use of the property, the right to use the property or the performance of a service in respect of which the payment is made;

• (d) a cost or expense in respect of the administration, management, overhead or financing of an interest holder or of the operator of production infrastructure;

• (e) a payment on account of an overriding royalty, a net profits interest, a carried interest or other similar interest;

• (f) a cost or expense resulting from any act or omission that constitutes a breach of any federal, provincial or municipal law;

• (g) a cost or expense in respect of processing petroleum, other than a cost or expense in respect of producing transportable petroleum;

• (h) a cost or expense in respect of the transportation of petroleum produced from the project lands to a point beyond the boundary of the project lands, unless it is for production infrastructure that is not located on project lands in accordance with paragraph 1(1)(m);

• (i) an allowed capital cost or allowed operating cost, respectively, of another project, unless it was allocated in accordance with section 3;

• (j) a tax imposed under Part IX of the Excise Tax Act, as amended from time to time;

• (k) the administrative costs of an abandonment and restoration royalty trust; or

• (l) a cost or expense that is not expressly provided for in section 1.

3 If allowed capital costs or allowed operating costs are attributable to more than one project or use, those costs shall be allocated to each project on a reasonable basis.

4 For the purposes of paragraph 2(a), if a person has transferred or assigned a right referred to in that paragraph, that person is considered to have received the amount of the reimbursement, compensation or other payment at the time of the transfer or assignment.

• 5 (1) Subject to subsection (2), if in any month there is an entitlement to receive an amount under a policy of insurance for loss or damage to property, or an amount from the licensing or from the sale, lease or other disposition or use of any tangible or intangible asset,

  • (a) the allowed capital costs in respect of that month shall be reduced by the amount of that entitlement, or by the fair market value of that property or asset, whichever is greater, when the cost of the property or asset to which the entitlement relates is an allowed capital cost of the project; and

  • (b) the allowed operating costs in respect of that month shall be reduced by the amount of that entitlement, when the cost of the property or asset to which the entitlement relates is an allowed operating cost of the project but not an allowed capital cost of it.

• (2) If the amount by which the allowed capital costs or the allowed operating costs are reduced under paragraph (1)(a) or (b), as the case may be, exceeds the amount of those costs in that month, the difference shall be considered to be the allowed capital costs or allowed operating costs, as the case may be, expressed as a negative value.