Royalty compliance is monitored by variance analysis of target royalties vs. actual royalties received by activity period.  Royalty volume targets for each well are calculated royalties and are compared to actual royalties received at a well level by activity period (volumes and revenue). Material variances are identified, flagged and communicated to Lessees.

Each lease agreement specifies the royalties owed to Heritage based on the following elements: royalty determination point, products, royalty rate, deductions, and price.

Royalty determination point: the point at which the royalty is calculated; a specific point of measurement in a production operations schematic (e.g. sales point). Royalty determination points are the basis for evaluating the accuracy of royalty payments, including allowable royalty deductions.

Example from Heritage “Parkland” lease form:

“Royalty Determination Point” means:

(i)   for Crude Oil, the point where product enters a feeder pipeline or any related lateral owned by the owner of the feeder pipeline;

(ii)  for Gas, excluding sulphur, the inlet to the meter station of the initial common transporter which includes, but is not limited to, TransCanada Transmission – Alberta System, or in the case here the Gas is sold directly to an end user, the inlet meter at the end use facility;

(iii)  for Natural Gas Liquids, the Natural Gas Liquids outlet meter of the facility at which the Natural Gas Liquids are extracted from Natural Gas;

(iv)  for Other Substances excluding sulphur, the point and time of sale to end user or initial common transporter; and

(v)  for sulphur, the outlet at the sulphur loading facility.

Products: crude oil, natural gas liquids, natural gas, and other substances produced.

Royalty rates: percentage of gross product volumes measured at the royalty determination point. Royalty rates can be calculated as a fixed percentage, sliding scale, or step scale.

Deductions: allowable processing, transportation and trucking fees, specific to each lease. Certain leases do not allow deductions, while others allow for specific deductions (e.g. clean oil trucking).

Pricing: the greater of the actual price received or the current market value of products.

Other considerations:

  •  Shrinkage: as the point of measurement for natural gas royalties is at the inlet to the meter station, shrinkage plays a factor in the calculation of natural gas royalties when comparing to gross production at the wellhead.
  • Contributing acreage: when the spacing unit for a well is not 100% owned by Heritage, royalty rates are adjusted to reflect Heritage’s share of production in that well.