Clearwater was designed to be a two-phase SAGD bitumen project. The first phase is situated adjoining the Fort McMurray Regional Airport in the Athabasca oil sands region of northeast Alberta. The Clearwater property covers 27.3 sections and comprises the McMurray Formation. AOS holds 100 percent working interest and is the operator.
Clearwater lies close to existing road infrastructure and provides mostly year-round access. The resource base has been extensively delineated. AOS filed the formal regulatory application for its Phase I project in January 2010 followed by an application update in December 2010.
LEASES SUBJECT TO CANCELLATION
In 2013, the Company received separate notices from Alberta Energy that certain parts of its Clearwater leases would be cancelled. The first notice, received by the Company in March 2013, advised AOS that parts of six (6) of the Company’s Clearwater leases located in the Gipsy-Gordon Wildland Park Conservation Area, comprising 1,200 hectares or approximately 22% of the affected leases, would be cancelled under the Lower Athabasca Regional Plan (“LARP”). The cancellation of lease areas under LARP did not materially affect AOS’ proposed SAGD project at its Clearwater leases.
The second notice, received by the Company in October 2013, advised AOS that parts of four (4) of the Company’s Clearwater leases located within the Fort McMurray Urban Development Sub-Region (“UDSR”), comprising 4,341 hectares or approximately 65% of the affected leases would be cancelled. The cancellation of lease areas under UDSR materially affected AOS’ proposed SAGD project at Clearwater, for which the Company was waiting for final project approval from Energy Resources Conservation Board (now Alberta Energy Regulator).
Both cancellations under LARP and UDSR are subject to compensation provided under the Mineral Rights Compensation Regulation. The Company recently received compensation under the LARP cancellation and continues to pursue compensation under the UDSR cancellation.
The compensation for the cancellation of lease areas under the LARP consisted of approximately $1.1 million representing the cost of acquiring the cancelled areas of the lease, including annual license fees and application fees, plus approximately $300,000 representing interest allowance. As expected by the Company, since no development expenditures or reclamation costs were incurred by the Company in these cancelled LARP areas, the compensation amount consisted solely of license fees and interest.
On July 25, 2013, the Province of Alberta publicly announced that it would be allocating 55,000 acres of Crown lands to the Regional Municipality of Wood Buffalo (Fort McMurray) under its Urban Development Sub-Region initiative (UDSR). As a result of the UDSR initiative, the Company’s oilsands leases at Clearwater will be cancelled. As a lessee to these affected leases, AOS will be compensated in accordance with existing legislation. The Mineral Rights Compensation Regulation (Alta. Reg. 317/2003) (Compensation Regulation) establishes the compensation payable by the Crown for cancelled agreements. Compensation includes at least the following:
- cost of acquiring the lease including annual license fees and application fees;
- wasted exploration and development expenditures;
- reclamation costs; and
- interest allowance calculated as Alberta Treasury Branch prime + 1%.
In October 2013, the Province of Alberta (Oil Sands Division) officially advised the Company by letter that the Company’s oil sands leases within the Fort McMurray Urban Development Sub-Region (UDSR) would be cancelled. Specifically, oil sands lease agreements 7407090336 and 7407070268 covering a total area of 1,920 hectres will be cancelled in their entirety; and portions of land representing a total area of 2,421.7 hectres under oil sands lease agreements 7407080532 and 7407070269 will also be cancelled.
The letter from the Province of Alberta also confirmed that the oil sands agreement cancellations are subject to the payment of compensation to be determined in accordance with the Mineral Rights Compensation Regulation.
UDSR COMPENSATION APPLICATION
In November 2013, the Company submitted its application to the Government of Alberta for compensation stipulated under the Mineral Rights Compensation Regulation (the “Compensation Regulation”). The claim submission is in the amount of $56 million including interest.
Since January 2014, the Alberta Department of Energy has been reviewing the Company’s compensation application and in normal course, has been conducting an audit of AOS’ submitted compensation claim to verify that the amounts claimed as development allowance from 2006 to 2013 are being claimed in accordance with section 6 of the Mineral Rights Compensation Regulation. AOS has been working with the Alberta Department of Energy during this audit process by providing supporting documents for the development allowance claimed and has responded to all government queries to date.