________
Annual Information Form
For the Year Ended December 31, 2020
Dated March 9, 2021
Table of Contents
Select Definitions .......................................................................................................................................... 3
Abbreviations and Conversion ...................................................................................................................... 4
Non-IFRS Measures ..................................................................................................................................... 5
Notes on Reserves Data and Other Oil and Natural Gas Information .......................................................... 5
Special Note Regarding Forward Looking Statements ................................................................................. 8
Surge Energy Inc. ....................................................................................................................................... 11
Development of the Business ..................................................................................................................... 11
Description of the Business......................................................................................................................... 12
Principal Producing Properties .................................................................................................................... 15
Statement of Reserves Data ....................................................................................................................... 17
Description of Capital Structure .................................................................................................................. 27
Dividend Policy ............................................................................................................................................ 29
Market for Securities ................................................................................................................................... 30
Directors and Officers ................................................................................................................................. 31
Audit Committee .......................................................................................................................................... 36
Industry Conditions ..................................................................................................................................... 38
Risk Factors ................................................................................................................................................ 59
Legal Proceedings And Regulatory Actions ................................................................................................ 73
Interest of Management and Others in Material Transactions .................................................................... 74
Auditor, Transfer Agent and Registrar ........................................................................................................ 74
Interest of Experts ....................................................................................................................................... 74
Additional Information ................................................................................................................................. 74
Schedule “A” – Form 51-101F2
Schedule “B” – Form 51-101F3
Schedule “C” – Audit Committee Charter
SELECT DEFINITIONS
Unless the context indicates otherwise, the following terms shall have the meanings set out below when
used in this Annual Information Form. Certain other terms and abbreviations used herein, but not defined
herein, are defined in NI 51-101 or the COGE Handbook and, unless the context otherwise requires, shall
have the same meanings herein as in NI 51-101 or the COGE Handbook.
“ABCA” means the Business Corporations Act, R.S.A. 2000, c. B-9, as amended;
“AIF” or “Annual Information Form” means this annual information form;
“Audit Committee” means the audit committee of the Board;
“Board of Directors” or “Board” means the board of directors of the Corporation;
“COGE Handbook” means the “Canadian Oil and Gas Evaluation Handbook” maintained by the Society of
Petroleum Evaluation Engineers (Calgary Chapter), as amended from time to time;
“Common Shares” means the common shares of the Corporation;
“Corporation” or “Surge” means Surge Energy Inc., a corporation amalgamated under the ABCA;
“Credit Facilities” means, collectively, (i) the $335 million extendible revolving term credit facility of the
Corporation with a banking syndicate led by National Bank of Canada, as amended from time to time; and
(ii) the $40 million four year term, non-revolving facility of the Corporation with a banking syndicate led by
National Bank of Canada;
“Debentures” means, collectively, the Initial Debentures and the Series 2 Debentures, as more particularly
described under the heading “Description of Capital Structure”;
“IFRS” means International Financial Reporting Standards, as issued by the International Accounting
Standards Board, as amended from time to time;
“Indenture” means the debenture indenture dated May 8, 2019 between Surge and Computershare Trust
Company of Canada, as amended on November 15, 2017 and as supplemented by a first supplemental
debenture indenture dated May 8, 2019, under which the Debentures are issued;
“Initial Debentures” means the 5.75% convertible unsecured subordinated debentures due on December
31, 2022;
“NI 51-101” means National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities;
“Reserves Report” means the independent engineering report with a preparation date of March 3, 2021
and effective December 31, 2020 prepared by and containing the evaluation of Sproule of the oil, NGL and
natural gas reserves attributable to the properties of the Corporation;
“Series 2 Debentures” means the 6.75% convertible unsecured subordinated debentures due on June 30,
2024;
“Sproule” means Sproule Associates Limited, independent oil and gas reservoir engineers;
“TSX” means the Toronto Stock Exchange; and
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“U.S.” or “United States” means the United States of America.
Words importing the singular number only include the plural, and vice versa, and words importing any
gender include all genders. All dollar amounts set forth in this Annual Information Form, including “dollar”,
“$” and “CAD$” are in Canadian dollars, except where otherwise indicated. “US$” means United States
dollars.
In this Annual Information Form, the abbreviations set forth below have the following meanings:
ABBREVIATIONS AND CONVERSION
Oil and Natural Gas Liquids
Natural Gas
bbl
bbls
Mbbls
MMbbls
Mstb
bbl/d
NGLs
stb
Barrel
Barrels
thousand barrels
million barrels
1,000 stock tank barrels
barrels per day
natural gas liquids
stock tank barrel
Mcf
MMcf
Mcf/d
MMcf/d
MMbtu
Bcf
GJ
thousand cubic feet
million cubic feet
thousand cubic feet per day
million cubic feet per day
million British Thermal Units
billion cubic feet
gigajoule
The following table sets forth certain standard conversions from Standard Imperial Units to the International
System of Units (or metric units).
To Convert From
To
Multiply By
Mcf
Cubic metres
Bbls
Cubic metres
Feet
Metres
Miles
Kilometres
Acres
Hectares
Gigajoules
MMbtu
Cubic metres
Cubic feet
Cubic metres
Bbls
Metres
Feet
Kilometres
Miles
Hectares
Acres
MMbtu
Gigajoules
28.174
35.494
0.159
6.293
0.305
3.281
1.609
0.621
0.405
2.50
0.950
1.0526
Other
AECO
API
°API
a natural gas storage facility located at Suffield, Alberta
American Petroleum Institute
an indication of the specific gravity of crude oil measured on the API gravity scale. Liquid
petroleum with a specified gravity of 35.1° API or greater is generally referred to as light
crude oil. Liquid petroleum with a specified gravity of 25.8° to 35° API or greater is generally
referred to as medium crude oil. Liquid petroleum with a specified gravity of 25.7° API or
lower is generally referred to as heavy crude oil.
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boe
boe/d
m3
Mboe
MMboe
$000s
M$ or $M
MM$
WTI
barrel of oil equivalent on the basis of 1 boe to 6 Mcf of natural gas. Boes may be
misleading, particularly if used in isolation. A boe conversion ratio of 1 boe for 6 Mcf is
based on an energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead
barrel of oil equivalent per day
cubic metres
1,000 barrels of oil equivalent
1,000,000 barrels of oil equivalent
thousands of dollars
thousands of dollars
millions of dollars
West Texas Intermediate, the reference price paid in U.S. dollars at Cushing, Oklahoma
for crude oil of standard grade
NON-IFRS MEASURES
This AIF contains the term “operating netback” which is not defined by IFRS and therefore may not be
comparable to performance measures presented by others. In this AIF, “operating netback” is calculated
by deducting royalties paid and production costs, including transportation costs, from prices received,
excluding the effects of hedging. Management believes that in addition to net income, operating netbacks
are a useful supplemental measure as it assists in the determination of the Corporation’s operating
performance. Readers should be cautioned, however, that this measure should not be construed as an
alternative to both net income and net cash from (used in) operating activities, which are determined in
accordance with IFRS, as indicators of the Corporation’s performance.
NOTES ON RESERVES DATA AND OTHER OIL AND NATURAL GAS INFORMATION
Caution Respecting Reserves Information
The determination of oil and natural gas reserves involves the preparation of estimates that have an
inherent degree of associated uncertainty. Categories of proved and probable reserves have been
established to reflect the level of these uncertainties and to provide an indication of the probability of
recovery. The estimation and classification of reserves requires the application of professional judgment
combined with geological and engineering knowledge to assess whether or not specific reserves
classification criteria have been satisfied. Knowledge of concepts including uncertainty and risk, probability
and statistics, and deterministic and probabilistic estimation methods is required to properly use and apply
reserves definitions. The estimates of reserves and future net revenue for individual properties may not
reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to
the effects of aggregation.
The recovery and reserve estimates of oil, NGL and natural gas reserves provided herein are
estimates only. Actual reserves may be greater than or less than the estimates provided herein.
The estimated future net revenue from the production of the Corporation’s natural gas and
petroleum reserves does not represent the fair market value of the Corporation’s reserves.
Caution Respecting Boe
In this AIF, the abbreviation boe means barrel of oil equivalent on the basis of 1 boe to 6 Mcf of natural gas
when converting natural gas to boes. Boes may be misleading, particularly if used in isolation. A boe
conversion ratio of 6 Mcf to 1 boe is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the wellhead.
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Definitions
Certain terms used in this AIF in describing reserves and other oil and natural gas information are defined
below. Certain other terms and abbreviations used in this AIF, but not defined or described, are defined in
NI 51-101 or the COGE Handbook and, unless the context otherwise requires, shall have the same
meanings herein as in NI 51-101 or the COGE Handbook.
Reserves
Reserves are estimated remaining quantities of oil and natural gas and related substances anticipated to
be recoverable from known accumulations, from a given date forward, based on: (i) analysis of drilling,
geological, geophysical and engineering data; (ii) the use of established technology; and (iii) specified
economic conditions, which are generally accepted as being reasonable and shall be disclosed. Reserves
are classified according to the degree of certainty associated with the estimates as follows:
“proved reserves” are those reserves that can be estimated with a high degree of certainty to be
recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved
reserves.
“probable reserves” are those additional reserves that are less certain to be recovered than proved
reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the
sum of the estimated proved plus probable reserves.
The qualitative certainty levels referred to in the definitions above are applicable to “individual reserves
entities” (which refers to the lowest level at which reserves calculations are performed) and to “reported
reserves” (which refers to the highest-level sum of individual entity estimates for which reserves estimates
are presented). Reported reserves should target the following levels of certainty under a specific set of
economic conditions:
at least a 90 percent probability that the quantities actually recovered will equal or exceed the
estimated proved reserves; and
at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum
of the estimated proved plus probable reserves.
Each of the reserves categories (proved and probable) may be divided into developed and undeveloped
categories as follows:
“developed reserves” are those reserves that are expected to be recovered from existing wells and
installed facilities or, if facilities have not been installed, that would involve a low expenditure (e.g., when
compared to the cost of drilling a well) to put the reserves on production. The developed category may be
subdivided into producing and non-producing as follows:
“developed producing reserves” are those reserves that are expected to be recovered from completion
intervals open at the time of the estimate. These reserves may be currently producing or, if shut-in, they
must have previously been on production, and the date of resumption of production must be known with
reasonable certainty.
“developed non-producing reserves” are those reserves that either have not been on production, or have
previously been on production but are shut-in and the date of resumption of production is unknown.
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“undeveloped reserves” are those reserves expected to be recovered from known accumulations where
a significant expenditure (e.g., when compared to the cost of drilling a well) is required to render them
capable of production. They must fully meet the requirements of the reserves classification (proved,
probable, possible) to which they are assigned.
In multi-well pools, it may be appropriate to allocate total pool reserves between the developed and
undeveloped categories or to sub-divide the developed reserves for the pool between developed producing
and developed non-producing. This allocation should be based on the estimator’s assessment as to the
reserves that will be recovered from specific wells, facilities and completion intervals in the pool and their
respective development and production status.
Interests in Reserves, Production, Wells and Properties
“gross” means: (i) in relation to an issuer’s interest in production or reserves, its “company gross reserves”,
which are its working interest (operating or non-operating) share before deduction of royalties and without
including any royalty interests of the issuer; (ii) in relation to wells, the total number of wells in which an
issuer has an interest; and (iii) in relation to properties, the total area of properties in which an issuer has
an interest.
“net” means: (i) in relation to an issuer’s interest in production or reserves its working interest (operating or
non-operating) share after deduction of royalty obligations, plus its royalty interests in production or
reserves; (ii) in relation to an issuer’s interest in wells, the number of wells obtained by aggregating the
issuer’s working interest in each of its gross wells; and (iii) in relation to an issuer’s interest in a property,
the total area in which the issuer has an interest multiplied by the working interest owned by the issuer.
“working interest” means the percentage of undivided interest held by an issuer in the oil and/or natural
gas or mineral lease granted by the mineral owner, Crown or freehold, which interest gives the issuer the
right to “work” the property (lease) to explore for, develop, produce and market the leased substances.
Description of Exploration and Development Wells and Costs
“development costs” means costs incurred to obtain access to reserves and to provide facilities for
extracting, treating, gathering and storing the crude oil and natural gas from the reserves. More specifically,
development costs, including applicable operating costs of support equipment and facilities and other costs
of development activities, are costs incurred to: (i) gain access to and prepare well locations for drilling,
including surveying well locations for the purpose of determining specific development drilling sites, clearing
ground, draining, road building, and relocating public roads, gas lines and power lines, to the extent
necessary in developing the reserves; (ii) drill, complete and equip development wells, development type
stratigraphic test wells and service wells, including the costs of platforms and of well equipment such as
casing, tubing, pumping equipment and wellhead assembly; (iii) acquire, construct and install production
facilities such as flow lines, separators, treaters, heaters, manifolds, measuring devices and production
storage tanks, natural gas cycling and processing plants, and central utility and waste disposal systems;
and (iv) provide improved recovery systems.
“development well” means a well drilled inside the established limits of an oil or gas reservoir, or in close
proximity to the edge of the reservoir, to the depth of a stratigraphic horizon known to be productive.
“exploration costs” means costs incurred in identifying areas that may warrant examination and in
examining specific areas that are considered to have prospects that may contain oil and natural gas
reserves, including costs of drilling exploratory wells and exploratory type stratigraphic test wells.
Exploration costs may be incurred both before acquiring the related property (sometimes referred to in part
as “prospecting costs”) and after acquiring the property. Exploration costs, which include applicable
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operating costs of support equipment and facilities and other costs of exploration activities, are: (i) costs of
topographical, geochemical, geological and geophysical studies, rights of access to properties to conduct
those studies, and salaries and other expenses of geologists, geophysical crews and others conducting
those studies (collectively sometimes referred to as “geological and geophysical costs”); (ii) costs of
carrying and retaining unproved properties, such as delay rentals, taxes (other than income and capital
taxes) on properties, legal costs for title defence, and the maintenance of land and lease records; (iii) dry
hole contributions and bottom hole contributions; (iv) costs of drilling, completing and equipping exploratory
wells; and (v) costs of drilling exploratory type stratigraphic test wells.
“exploration well” means a well that is not a development well, a service well or a stratigraphic test well.
“service well” means a well drilled or completed for the purpose of supporting production in an existing
field. Wells in this class are drilled for the following specific purposes: gas injection (natural gas, propane,
butane or flue gas), water injection, steam injection, air injection, salt water disposal, water supply for
injection, observation or injection for combustion.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements or disclosures contained in this Annual Information Form constitute forward-looking
statements. The use of any of the words “anticipate”, “continue”, “estimate”, “expect”, “may”, “will”, “project”,
“should”, “believe” and similar expressions are intended to identify forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors that may cause actual results
or events to differ materially from those anticipated in such forward-looking statements. The Corporation
believes the expectations reflected in those forward-looking statements are reasonable, but no assurance
can be given that these expectations will prove to be correct. Since forward-looking statements address
future events and conditions, by their very nature they involve inherent risks and uncertainties. Such
forward-looking statements included in this Annual Information Form should not be unduly relied upon.
These statements speak only as of the date of this Annual Information Form.
In particular, this Annual Information Form may contain forward-looking statements and information
pertaining to the following:
the performance characteristics of the Corporation’s oil and natural gas properties;
oil and natural gas production levels, and expectations of future production rates, volumes and product
mixes;
the size of the oil and natural gas reserves of the Corporation and anticipated future cash flows from
such reserves;
projections of market prices and costs, and exchange and inflation rates;
supply and demand for oil and natural gas;
expectations regarding the ability to raise capital and to continually add to reserves through
acquisitions and development;
the Corporation’s dividend policy;
treatment under governmental regulatory regimes and tax and royalty laws;
criteria and considerations in participations and acquisitions;
estimated abandonment and reclamation costs and the timing thereof;
expected land expiries and plans with respect thereto;
plans to implement enhanced recovery; and
capital expenditure programs, the allocation of such capital and the timing thereof.
the Corporation’s tax horizon;
timing of development of undeveloped reserves;
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With respect to forward looking statements contained in this Annual Information Form, the Corporation has
made assumptions regarding:
the success of the Corporation’s operations and exploration and development activities;
the size of Surge’s oil, natural gas and NGL reserves and the recoverability of its reserves;
the availability of labour, services and drilling equipment;
the availability of capital to fund planned expenditures;
timing and amount of capital expenditures;
timing of production curtailments;
future operating costs and future cash flow;
the Corporation’s future debt levels;
oil and natural gas production levels and the timing of new wells coming on-stream;
prevailing weather conditions, commodity prices and exchange rates;
general economic and financial market conditions;
government regulation in the areas of taxation, royalty rates and environmental protection.
the Corporation’s ability to market production of oil and natural gas successfully to customers;
the applicability of technologies for recovery and production of the Corporation’s reserves;
the success, nature and timing of water flood activities;
the ability of the Corporation to secure necessary capital, personnel, equipment and services; and
The actual results, performance or achievements of the Corporation may differ materially from those
anticipated in these forward-looking statements as a result of the risk factors set forth below and elsewhere
in this Annual Information Form:
the impact of the COVID-19 pandemic;
whether the Corporation can continue as a going concern;
uncertainty surrounding the amount that will be available under the Credit Facilities in the future;
volatility in market prices for oil and natural gas;
volatility in exchange rates;
uncertainties associated with estimating oil and natural gas reserves and production levels;
inability to secure labour, services or equipment on a timely basis or on favourable terms;
failure to obtain industry partner or other third party consents and approvals, when required;
competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled
liabilities inherent in oil and natural gas operations;
personnel;
fluctuations in the cost of borrowing;
the marketability of production and demand of Surge’s products;
the inability to access sufficient capital from internal and external sources;
changes in general economic, market and business conditions;
unanticipated operating events which can reduce production or cause production to be shut in or
delayed;
unfavourable weather conditions;
incorrect assessments of the value of acquisitions, dispositions and exploration and development
programs;
geological, technical, drilling, completion and processing problems;
results of water flood responses;
the outcome of litigation or regulatory proceedings brought against the Corporation or other disputes
involving the Corporation;
changes in legislation, including changes in tax laws and incentive programs relating to the oil and
gas industry;
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cyber-security issues;
failure to realize the anticipated benefits of acquisitions and dispositions; and
the other factors discussed under “Risk Factors”.
Statements relating to “reserves” or “resources” are deemed to be forward-looking statements, as they
involve the implied assessment, based on certain estimates and assumptions that the resources and
reserves described can be profitably produced in the future.
Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking
statements contained in this Annual Information Form are expressly qualified by this cautionary
statement. The Corporation does not undertake any obligation to publicly update or revise any
forward-looking statements other than as required under applicable securities laws.
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Corporate Structure
SURGE ENERGY INC.
Surge was incorporated on January 26, 1998 under the ABCA as “Zapata Capital Inc.” On June 18, 1999,
the Corporation acquired all of the issued and outstanding shares of 744997 Alberta Ltd. and amalgamated
with 744997 Alberta Ltd. under the name “Zapata Energy Corporation”. On June 25, 2010, the Corporation
changed its name to “Surge Energy Inc.” On December 31, 2010, the Corporation amalgamated with its
wholly-owned subsidiary, Breaker Resources Ltd. On December 31, 2012, the Corporation amalgamated
with is wholly-owned subsidiary, Surge Oil Inc. On December 31, 2013, the Corporation amalgamated with
its wholly-owned subsidiaries, Flagstone Energy Inc. and 1779275 Alberta Ltd. On December 31, 2014,
the Corporation amalgamated with its wholly-owned subsidiary, Longview Oil Corp. On December 31,
2018, the Corporation amalgamated with its wholly-owned subsidiary, Mount Bastion Oil & Gas Corp.
The head office of the Corporation is located at 2100, 635 – 8th Avenue S.W., Calgary, Alberta T2P 3M3.
The registered office of the Corporation is located at Suite 4000, 421 – 7th Avenue S.W., Calgary, Alberta,
T2P 4K9.
Intercorporate Relationships
The Corporation currently has one subsidiary, 1413942 Alberta Ltd., which is wholly-owned by Surge. On
December 31, 2020, Surge acquired all of the partnership interest of Surge General Partnership held by
1413942 Alberta Ltd. and the partnership was dissolved on such date.
General
DEVELOPMENT OF THE BUSINESS
The Corporation is an independent, Calgary, Alberta-based oil and gas company operating primarily in
Alberta and Saskatchewan. The Common Shares are listed on the TSX under the symbol “SGY” and the
Initial Debentures and Series 2 Debentures are listed on the TSX under the symbols “SGY.DB” and
“SGY.DB.A”, respectively.
Three Year History
Significant developments of the Corporation over the last three completed financial years are as set forth
below:
Year ended December 31, 2018
On January 4, 2018, Surge completed the sale of certain non-core assets in Central Alberta for proceeds
of $6.7 million.
On May 31, 2018, Surge completed an acquisition of crude oil producing assets in its core Sparky area of
Central Alberta for a purchase price of $27.9 million.
On July 18, 2018, Surge completed an acquisition of crude oil producing assets in its core Valhalla area of
Northern Alberta for a purchase price of $6.2 million.
On October 25, 2018, Surge closed its acquisition of Mount Bastion Oil & Gas Corp. (“Mount Bastion”)
pursuant to an arrangement under the provisions of the ABCA. See “Development of the Business –
Significant Acquisitions”.
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Year ended December 31, 2019
On March 28, 2019, Surge completed the sale of certain non-core assets in Northwest Alberta for aggregate
cash proceeds of $28.1 million.
On June 28, 2019, Surge disposed of a 1.7 percent gross overriding royalty on total revenue from the
Corporation’s Southwest Saskatchewan, Southeast Alberta and North Central Alberta assets, for aggregate
cash proceeds of $29.1 million.
On August 13, 2019, Surge completed an acquisition of a gas processing facility in its core Sparky area of
Southeast Alberta for a purchase price of $12.1 million.
Year ended December 31, 2020
On June 26, 2020, Surge completed the sale of certain non-core assets in Northwest Alberta for aggregate
cash proceeds of $5.3 million.
Events Subsequent to December 31, 2020
Subsequent to December 31, 2020, the Corporation executed a binding purchase and sale agreement for
the disposition of certain core assets in Northeast Alberta and Southeast Alberta for gross cash proceeds
of $106 million, subject to standard closing adjustments. The sale is scheduled to close on or before March
25, 2021.
Significant Acquisitions
Surge did not complete any “significant acquisitions” (as such term is defined in NI 51-102) during the
financial year ended December 31, 2020.
Overview
DESCRIPTION OF THE BUSINESS
The Corporation is an oil and gas exploration, development and production company. Surge holds focused
and operated light and medium gravity crude oil properties in Alberta and Saskatchewan characterized by
large oil in place crude oil reservoirs with low recovery factors. The Corporation has a significant inventory
of low risk development drilling locations, including several successful water flood projects.
Corporate Strategy
The Corporation focuses on assets with the following criteria: large oil in place with low recovery factors;
available infrastructure; high working interest; operatorship; all-season access and drilling inventory; water
flood opportunities; and other upside that provides a definable high rate of return.
Management believes in controlling the timing and costs of the Corporation’s projects wherever possible.
Accordingly, the Corporation seeks to become the operator of its properties. Further, to minimize
competition within its geographic areas of interest, the Corporation strives to maximize its working interest
ownership in its properties where reasonably possible.
In reviewing potential drilling or acquisition opportunities, the Corporation gives consideration to the
following criteria: risk capital to secure or evaluate the opportunity; the potential return on the project, if
successful; the likelihood of success; and risked return versus cost of capital.
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In general, the Corporation pursues a portfolio approach in developing a large number of opportunities with
a balance of risk profiles in an attempt to generate sustainable levels of growth. The Board of Directors of
the Corporation may, in its discretion, approve asset or corporate acquisitions or investments that do not
conform to the guidelines discussed above based upon the Board’s consideration of the qualitative aspects
of the subject properties, including risk profile, technical upside, reserve life and asset quality.
In addition, the management team of the Corporation, as described below under “Directors and Officers”,
is continually assessing the assets and operations of the Corporation, including its existing land base,
facilities, reserves, prospects and personnel.
Competition
The oil and natural gas industry is competitive in all its phases. The Corporation competes with numerous
other participants in the search for, and the acquisition of, oil and natural gas properties and in the marketing
of oil and natural gas. The Corporation’s competitors include resource companies which have greater
financial resources, staff and facilities than those of the Corporation. Competitive factors in the distribution
and marketing of oil and natural gas include price and methods and reliability of delivery. The Corporation
believes that its competitive position is equivalent to that of other oil and gas issuers of similar size and at
a similar stage of development.
Cyclical and Seasonal Nature of Industry
Surge’s operational results and financial condition are dependent on the prices received for oil and natural
gas production. Oil and natural gas prices have fluctuated dramatically during recent years and are
determined by a number of factors, including global and local supply and demand factors, and including
weather and general economic conditions, as well as conditions in other oil and natural gas producing and
consuming regions. Surge attempts to mitigate such price risk through closely monitoring commodity
markets and establishing disciplined hedging programs.
The level of activity in the Canadian oil and natural gas industry is influenced by seasonal weather patterns.
Wet weather and spring thaw may make the ground unstable. Consequently, municipalities and provincial
transportation departments enforce road bans that restrict the movement of rigs and other heavy
equipment, thereby reducing activity levels. Also, certain oil and natural gas producing areas are located
in areas that are inaccessible other than during the winter months because the ground surrounding the
sites in these areas consists of swampy terrain.
Seasonal factors and unexpected weather patterns may lead to declines in exploration and production
activity and corresponding declines in the demand for the goods and services of the Corporation. Demand
for natural gas typically rises during cold winter months and hot summer months.
Environmental Regulation
The oil and natural gas industry is subject to environmental regulations pursuant to a variety of provincial
and federal legislation. Compliance with such legislation can require significant expenditures or result in
operational restrictions. Breach of such requirements may result in suspension or revocation of necessary
licenses and authorizations, civil liability for pollution damage and the imposition of material fines and
penalties, all of which might have a significant negative impact on earnings and overall competitiveness.
See below under the headings “Industry Conditions - Environmental Regulation” and “Risk Factors –
Environmental Concerns”.
The Corporation is obligated to abandon, retire and reclaim wells and well sites in compliance with
applicable environmental laws and regulations. As of December 31, 2020, the Corporation has recorded
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an asset retirement obligation of $294.7 million. The Corporation anticipates that the expenditures
necessary to satisfy the asset retirement obligation will be incurred over a period of twenty years, with the
majority of the expenditures being incurred from years 2021 to 2041. Other than asset retirement
obligations and ordinary course operational expenditures necessary to ensure environmental compliance,
the Corporation is not aware of any environmental protection requirement that will impact its capital
expenditures, earnings or competitive position in a manner disproportionate to that of its peers in its area
of operations.
Marketing
Surge’s crude oil and natural gas production are sold primarily through marketing companies at current
market prices. See also “Interest of Management and Others in Material Transactions”.
The Corporation also has a hedging policy as described under “Statement of Reserves Data – Other Oil
and Gas Information – Forward Contracts”. For details of the Corporation’s forward contracts in place as at
December 31, 2020, see the Corporation’s audited annual financial statements for the year ended
December 31, 2020, which have been filed on SEDAR and may be viewed under the Corporation’s profile
at www.sedar.com. See “Risk Factors – Fixed Price Hedging”.
Personnel
As at December 31, 2020, the Corporation had 65 head office employees and 6 field employees.
Health, Safety and Environmental
Management, employees and contractors are responsible and accountable for the overall health, safety
and environmental program. Surge operates in compliance with all applicable regulations and ensures that
all staff and contractors employ sound practices to protect the environment and to ensure employee and
public health and safety.
Surge maintains a safe and environmentally responsible work place and provides training, equipment and
procedures to all individuals in adhering to its policies. It also solicits and takes into consideration input
from neighbors, communities and other stakeholders in regard to protecting people and the environment.
In 2020 Surge continued its commitment to environmental, social and governance spending initiatives by
spending an aggregate of $9.3 million on abandonment activities.
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PRINCIPAL PRODUCING PROPERTIES
The Corporation’s principal oil and natural gas producing properties are located in Alberta and
Saskatchewan and are focused across five core areas: Greater Sawn, Valhalla, Sparky, Shaunavon and
Minors. A description of those properties, as at December 31, 2020, is provided below.
See “Development of the Business – Three Year History – Events Subsequent to December 31, 2020”
Greater Sawn
As at December 31, 2020, the Corporation’s principal properties in the Greater Sawn area included Sawn
Lake, Otter, Red Earth (which collectively comprise the Greater Sawn Lake assets), Nipisi and Nevis. At
Greater Sawn, Surge held an average working interest of approximately 83 percent in approximately
131,928 gross (109,941 net) developed acres and an average working interest of approximately 92 percent
in approximately 164,798 gross (152,344 net) undeveloped acres. As at December 31, 2020, the
Corporation held interests in 380 gross (316 net) oil wells and 19 gross (13 net) gas wells producing from
formations including, but not limited to, Slave Point, Granite Wash, Gilwood, Wabamun and Banff. In
addition, the Corporation operates multiple oil batteries providing a strong infrastructure base for future
development in the area. Surge’s fourth quarter 2020 production in Greater Sawn was approximately 4,400
boe/d (92 percent oil and NGLs).
Greater Sawn Lake
The Greater Sawn Lake assets are comprised of three main fields (Sawn Lake, Otter and Red Earth) near
Red Earth Creek in Northern Alberta. Production from this property is primarily 40° API light oil from the
Slave Point and Granite Wash formations. The majority of the new development is focused on the Slave
Point formation. The majority of these pools are currently on primary production with horizontal Slave Point
waterflood being implemented in Sawn Lake. These assets were acquired on October 25, 2018, with the
corporate acquisition of Mount Bastion.
Valhalla
As at December 31, 2020, the Corporation’s principal property in the Valhalla area is the Valhalla/Wembley
property. At Valhalla, Surge held an average working interest of approximately 70 percent in approximately
22,920 gross (16,032 net) developed acres and an average working interest of approximately 74 percent
in approximately 11,160 gross (8,208 net) undeveloped acres. As at December 31, 2020, the Corporation
held interests in 94 gross (56 net) oil wells and 10 gross (4 net) gas wells producing from formations
including, but not limited to, Doig, Montney, and Charlie Lake. In addition, the Corporation operates multiple
oil batteries providing a strong infrastructure base for future development in the area. Surge’s fourth quarter
2020 production in Valhalla was approximately 3,300 boe/d (53 percent oil and NGLs).
The Valhalla/Wembley property is located in northwestern Alberta, approximately 40 kilometres northwest
of Grand Prairie. The majority of production from this property was from the horizontal oil wells producing
from an extensive tight sand, with up to 40 metres of gross light oil pay in the Triassic Doig formation.
Sparky
As at December 31, 2020, Surge’s principal properties in the Sparky area included the Sparky assets and
the Lloyd/Cummings zone waterflood at Silver. At Sparky, Surge held an average working interest of
approximately 76 percent in approximately 105,502 gross (80,213 net) developed acres and an average
working interest of approximately 96 percent in approximately 61,094 gross (58,598 net) undeveloped
acres. As at December 31, 2020, the Corporation held interests in 555 gross (466 net) oil wells and 32
- 15 -
gross (10 net) gas wells producing from formations including, but not limited to, Sparky, Lloydminster, and
Cummings. In addition, the Corporation operates multiple oil batteries, providing a strong infrastructure
base for future development in the area. Surge’s fourth quarter 2020 production in Sparky was
approximately 7,900 boe/d (90 percent oil and NGLs).
Sparky
The Sparky assets are comprised of six main fields spread between Provost and Wainwright in eastern
Alberta and western Saskatchewan. Eye Hill, Provost and Betty Lake are early stage primary development
properties, while Wainwright, Macklin, Lakeview, and East Sounding are more mature, mostly developed
waterflood assets. Production from the Sparky assets is primarily crude oil (90 percent oil and NGLs)
ranging from 23° to 28° degrees API.
In 2020, the Corporation drilled 32 gross (32 net) horizontal, multi-frac, Sparky oil wells. Of these wells, 19
were on production by year-end 2020, with the remaining wells coming on production in Q1 2021.
Shaunavon
The Shaunavon properties are primarily located approximately 100 kilometres southwest of Swift Current,
Saskatchewan and 140 kilometres east of the Alberta border. As at December 31, 2020, these operated
properties included an average working interest of approximately 100 percent in approximately 23,409
gross (23,409 net) developed acres and an average working interest of approximately 100 percent in 13,698
gross (13,698 net) undeveloped acres. As at December 31, 2020, the Corporation held interests in 176
gross (176 net) oil wells producing from the Upper and Lower Shaunavon formations, among others. The
Corporation’s production from this property is weighted 100 percent to medium crude oil (21-26° API). The
Corporation operates major facilities at this property providing a strong infrastructure base for future
development in the area. This property’s fourth quarter 2020 production was approximately 1,300 boe/d
(100 percent oil).
Minors
As at December 31, 2020, the Corporation’s principal properties in the Minors area included Edmonton and
other minor areas. At Minors, Surge held an average working interest of approximately 61 percent in
approximately 144,305 gross (88,178 net) developed acres and an average working interest of
approximately 39 percent in approximately 26,915 gross (10,483 net) undeveloped acres. As at December
31, 2020, the Corporation held interests in 83 gross (28 net) oil wells and 83 gross (7 net) gas wells
producing from formations including, but not limited to, Rock Creek. This area’s fourth quarter 2020
production was approximately 400 boe/d (59 percent oil and NGLs).
- 16 -
STATEMENT OF RESERVES DATA
In accordance with NI 51-101, Sproule prepared the Reserves Report based on its evaluation of the oil,
NGL and natural gas reserves attributable to the properties of the Corporation as at December 31, 2020.
The Reserves Report has a preparation date of March 3, 2021.
The tables below are a combined summary of the oil, NGL and natural gas reserves attributable to the
properties of the Corporation and the net present value of future net revenue attributable to such reserves
as evaluated in the Reserves Report based on forecast price and cost assumptions. The tables summarize
the data contained in the Reserves Report and, as a result, may contain slightly different numbers than
such report due to rounding. Also due to rounding, certain columns may not add exactly.
The net present value of future net revenue attributable to reserves is stated without provision for interest
costs and general and administrative costs, but after providing for estimated royalties, production costs,
development costs, other income, future capital expenditures and well abandonment costs for only those
wells assigned reserves by Sproule. It should not be assumed that the undiscounted or discounted net
present value of future net revenue attributable to reserves estimated by Sproule represent the fair market
value of those reserves evaluated. Other assumptions and qualifications relating to costs, prices for future
production and other matters are summarized herein. The recovery and reserve estimates of oil, NGL and
natural gas reserves provided herein are estimates only. Actual reserves may be greater than or less than
the estimates provided herein.
The Reserves Report is based on certain factual data supplied by the Corporation and Sproule’s opinions
of reasonable practice in the industry. The extent and character of ownership and all factual data pertaining
to petroleum properties and contracts (except for certain information residing in the public domain) were
supplied by the Corporation to Sproule. Sproule accepted this data as presented and neither title searches
nor field inspections were conducted.
Summary of Oil and Gas Reserves – Forecast Prices and Costs
Light and
Medium
Crude Oil
(Mbbls)
Heavy
Crude Oil
(Mbbls)
Gross Reserves
Natural
Gas
Liquids
(Mbbls)
Conventional
Natural Gas
(MMcf)
Coalbed
Methane
(MMcf)
Light and
Medium
Crude Oil
(Mbbls)
Heavy
Crude Oil
(Mbbls)
Net Reserves
Natural
Gas
Liquids
(Mbbls)
Conventional
Natural Gas
(MMcf)
Coalbed
Methane
(MMcf)
17997.8
7,852.2
811.1
23,522
685
15,957.2
7,231.3
636.5
21,600
611
506.9
20,265.5
38,770.3
20,911.5
361.4
8,337.9
16,551.5
7,903.1
32.0
1,125.2
1,968.3
860.9
936
33,781
58,240
27,002
-
56
741
182
476.8
17,842.2
34,276.1
17,632.4
324.2
7,750.0
15,305.6
7,254.5
23.3
959.9
1,619.7
697.8
59,681.8
24,454.6
2,829.2
85,241
924
51,908.5
22,560.0
2,317.5
872
31,171
53,644
24,696
78,339
-
52
663
169
832
Proved
Developed
Producing
Developed
Non-
Producing
Undeveloped
Total Proved
Probable
Total Proved
plus Probable
- 17 -
Net Present Value of Future Net Revenue – Forecast Prices and Costs
($M)
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Probable
Total Proved plus Probable
($M)
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Probable
Total Proved plus Probable
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Probable
Total Proved plus Probable
Before Future Income Tax Expenses and Discounted at
0%
5%
36,085
17,387
477,335
530,807
855,403
1,386,210
295,965
13,826
335,816
645,607
576,569
1,222,175
10%
297,694
11,313
237,361
546,369
413,755
960,123
15%
275,589
9,471
168,662
453,722
311,114
764,835
After Future Income Tax Expenses and Discounted at
0%
5%
36,085
17,387
477,335
530,807
704,096
1,234,904
295,965
13,826
335,816
645,607
475,785
1,121,391
10%
297,694
11,313
237,361
546,369
344,014
890,382
15%
275,589
9,471
168,662
453,722
261,300
715,021
20%
253,321
8,076
119,976
381,373
242,424
623,797
20%
253,321
8,076
119,976
381,373
205,886
587,259
Unit Value before Income Tax Discounted
at 10%/year ($/boe)
10.81
11.67
7.47
9.07
13.92
10.67
Additional Information Concerning Future Net Revenue – Forecast Prices and Costs
(Undiscounted)
Revenue Royalties
341,838
3,496,940
Operating
Costs
1,532,364
Develop-
ment
Costs
635,546
Abandon-
ment
and Other
Costs
456,385
Future net
revenue
before
income
taxes
530,807
Future
income
taxes
-
Future
net
revenue
after
income
taxes
530,807
5,495,629
597,004
2,204,887
839,432
468,097
1,386,210
151,306
1,234,904
(Undiscounted) ($M)
Total Proved
Total Proved plus
Probable
- 18 -
Future Net Revenue by Production Group – Forecast Prices and Costs
Proved
Light and Medium Crude Oil(1)
Heavy Crude Oil(1)
Conventional Natural Gas(2)
Coalbed Methane(2)
Proved plus Probable
Light and Medium Crude Oil(1)
Heavy Crude Oil(1)
Conventional Natural Gas(2)
Coalbed Methane(2)
Future Net Revenue Before
Income Taxes and
Discounted at 10% per
year ($M)
Per Unit Future Net Revenue Before
Income Taxes and Discounted at
10%(3) per year ($/boe)
375,999
169,038
1,039
292
679,648
278,959
1,172
344
8.60
10.39
6.22
2.64
10.36
11.60
5.54
2.48
Notes:
1.
2.
3.
Including solution gas and other by-products.
Including by-products, but excluding solution gas from oil wells.
Based on net reserves volumes.
Pricing Assumptions – Forecast Prices and Costs
Sproule employed the following pricing and inflation rate assumptions as of December 31, 2020 in its
evaluation in estimating reserves data using forecast prices and costs. The weighted average historical
prices received by the Corporation for 2020 are also reflected in the table below.
Medium and Light
Crude Oil
Natural
Gas
NGL
Canadian
Light
Sweet
Crude 40
API ($/bbl)
45.39
54.55
57.14
63.64
64.91
66.21
67.53
68.88
70.26
71.66
73.10
74.56
Western
Canada
Select
20.5
API ($/bbl)
35.59
43.51
46.10
52.60
53.65
54.72
55.82
56.93
58.07
59.23
60.42
61.63
Alberta
AECO
Gas Price
($/MMBtu)
2.24
2.86
2.78
2.69
2.75
2.80
2.86
2.91
2.97
3.03
3.09
3.15
Edmonton
Pentanes
plus
($/bbl)
Edmonton
Butane
($/bbl)
Edmonton
Propane
($/bbl)
Operating
Cost
Inflation
rates
(%/Yr)
49.85
55.84
58.40
64.82
66.11
67.44
68.78
70.16
71.56
72.99
74.45
75.94
21.87
29.87
34.29
39.92
40.72
41.53
42.37
43.21
44.08
44.96
45.86
46.78
16.31
19.36
21.35
24.56
25.06
25.56
26.07
26.59
27.12
27.66
28.22
28.78
-5.0%
0.0%
1.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
Capital
Cost
Inflation
rates
(%/Yr)
-5.0%
0.0%
1.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
Exchange
rate
($US/$Cdn)
0.75
0.77
0.77
0.77
0.77
0.77
0.77
0.77
0.77
0.77
0.77
0.77
Year
2020 (Historic)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
Note:
1.
Escalated thereafter at a rate of +2.0% per annum.
- 19 -
Reconciliation of Changes in Reserves
The following table sets forth a combined reconciliation of the Corporation’s gross reserves as at December
31, 2020, derived from the Reserves Report using forecast prices and cost estimates, reconciled to the
gross reserves of the Corporation as at December 31, 2020.
Proved
Balance at December 31, 2019
Product Type Transfer
Extensions and Improved Recovery
Infill Drilling
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Production
Balance at December 31, 2020
Probable
Balance at December 31, 2019
Product Type Transfer
Extensions and Improved Recovery
Infill Drilling
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Production
Balance at December 31, 2020
Light and
Medium Crude
Oil (Mbbls)
Heavy Crude
Oil
(Mbbls)
Natural Gas
Liquids
(Mbbls)
Conventional
Natural Gas
(MMcf)
Coalbed
Methane
(MMcf)
Boe
(Mboe)
43,914
-
576
297
1,495
-
(960)
(2,680)
(3,872)
38,770
20,051
-
720
415
(1,870)
-
-
(1,380)
(1,456)
16,552
2,381
-
35
2
(32)
-
(74)
(125)
(220)
1,968
66,468
-
2,626
279
1,067
-
(2,709)
(3,389)
(6,103)
58,240
-
-
-
-
944
-
-
(118)
(85)
740.6
77,424
-
1,768
761
(72)
-
(1,485)
(4,697)
(6,579)
67,120
Light and
Medium Crude
Oil (Mbbls)
Heavy Crude
Oil
(Mbbls)
Natural Gas
Liquids
(Mbbls)
Conventional
Natural Gas
(MMcf)
Coalbed
Methane
(MMcf)
Boe
(Mboe)
23,083
-
407
261
(1,355)
-
(1,,96)
(288)
-
20,912
9,954
-
630
77
(2,535)
-
-
(223)
-
7,903
1,046
-
22
4
(109)
-
(82)
(19)
-
861
31,837
-
1,625
121
(2,796)
-
(3,035)
(749)
-
27,002
170
-
-
-
49
-
-
(37)
182
39,417
-
1,329
363
(4,457)
-
(1,784)
(661)
-
34,206
Proved plus Probable
Balance at December 31, 2019
Product Type Transfer
Extensions and Improved Recovery
Infill Drilling
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Production
Balance at December 31, 2020
Light and
Medium Crude
Oil (Mbbls)
Heavy Crude
Oil
(Mbbls)
Natural Gas
Liquids
(Mbbls)
Conventional
Natural Gas
(MMcf)
Coalbed
Methane
(MMcf)
Boe
(Mboe)
66,997
-
982
558
140
-
(2,156)
(2,967)
(3,872)
59,682
30,005
-
1,350
234
(4,147)
-
-
(1,531)
(1,456)
24,455
3,427
-
57
6
(141)
-
(156)
(144)
(220)
2,829
98,305
-
4,251
189
(1,518)
-
(5,744)
(4,138)
(6,102)
85,243
170
-
-
-
993
-
-
(155)
(85)
924
116,841
-
3,097
829
(4,235)
-
(3,269)
(5,357)
(6,579)
101,327
- 20 -
Additional Information Relating to Reserves Data
First Attributed Undeveloped Reserves
The following table sets forth the volumes of proved undeveloped reserves that were first attributed in each
of the three most recent financial years:
Proved
2018
2019
2020
Light and
Medium Crude
Oil (Mbbls)
Heavy Crude Oil
(Mbbls)
Natural Gas
Liquids
(Mbbls)
Conventional
Natural Gas
(MMcf)
7,495.4
4,388.5
674.0
2,242.0
1,685.3
795.0
209.5
104.9
21.0
5,167.0
5,434.0
1,587.0
The following table sets forth the volumes of probable undeveloped reserves that were first attributed in
each of the three most recent financial years:
Probable
2018
2019
2020
Light and
Medium Crude
Oil (Mbbls)
Heavy Crude Oil
(Mbbls)
Natural Gas
Liquids
(Mbbls)
Conventional
Natural Gas
(MMcf)
5,787.5
3,769.8
537.0
1,777.3
1,289.7
673.0
170.2
84.2
20.0
5,051.0
1,308.0
1,435.0
Proved undeveloped reserves are generally those reserves related to infill wells that have not yet been
drilled or wells further away from gathering systems requiring relatively high capital to bring on production.
Probable undeveloped reserves are generally those reserves tested or indicated by analogy to be
productive, infill drilling locations and lands contiguous to production. This also includes the probable
undeveloped wedge from the proved undeveloped locations.
The Corporation currently plans to pursue the development of its proven and probable undeveloped
reserves within the next two years through ordinary course capital expenditures. However, the Corporation
may choose to delay development depending on a number of circumstances, including the existence of
higher priority expenditures and prevailing commodity prices and cash flow.
Significant Factors or Uncertainties Affecting Reserves Data
The process of estimating reserves is complex. It requires significant judgments and decisions based on
available geological, geophysical, engineering, and economic data. These estimates may change
substantially as additional data from ongoing development activities and production performance becomes
available and as economic conditions impacting oil and gas prices and costs change. The reserve estimates
contained herein are based on current production forecasts, prices and economic conditions.
As circumstances change and additional data becomes available, reserve estimates also change.
Estimates made are reviewed and revised, either upward or downward, as warranted by the new
information. Revisions are often required due to changes in well performance, prices, economic conditions
and governmental restrictions.
Although every reasonable effort is made to ensure that reserve estimates are accurate, reserve estimation
is an inferential science. As a result, subjective decisions, new geological or production information and a
changing environment may impact these estimates. Revisions to reserve estimates can arise from changes
in year-end oil and gas prices and reservoir performance. Such revisions can be either positive or negative.
- 21 -
Future Development Costs
The table below sets out the combined total development costs deducted in the estimation in the Reserves
Report of future net revenue attributable to proved reserves and proved plus probable reserves (using
forecast prices and costs).
2021
2022
2023
2024
2025
Remaining Years
Total Undiscounted
Forecast Prices and Costs
Proved Reserves
($M)
69,669
160,751
144,851
128,666
73,595
58,014
Proved plus
Probable
Reserves ($M)
84,789
200,491
183,710
172,175
93,661
104,606
635,546
839,432
The Corporation has four sources of funding available to finance its capital expenditure programs: internally
generated cash flow from operations, funds raised from the sale of non-core assets, debt financing when
appropriate and new issues of Common Shares, if available on favourable terms. The Corporation expects
to fund the above future development costs primarily through internally generated cash flow, funds raised
from the sale of non-core assets and debt. There can be no guarantee that the Board of Directors will
allocate funding to develop all of the reserves attributed in the Reserves Report. Failure to develop those
reserves could have a negative impact on the Corporation’s future cash flow.
Other Oil and Gas Information
Oil and Gas Wells
The following table sets forth the number and status of the Corporation’s wells effective December 31,
2020.
Producing
Non-Producing
Oil
Natural Gas
Coalbed
Methane
Water Inj/Disp
Oil
Natural
Gas
Coalbed
Methane
Water
Inj/Disp
Gross
Net
Gross
Net Gross
Net Gross
Net
Gross
Net
Gros
s
Net Gross
Net
Gross
Net
Alberta
Saskatchewan
1,089
199
843
199
62
75
Total
1,288
1,042
137
25
5
30
7
-
7
4
-
4
308
21
329
219
19
238
2,096
1,742
421
320
91
64
16
7
2,187
1,806
437
327
1
-
1
1
-
1
277
11
288
223
9
232
- 22 -
Properties with no Attributed Reserves
The following table summarizes, effective December 31, 2020, the gross and net acres of unproved
properties in which the Corporation has an interest and also the number of net acres for which the
Corporation’s rights to explore, develop or exploit will, absent further action, expire within one year.
Alberta
Saskatchewan
Total
Gross
Undeveloped
Acres
Net
Undeveloped
Acres
Net
Undeveloped
Acres Expiring
within One Year
258,629
19,037
277,666
226,230
17,101
243,331
21,885
-
21,885
Additional Information Concerning Abandonment and Reclamation Costs
The Corporation typically estimates well abandonment costs area by area. Such costs are included in the
Reserves Report as deductions in arriving at future net revenue. The expected total abandonment costs
included in the Reserves Report for 4,075 net wells under the proved reserves category is $456.4 million
undiscounted ($50.4 million discounted at 10 percent), of which a total of $11.7 million is estimated to be
incurred in 2021, 2022 and 2023. This estimate includes expected reclamation costs for surface leases
which have existing wells with economic developed reserves assigned or future development drilling
locations. The Corporation will be liable for its share of ongoing environmental obligations and for the
ultimate reclamation of the properties held by it upon abandonment. Subject to pending changes in
applicable regulations regarding the abandonment and reclamation, ongoing environmental obligations are
expected to be funded out of cash flow.
Forward Contracts
Surge is exposed to market risks resulting from fluctuations in commodity prices, foreign exchange rates
and interest rates in the normal course of operations. A variety of derivative instruments are used by Surge
to reduce its exposure to fluctuations in commodity prices and foreign exchange rates. Surge is exposed
to losses in the event of default by the counterparties to these derivative instruments. Surge manages this
risk by diversifying its derivative portfolio amongst a number of financially sound counterparties.
For details of the Corporation’s forward contracts in place as at December 31, 2020, see the Corporation’s
audited annual financial statements for the year ended December 31, 2020, which have been filed on
SEDAR and may be viewed under the Corporation’s profile at www.sedar.com. See “Risk Factors – Fixed
Price Hedging”.
Tax Horizon
Based on planned capital expenditures and the forecast commodity pricing employed in the Reserves
Report, the Corporation estimates that it will not be required to pay current income taxes before 2025.
- 23 -
Costs Incurred
The following table summarizes capital expenditures incurred by the Corporation during the year ended
December 31, 2020.
Property Acquisition Costs
Unproved
Properties
-
Proved
Properties
-
Property
Dispositions
(6,038)
Exploration
Costs
-
Development
Costs
52,773
Total ($M)
Drilling Activity
The following table sets forth the gross and net exploration and development wells drilled by the Corporation
based on rig release date during the year ended December 31, 2020.
Light and Medium Crude Oil
Heavy Crude Oil
Conventional Natural Gas
Service
Dry
Total
Planned Capital Expenditures
Exploration Wells
Gross
Development Wells
Net
Gross
-
-
-
-
-
-
-
-
-
-
-
-
32.00
-
-
-
-
32.00
Net
32.00
-
-
-
-
32.00
The Corporation has announced a planned capital expenditure budget of approximately $55 million for
2021.
Production Estimates
The following table discloses for each product type the total volume of production estimated by Sproule in
the Reserves Report for 2020 in the estimates of future net revenue from gross proved and gross proved
plus probable reserves disclosed above.
Light and
Medium
Crude Oil
(bbls/d)
Heavy
Crude Oil
(bbls/d)
Conventional
Natural Gas
(Mcf/d)
Coalbed
Methane
(Mcf/d)
Natural
Gas
Liquids
(bbls/d)
Proved
Greater Sawn
Valhalla
Sparky
Shaunavon
Minors
Total Proved
Proved Plus Probable
Greater Sawn
Valhalla
Sparky
Shaunavon
Minors
Total Proved Plus Probable
3,992
1,371
5,130
-
97
10,590
4,215
1,499
5,880
-
108
11,700
-
-
2,876
1,237
67
4,180
-
-
3,014
1,295
70
4,379
1,210
8,947
5,581
-
534
16,271
1,256
9,705
6,350
-
560
17,871
367
-
-
-
-
367
373
-
-
-
-
373
85
322
95
-
6
508
89
349
111
-
6
555
Boe
(boe/d)
4,340
3,184
9,031
1,237
259
18,050
4,575
3,465
10,063
1,295
277
19,675
%
24%
18%
50%
7%
1%
100%
23%
18%
51%
7%
1%
100%
- 24 -
Production History
The following table discloses, on a quarterly basis for the year ended December 31, 2020, certain
information in respect of production, product prices received, royalties paid, operating expenses and
resulting operating netback for the Corporation.
Average Daily Production Volume
Conventional Natural Gas (Mcf/d)
Light and Medium Crude Oil (bbls/d)
NGL (bbls/d)
Coalbed Methane (Mcf/d)
Total (boe/d)
Mar 31, 2020
Jun 30, 2020
Sep 30, 2020
Dec 31, 2020
Three Months Ended
17,281
16,891
564
128
20,357
16,539
13,813
528
125
17,118
16,251
13,759
582
252
17,092
16,630
13,788
726
420
17,356
Prices Received, Royalties Paid, Production Costs and Operating Netback – Crude Oil
($ per Bbl)
Prices Received
Royalties Paid
Production Costs
Transportation Costs
Operating Netback(1)
Mar 31, 2020
Jun 30, 2020
Sep 30, 2020
Dec 31, 2020
Three Months Ended
34.24
(4.62)
(14.28)
(1.61)
13.73
19.42
(2.06)
(14.49)
(1.67)
1.21
36.02
(4.01)
(14.17)
(1.36)
16.48
37.24
(4.14)
(15.77)
(1.17)
16.17
Note:
1.
Including solution gas and associated natural gas liquids revenue.
Prices Received, Royalties Paid, Production Costs and Operating Netback – Conventional Natural
Gas
($ per Mcf)
Prices Received
Royalties Received
Production Costs
Transportation Costs
Operating Netback
Mar 31, 2020
Jun 30, 2020
Sep 30, 2020
Dec 31, 2020
Three Months Ended
0.90
0.19
(0.05)
(0.21)
0.83
0.94
0.01
(0.09)
(0.20)
0.67
1.17
0.06
0.06
(0.20)
1.08
1.66
0.40
(1.30)
(0.07)
0.69
Prices Received, Royalties Paid, Production Costs and Operating Netback – Combined
($ per boe)
Prices Received
Royalties Paid
Production Costs
Transportation Costs
Operating Netback
Mar 31, 2020
Jun 30, 2020
Sep 30, 2020
Dec 31, 2020
Three Months Ended
34.39
(4.59)
(14.29)
(1.64)
13.87
19.58
(2.06)
(14.50)
(1.70)
1.32
36.21
(4.00)
(14.16)
(1.39)
16.66
37.52
(4.07)
(15.99)
(1.18)
16.28
Note:
1.
Operating Netback is calculated by deducting royalties paid and production costs, including transportation costs, from prices
received, excluding the effects of hedging.
- 25 -
Production Volume by Field
The following table indicates the average daily net production from the Corporation’s important fields for
the year ended December 31, 2020.
Light and
Medium
Crude Oil
(bbls/d)
3,801
1,689
7,339
1,506
223
14,558
Conventional
Natural Gas
(Mcf/d)
Natural Gas
Liquids
(bbls/d)
Coalbed
Methane
(Mcf/d)
1,352
10,173
4,552
-
598
16,675
133
353
101
-
14
600
-
-
-
-
231
231
Field
Greater Sawn
Valhalla
Sparky
Shaunavon
Minors
Total
Boe
(boe/d)
4,159
3,737
8,199
1,506
375
17,976
%
23%
21%
46%
8%
2%
100%
- 26 -
DESCRIPTION OF CAPITAL STRUCTURE
Share Capital
The Corporation is authorized to issue an unlimited number of Common Shares and an unlimited number
of preferred shares, issuable in series.
Common Shares
The holders of Common Shares are entitled to: (i) one vote for each Common Share held at all meetings
of shareholders of the Corporation other than meetings of the holders of any class or series of shares
meeting as a class or series; (ii) receive any dividends declared by the Corporation on the Common Shares;
and (iii) subject to the rights of shares ranking prior to the Common Shares, to receive the remaining
property of the Corporation on dissolution, after the payment of all liabilities.
Preferred Shares
Preferred shares may be issued in one or more series. The Board of Directors is authorized to fix the
number of shares in each series and to determine the designation, rights, privileges, restrictions and
conditions attached to the shares of each series. Preferred shares of the Corporation are entitled to a priority
over the Common Shares with respect to the payment of dividends and the distribution of assets upon the
liquidation, dissolution or winding-up of the Corporation.
Debentures
The Debentures, including the Initial Debentures and the Series 2 Debentures, are issued under and
pursuant to the provisions of the Indenture among Computershare Trust Company of Canada and Surge.
The following is a summary of the material attributes and characteristics of the Debentures. This summary
does not purport to be complete and is subject to and qualified in its entirety by reference to the terms of
the Indenture which may be viewed under Surge’s profile on SEDAR at www.sedar.com.
The Debentures are direct, subordinated, unsecured obligations of the Corporation, subordinated to any
existing and future senior indebtedness of the Corporation and ranking equally with one another and with
all other existing and future subordinated unsecured indebtedness of the Corporation to the extent
subordinated on the same terms.
Initial Debentures
The Initial Debentures will mature and be repayable on December 31, 2022 (the “Initial Debenture
Maturity Date”) and will accrue interest at the rate of 5.75% per annum payable semi-annually in arrears
on December 31 and June 30 of each year (each an “Initial Debenture Interest Payment Date”),
commencing on June 30, 2018 and computed on the basis of a 365-day year. The June 30, 2018 interest
payment will represent accrued interest for the period from and including November 15, 2017 up to, but
excluding, June 30, 2018. Interest on the Initial Debentures will be payable in lawful money of Canada.
At the holder’s option, the Initial Debentures may be converted into Common Shares at any time prior to
5:00 p.m. (Calgary time) on the earlier of the business day immediately preceding (i) the Initial Debenture
Maturity Date; and (ii) if called for redemption, the date fixed for redemption by the Corporation, at a
conversion price of $2.75 per Common Share, subject to adjustment in certain events (the “Initial
Debenture Conversion Price”). This represents a conversion rate of approximately 363.6364 Common
Shares for each $1,000 principal amount of Initial Debentures, subject to certain anti-dilution provisions.
Holders who convert their Initial Debentures will receive, in addition to the applicable number of Common
- 27 -
Shares, accrued and unpaid interest in respect thereof for the period up to, but excluding, the date of
conversion from, and including, the most recent Initial Debenture Interest Payment Date. If a holder elects
to convert its Debentures in connection with a change of control that occurs prior to the Initial Debenture
Maturity Date, the holder will be entitled to receive additional Common Shares as a make-whole premium
on conversion in certain circumstances (as more fully described in the Indenture).
The Initial Debentures may not be redeemed by the Corporation prior to December 31, 2020 except in
certain circumstances following a change of control. On and after December 31, 2020 and prior to
December 31, 2021, the Initial Debentures may be redeemed by the Corporation, in whole or in part, from
time to time, on not more than 60 days and not less than 30 days prior written notice at a redemption price
equal to their principal amount plus accrued and unpaid interest, if any, up to but excluding the date set for
redemption, provided that the volume weighted average trading price of the Common Shares on the TSX
for the 20 consecutive trading days ending five trading days prior to the date on which notice of redemption
is provided is at least 125 percent of the Initial Debenture Conversion Price. On or after December 31, 2021
and prior to the Initial Debenture Maturity Date, the Initial Debentures may be redeemed by the Corporation,
in whole or in part, from time to time, on not more than 60 days and not less than 30 days prior notice at a
redemption price equal to their principal amount plus accrued and unpaid interest, if any, up to but excluding
the date set for redemption.
The Initial Debentures were listed and posted for trading on the TSX under the symbol “SGY.DB” at the
open of markets on November 15, 2017.
Series 2 Debentures
The Series 2 Debentures will mature and be repayable on June 30, 2024 (the “Series 2 Debenture
Maturity Date”) and will accrue interest at the rate of 6.75% per annum payable semi-annually in arrears
on December 31 and June 30 of each year (each a “Series 2 Debenture Interest Payment Date”),
commencing on December 31, 2019 and computed on the basis of a 365-day year. The December 31,
2019 interest payment will represent accrued interest for the period from and including May 8, 2019 up to,
but excluding, December 31, 2019. Interest on the Series 2 Debentures will be payable in lawful money of
Canada.
At the holder’s option, the Series 2 Debentures may be converted into Common Shares at any time prior
to 5:00 p.m. (Calgary time) on the earlier of the business day immediately preceding (i) the Series 2
Debenture Maturity Date; and (ii) if called for redemption, the date fixed for redemption by the Corporation,
at a conversion price of $2.25 per Common Share, subject to adjustment in certain events (the “Series 2
Debenture Conversion Price”). This represents a conversion rate of approximately 444.4444 Common
Shares for each $1,000 principal amount of Series 2 Debentures, subject to certain anti-dilution provisions.
Holders who convert their Series 2 Debentures will receive, in addition to the applicable number of Common
Shares, accrued and unpaid interest in respect thereof for the period up to, but excluding, the date of
conversion from, and including, the most recent Series 2 Debenture Interest Payment Date. If a holder
elects to convert its Series 2 Debentures in connection with a change of control that occurs prior to the
Series 2 Debenture Maturity Date, the holder will be entitled to receive additional Common Shares as a
make-whole premium on conversion in certain circumstances (as more fully described in the Indenture).
The Series 2 Debentures may not be redeemed by the Corporation prior to June 30, 2022 except in certain
circumstances following a change of control. On and after June 30, 2022 and prior to June 30, 2023, the
Series 2 Debentures may be redeemed by the Corporation, in whole or in part, from time to time, on not
more than 60 days and not less than 30 days prior written notice at a redemption price equal to their principal
amount plus accrued and unpaid interest, if any, up to but excluding the date set for redemption, provided
that the volume weighted average trading price of the Common Shares on the TSX for the 20 consecutive
trading days ending five trading days prior to the date on which notice of redemption is provided is at least
- 28 -
125 percent of the Conversion Price. On or after June 30, 2023 and prior to the Series 2 Debenture Maturity
Date, the Series 2 Debentures may be redeemed by the Corporation, in whole or in part, from time to time,
on not more than 60 days and not less than 30 days prior notice at a redemption price equal to their principal
amount plus accrued and unpaid interest, if any, up to but excluding the date set for redemption.
The Series 2 Debentures were listed and posted for trading on the TSX under the symbol “SGY.DB.A” at
the open of markets on May 8, 2019.
DIVIDEND POLICY
The Credit Facilities contain restrictions on Surge’s ability to pay dividends. In addition, the payment of
dividends by a corporation is governed by the liquidity and insolvency tests described in the ABCA.
Pursuant to the ABCA, after the payment of a dividend, a corporation must be able to pay its liabilities as
they become due and the realizable value of the assets of the corporation must be greater than the liabilities
and the legal stated capital of its outstanding securities.
On March 9, 2020, the Corporation announced it was reducing monthly dividend by 90%, from $0.10 per
Common Share per year to $0.01 per Common Share per year, effective with the March 2020 dividend
payable in April 2020. On April 14, 2020, the Corporation suspended the Corporation’s dividend program
in its entirely. The final cash dividend payment prior to suspension was made on April 15, 2020 for
Shareholders of record as at March 31, 2020, as declared on March 16, 2020.
The following monthly cash dividends on Common Shares were declared in respect of the periods indicated:
Month
January
February
March
April
May
June
July
August
September
October
November
December
Total
2021
-
-
-
-
-
-
-
-
-
-
-
-
-
Dividends per Common Share ($)
2020
0.008333
0.008333
0.000833
-
-
-
-
-
-
-
-
-
0.017499
2019
0.008333
0.008333
0.008333
0.008333
0.008333
0.008333
0.008333
0.008333
0.008333
0.008333
0.008333
0.008333
0.099996
2018
0.007917
0.007917
0.007917
0.007917
0.007917
0.008333
0.008333
0.008333
0.008333
0.008333
0.008333
0.008333
0.097916
Unless otherwise specified, all dividends paid are designated as “eligible dividends” under the Income Tax
Act (Canada).
The amount of future cash dividends, if any, will be subject to the discretion of the Board of
Directors and will otherwise depend on a variety of factors, including the removal of the restrictions
on the payment of dividends contained in the Credit Facilities, prevailing economic and competitive
environment, results of operations, fluctuations in working capital, the price of oil and gas, the
taxability of the Corporation, the Corporation’s ability to raise capital, the amount of capital
expenditures, the satisfaction of solvency tests imposed by the ABCA for the declaration and
payment of dividends, applicable law and other factors. See “Dividend Policy”.
- 29 -
MARKET FOR SECURITIES
The Common Shares are listed and posted for trading on the TSX under the trading symbol “SGY”. The
following table sets forth the market price ranges and the trading volumes for the Common Shares for the
periods indicated, as reported by the TSX, for the year ended December 31, 2020.
Price Range ($)
Period
High
January
February
March
April
May
June
July
August
September
October
November
December
1.18
1.03
0.90
0.33
0.32
0.54
0.36
0.36
0.31
0.20
0.33
0.39
Low
0.99
0.78
0.19
0.20
0.24
0.26
0.30
0.30
0.19
0.14
0.19
0.28
Trading
Volume
14,546,958
11,453,169
35,067,095
36,331,017
21,180,626
48,773,178
10,188,258
18,536,129
11,683,939
18,924,044
27,131,909
24,879,662
The Initial Debentures are listed and posted for trading on the TSX under the trading symbol “SGY.DB”.
The following table sets forth the market price ranges and the trading volumes for the Initial Debentures for
the periods indicated, as reported by the TSX, for the year ended December 31, 2020.
Period
January
February
March
April
May
June
July
August
September
October
November
December
Price Range ($)
High
98.74
98.20
91.50
47.99
45.00
64.99
55.00
60.00
53.02
38.00
55.98
68.00
Low
96.01
88.00
18.21
23.00
33.00
39.00
50.50
51.00
30.00
27.75
30.00
50.00
Trading
Volume
465,999
297,000
1,248,000
1,062,999
349,000
487,000
253,000
385,000
464,000
1,741,999
2,457,000
566.999
- 30 -
The Series 2 Debentures are listed and posted for trading on the TSX under the trading symbol “SGY.DB.A”.
The following table sets forth the market price ranges and the trading volumes for the Series 2 Debentures
for the periods indicated, as reported by the TSX, for the year ended December 31, 2020.
Price Range ($)
Period
High
Low
January
February
March
April
May
June
July
August
September
October
November
December
100.00
101.21
96.03
46.50
45.00
63.00
57.50
58.75
52.00
40.00
53.99
67.00
98.00
96.00
19.00
25.00
38.00
45.00
50.00
49.80
39.00
26.00
26.00
46.00
Trading
Volume
775,000
357,999
480,000
271,000
270,000
420,998
115,000
269,999
67,000
751,999
1,438,998
426,000
DIRECTORS AND OFFICERS
The name, municipality of residence, principal occupation for the prior five years and position with the
Corporation of each of the directors and officers of the Corporation are as follows:
Name and
Residence
Paul Colborne
Alberta, Canada
Position
Principal Occupation During Previous Five Years
President and
Chief Executive
Officer
Director since
April 13, 2010
President and Chief Executive Officer of the Corporation. He is also the
President of StarValley Oil and Gas Ltd., a private, Calgary-based oil and
gas company founded in November 2005. Mr. Colborne currently serves as
Chairman of the board of directors of Rising Star Resources Ltd., a private
oil and gas company. In 1993, after nine years practicing securities, banking
and oil and gas law, Mr. Colborne directed his focus to the oil and gas
industry and founded an oil and gas company called Startech Energy Ltd., a
publicly traded company, which grew to 15,000 boe/d. Eight years later in
2001, Startech was acquired by ARC Energy Trust for more than C$500
million. From September 2003 to January 2005, Mr. Colborne was the
President and Chief Executive Officer of StarPoint Energy Trust, a 36,000
boe/d publicly traded energy trust. From 1996 to May 2013, Mr. Colborne
was on the board of directors of Crescent Point Energy Corp., a 110,000
boe/d publicly traded oil and gas company. Until its sale in July of 2009, Mr.
Colborne served as Chairman of TriStar Oil & Gas Ltd. He was also
previously a Director for Westfire Energy Ltd., Twin Butte Energy Ltd., Red
River Oil Inc., Cequence Energy Ltd., and Chairman of Seaview Energy Ltd.
Until its sale in December of 2009, he also served as a Director of Breaker
Energy Ltd. Mr. Colborne was also Chairman and a Director of Mission Oil
and Gas Inc. until its sale in February 2007. In May of 2014, Paul stepped
down from the board of Legacy Oil + Gas. In June of 2014, Paul completed
- 31 -
Name and
Residence
Position
Principal Occupation During Previous Five Years
James Pasieka
Alberta, Canada
Director since
April 13, 2010
Chairman of the
Board since
January 7, 2015
Marion Burnyeat
ICD.D(2)(4) Alberta,
Canada
Director since
July 16, 2018
Daryl Gilbert(2)(3)
Alberta, Canada
Director since
June 5, 2014
Michelle
Gramatke(1)
Alberta, Canada
Director since
May 2019
his term as Chairman of a private company called New Star Energy Ltd., and
stepped down as a Director.
Counsel to the national law firm McCarthy Tétrault LLP since January 1,
2020. Prior thereto, partner at McCarthy Tétrault LLP since September 1,
2013. Prior to that, partner of the national law firm Heenan Blaikie LLP since
January 1, 2001. Mr. Pasieka has served as an officer and director of a
number of public energy companies, and chairman of the board of several
oil and gas companies.
Director, SECURE Energy Services since April 2020 and Calgary Academy
and Headwater Learning Group since June 2018. Consultant with Inter
Pipeline on mergers and acquisitions from April to June 2018. Vice
President of Field Services at Westcoast Energy Inc. from January 2013 to
March 2017. Prior thereto, Ms. Burnyeat served as Vice President of
Midstream of Westcoast Energy Inc. from May 2008 to January 2013. She
served as Vice President Strategic Development and Stakeholder Relations
at Westcoast Energy Inc. from January 2007 to May 2008. Ms. Burnyeat has
nearly thirty years in the energy sector primarily with Spectra Energy
Corporation and
increasingly
responsible executive roles in leading Midstream business units, Strategic
Development, Stakeholder Relations and Business Development. Ms.
Burnyeat holds the ICD.D designation from the Institute of Corporate
Directors, a Bachelor of Commerce degree from the University of Alberta
and a Master of Business Administration degree from Edinburgh University,
Scotland. She has held positions on not for profit boards and is an active
volunteer for several charitable organizations including Freestyle Alberta.
its predecessor companies. She held
Chair of the Reserves Committee for the Corporation. Managing Director
and Investment Committee member of JOG Capital Inc. since May 2008.
Mr. Gilbert has also been an independent businessman and investor, and
serves as a director for a number of public and private entities, since 2005.
Mr. Gilbert has been active in the Western Canadian oil and natural gas
sector for over 40 years, working in reserves evaluation with Gilbert
Laustsen Jung Associates Ltd. (now GLJ Petroleum Consultants Ltd.)
(“GLJ”), an engineering consulting firm, from 1979 to 2005. Mr. Gilbert
served as President and Chief Executive Officer of GLJ from 1994 to 2005.
Ms. Gramatke is a Chartered Accountant with over 25 years of financial
experience. She was most recently the Chief Financial Officer of JOG
Capital (a private equity investment firm based in Calgary) from 2004 until
August 2020. Prior to working for JOG Capital, Ms. Gramatke held several
executive
of
PricewaterhouseCoopers Central Asia, Deputy Chief Financial Officer for an
American NASDAQ-listed telecommunications company with operations in
Russia and Manager with PricewaterhouseCoopers Moscow. Ms. Gramatke
began her career with KPMG in Calgary focusing on Canadian upstream oil
and gas, construction and mining companies.
Financial
positions
including
Officer
Chief
- 32 -
Name and
Residence
Position
Principal Occupation During Previous Five Years
Robert Leach(1)(2)
Arizona, United
States of America
Director since
April 13, 2010
Allison Maher(1)(3)
Alberta, Canada
Director since
July 16, 2018
P. Daniel
O’Neil(3)(4)
Alberta, Canada
Director since
April 13, 2010
Murray Smith(2)(4)
Alberta, Canada
Director since
June 25, 2010
Murray Bye
Alberta, Canada
Chief Operating
Officer
Jared Ducs
Alberta, Canada
Chief Financial
Officer
Chief Executive Officer of Custom Truck Sales Ltd., a private company
operating Kenworth truck dealerships in Saskatchewan and Manitoba since
1986, and Vice President of ReNue Properties Arizona Inc. since 2015. Mr.
Leach was formerly the Chairman of the board of directors of Breaker Energy
Inc.
Chair of the Audit Committee. President, Director and Co-founder of Family
Wealth Coach Planning Services since January 2009. Prior thereto, Ms.
Maher worked at other financial-advisory and estate-planning companies
such as Great-West Life (London Life) for almost two decades. Ms. Maher
began her career at KPMG in the areas of Tax and Corporate Audit. Ms.
Maher has her Certified Corporate Director, Chartered Professional
Accountant and Certified Financial Planner designations. Ms. Maher
received her Bachelor of Commerce degree, with Distinction, from the
University of Calgary. Ms. Maher is an active member of the Institute of
Corporate Directors, Chair of TIGER21 Calgary and currently holds board
positions on several not for profit boards.
Chair of the Environment, Health and Safety Committee for the Corporation.
Independent businessperson since his retirement on May 8, 2013. Prior
thereto, President and Chief Executive Officer of the Corporation from April
13, 2010 until his retirement. Prior thereto, President and Chief Executive
Officer of Breaker Energy Ltd., a publicly traded oil and natural gas company,
from its formation in September 2004 until its acquisition by NAL Oil & Gas
Trust in December 2009. Mr. O’Neil was also a director of Cathedral Energy
Services Ltd. Prior to their sales, Mr. O’Neil was also a Director of Hyperion
Exploration Corporation and Cequence Energy Ltd
Chair of the Compensation Committee for the Corporation. President of
Murray Smith and Associates. Mr. Smith also serves on the board of two
private companies and Williams Companies Inc. (WMB.nyse), a Tulsa based
midstream company. Prior thereto, Mr. Smith was an Official Representative
of the Province of Alberta to the United States of America until 2007. Prior
thereto, he was a member of the Legislative Assembly in the Province of
Alberta serving in four different Cabinet portfolios – Energy, Gaming, Labour,
and Economic Development from 1993 to 2005.
Chief Operating Officer of the Corporation since August 2018. Prior thereto,
Mr. Bye was Vice President, Production of the Corporation from May 2013.
Prior thereto, Mr. Bye was Asset Team Lead – West at Surge since June
2010. Prior to his role at Surge, Mr. Bye held a number of positions at
EnCana Corporation between the years 2000 to 2010 including: Group Lead
of Development, Exploitation Engineer, and Production Engineer. Mr. Bye
received a Petroleum Engineering degree from Montana Tech.
Chief Financial Officer of the Corporation since August 2019. Prior thereto,
Vice President, Finance of the Corporation since August 2018. Prior thereto,
Mr. Ducs has held several progressively more senior roles at Surge since
April 2010 including Director of Corporate Development, Assistant Controller
and Manager of Financial Reporting. Preceding his role at Surge, Mr. Ducs
was a senior member of the Finance group at Breaker Energy Ltd., prior to
its sale to NAL Oil & Gas Trust in 2009. Prior thereto, Mr. Ducs held the
position of Senior Associate with Ernst & Young LLP. Mr. Ducs holds a
Charted Accountant Designation and received his Bachelor of Management
- 33 -
Name and
Residence
Position
Principal Occupation During Previous Five Years
Derek Christie
Alberta, Canada
Senior Vice
President –
Geosciences
Margaret Elekes
Alberta, Canada
Senior Vice-
President, Land
and Business
Development
Rod Monden
Alberta, Canada
Controller
in Accounting and Finance from the University of Lethbridge.
Senior Vice President, Geosciences of the Corporation since November
2019. Prior thereto, Mr. Christie was the Senior Vice President of Exploration
& Corporate Development at Crescent Point Energy and was employed with
that company since February 2007. During this period he held various
Senior Management positions in exploration, geosciences and corporate
development.
Senior Vice-President, Land and Business Development of the Corporation
since August 2018. Prior thereto, Ms. Elekes was Vice-President, Land and
Business Development of the Corporation from August 2016. Prior thereto,
Vice-President, Land of the Corporation at Surge since April 2010. Prior
thereto, Consulting Landman for Breaker Energy from its formation in
September 2004 until its acquisition by NAL Oil & Gas Trust in December
2009. Prior thereto, Landman and US Land Manager for Upton Resources
from December 1995 until its acquisition by StarPoint Energy in February
2004.
Controller of the Corporation. Prior thereto, Mr. Monden held the position of
Controller for Breaker Energy Ltd. from January 2008 until its acquisition by
NAL Oil & Gas Trust in December 2009. Prior thereto, he was the VP
Finance and Chief Financial Officer of a private junior oil and gas company
from September 2006 to October 2008. Prior thereto, Mr. Monden worked
as Manager, Financial Reporting & Budgets at Burlington Resources
Canada Ltd. from September 2002 to August 2006. Mr. Monden is a
Chartered Professional Accountant (C.A.).
Notes:
1.
2.
3.
4.
Member of the Audit Committee.
Member of the Compensation, Nominating and Corporate Governance Committee of the Board.
Member of the Reserves Committee of the Board.
Member of the Environment, Health and Safety Committee of the Board.
As at March 9, 2021, the directors and executive officers of the Corporation, as a group, beneficially own,
control or direct, directly or indirectly, 16,295,099 Common Shares, representing approximately 4.8 percent
of the outstanding Common Shares.
The terms of office of each of the directors of the Corporation will expire at the next annual general meeting
of the shareholders of the Corporation.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Other than as set forth below, to the knowledge of management of the Corporation:
a)
no director or executive officer of the Corporation is, or within the 10 years before the date of this
AIF, has been, a director, chief executive officer or chief financial officer of any other issuer that: (i)
was the subject of a cease trade or similar order or an order that denied the other issuer access to
any exemptions under Canadian securities legislation that lasted for a period of more than 30
consecutive days that was issued while the director or executive officer was acting in the capacity
as director, chief executive officer or chief financial officer; or (ii) was subject to a cease trade or
similar order or an order that denied the relevant issuer access to any exemption under securities
legislation that lasted for a period of more than 30 consecutive days that was issued after the
- 34 -
b)
c)
director or executive officer ceased to be a director, chief executive officer or chief financial officer
and which resulted from an event that occurred while the person was acting in the capacity as
director, chief executive officer or chief financial officer;
no director or executive officer, or any shareholder holding a sufficient number of securities of the
Corporation to affect materially the control of the Corporation, or a personal holding company of
any such person: (i) is, at the date of this AIF or has been within the 10 years before the date of
this AIF, a director or executive officer of any company that, while that person was acting in that
capacity or within a year of that person ceasing to act in that capacity, became bankrupt, made a
proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted
any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager
or trustee appointed to hold its assets; or (ii) has, within the 10 years before the date of this AIF,
become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or
was subject to or instituted any proceedings, arrangement or compromise with creditors, or had a
receiver, receiver manager or trustee appointed to hold the assets of the director, officer or
shareholder; and
no director or executive officer, or any shareholder holding a sufficient number of securities of the
Corporation to affect materially the control of the Corporation, has: (i) been subject to any penalties
or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian
securities regulatory authority or has entered into a settlement agreement with the Canadian
securities regulatory authority; or (ii) been subject to any other penalties or sanctions imposed by
a court or regulatory body that would likely be considered important to a reasonable investor in
making an investment decision.
Mr. Gilbert was a director of LGX Oil and Gas Inc. (“LGX”), a public oil and gas company, from August 2013
until June 2016. On June 7, 2016 a consent receivership order was granted by the Alberta Court of Queen’s
Bench (the “Court”) upon an application by LGX’s senior lender. LGX’s stock was cease traded shortly
thereafter and a receiver manager was appointed. Mr. Gilbert was a director of Connacher Oil & Gas Limited
(“Connacher”) from October 2014 until February 2019. On May 17, 2016, Connacher applied for and was
granted protection from its creditors by the Court pursuant to the Companies’ Creditors Arrangement Act
(Canada), (“CCAA”). On February 16, 2019, Connacher announced that it was proceeding to close on a
credit bid transaction with its supporting lenders. Mr. Gilbert resigned from the Board shortly thereafter. Mr.
Gilbert was a director of Trident Exploration Corp. (“Trident”) from 2010 through year end 2018. On April
30, 2019, Trident announced it had ceased operations and had transferred all assets to the Alberta Energy
Regulator. On May 3rd, 2019, PricewaterhouseCoopers LLP was appointed receiver. A liquidation process
is currently underway.
Mr. Pasieka was also a director of LGX. Mr. Pasieka resigned as a director of LGX in July 2015. LGX was
placed into receivership nearly twelve months later in June 2016 and, in connection therewith, a receiver
was appointed under the Bankruptcy and Insolvency Act (Canada). Cease trade orders in respect of LGX
were issued shortly after the appointment of the receiver.
Conflicts of Interest
As at the date hereof, the Corporation is not aware of any existing or potential material conflicts of interest
between the Corporation and a director or officer of the Corporation.
- 35 -
Composition of the Audit Committee, Charter and Review of Services
AUDIT COMMITTEE
The Audit Committee of the Board of Directors operates under a written charter that sets out its
responsibilities and composition requirements. A copy of the charter is attached to this AIF as Schedule
“C”.
The members of the Audit Committee of the Board of Directors are Allison Maher (Chair), Robert Leach
and Michelle Gramatke. The Audit Committee charter requires all members of the Audit Committee to be
“financially literate” and “independent” within the meaning of applicable securities laws. All members of the
Audit Committee meet these requirements. The relevant education and experience of each Audit
Committee member is outlined below:
Name
Independent
Financially
Literate
Relevant Education and Experience
Allison Maher
Robert Leach
Ms. Maher is currently the President and Director of her own
advisory firm, Family Wealth Coach Planning Services. She is
highly involved in matters related to succession planning, as
well as family governance, estate and risk management. Ms.
Maher began her career with KPMG in the areas of Tax and
Corporate Audit.
Ms. Maher is presently a member of the Chartered Professional
Accountants of Alberta, as well as an active member of the
Institute of Corporate Directors, Chair of TIGER21 Calgary and
currently holds board positions on several not for profit boards.
Ms. Maher also holds Certified Corporate Director and Certified
Financial Planner designations.
Ms. Maher has been a member of the board of the Calgary
Health Foundation since February 2020 and was a member of
the board of the Heritage Park Foundation since June 2014 to
June 2020. Ms. Maher has been a trustee for the Cidel Donor
Advised Fund since June 2014. From May 2011 to May 2017,
she served as chairperson and advisory board member for the
Alberta Business Family Institute (University of Alberta).
Ms. Maher holds a Bachelor of Commerce degree, with
Distinction, from the University of Calgary.
Mr. Leach is currently the President of Sonoma Valley LLC
Arizona Inc., a Phoenix based real estate investment company.
Mr. Leach was formerly the Chairman of the board of Breaker
Energy Ltd. and holds a Bachelor of Commerce degree,
majoring in accounting, from the University of Saskatchewan.
Mr. Leach has experience reviewing and assessing financial
statements from his tenure on the audit committee of Breaker,
as a member of the Board of Surge, and through his years of
experience at Custom Truck Sales Ltd. and International
Fitness Holdings.
- 36 -
Name
Independent
Financially
Literate
Relevant Education and Experience
Michelle
Gramatke
Ms. Gramatke was Chief Financial Officer and Chief
Compliance Officer of JOG Capital, a Calgary based private
equity investment fund advisor which invests in Canadian oil &
gas companies from 2004 to August 2020. Ms. Gramatke was
responsible for JOG Capital’s financial reporting, treasury, tax
and regulatory compliance.Ms. Gramatke
is presently a
member of the Chartered Professional Accountants of Alberta
and holds a Bachelor of Management degree from the
University of Lethbridge.
Pre-Approval of Policies and Procedures
The Audit Committee charter requires that any non-audit services by the Corporation’s auditors must be
pre-approved by the Audit Committee. The Audit Committee has passed a resolution providing the
Chairman of the Audit Committee with delegated authority to approve the provision of non-audit services
by the Corporation’s auditors from time to time, provided that: (i) such services are provided pursuant to a
written engagement letter setting out the services to be provided and the applicable fees; (ii) the provision
of such services is otherwise in compliance with the Audit Committee’s charter; (iii) such services could not
be reasonably seen to result in the auditors performing any management function, auditing their own work
or serving in an advocacy role on behalf of the Corporation; (iv) the fees for such services do not exceed
$50,000 per engagement; and (v) the Chairman reports to the Committee at the next regularly scheduled
meeting any approval of non-audit services made pursuant to the authority delegated under the resolution.
The Audit Committee also pre-approves all audit services and the fees to be paid.
External Auditor Service Fees
KPMG LLP are the auditors of the Corporation. KPMG LLP have been the auditors of the Corporation since
May 5, 2010.
The following table sets out the aggregate fees billed by KPMG LLP to the Corporation in each of the last
two fiscal years.
Year
2020
2019
Audit Fees(1) Audit-Related Fees
Tax Fees(2)
All Other Fees
$262,150
$250,000
$nil
$nil
$54,300
$72,000
$nil
$145,000
Notes:
1.
2.
Audit fees consist of fees for the audit of annual financial statements or services that are normally provided in connection
with statutory and regulatory filings or engagements. The services provided in this category included quarterly review fees.
Fees for tax compliance, tax advice and tax planning.
- 37 -
Restrained Pipeline Capacity and Differential Volatility
INDUSTRY CONDITIONS
Western Canada has seen significant growth in crude production volumes over recent years. This has
resulted in pressure on the pipeline take-away capacity, leading to apportionment on the main lines and, in
turn, backed-up local feeder pipelines. This has contributed to a widening of, and increased volatility in,
the light oil pricing differential between WTI and Edmonton Par and the medium/heavy crude oil pricing
differential between WTI and Cromer/WCS/Hardisty. Although pipeline expansions and optimizations are
ongoing and producers are increasingly turning to rail as an alternative means of transportation, the lack of
firm pipeline capacity continues to affect the oil and natural gas industry in Western Canada and limit the
ability to produce and to market production. In addition, the pro-rationing of capacity on the interprovincial
pipeline systems also continues to affect the ability to export oil and natural gas.
Under the Canadian constitution, interprovincial and international pipelines fall within the federal
government’s jurisdiction and require approval by both the Canada Energy Regulator (“CER”) and the
cabinet of the federal government. On August 28, 2019, Bill C-69 and related legislation came into force,
creating a new regulatory regime pursuant to the Canadian Energy Regulator Act (“CER Act”); the
Canadian Navigable Waters Act; and the Impact Assessment Act (“IAA”). The CER Act replaced the
National Energy Board (“NEB”) with the CER. The CER has similar oversight over federal energy
infrastructure projects as the NEB had. However, approvals for projects requiring an impact assessment
will now be conducted by a review panel established under the IAA instead of the CER. The focus of the
new CER Act is greater Indigenous and public participation as well consideration for a broader range of
impacts beyond just environmental impacts. Even when projects are approved on a federal level, such
projects often face further delays due to interference by provincial and municipal governments as well as
court challenges on various issues such as Indigenous title, the government’s duty to consult and
accommodate Indigenous peoples and the sufficiency of environmental review processes, which creates
further uncertainty. Export pipelines from Canada to the United States face additional uncertainty as such
pipelines require approvals of several levels of government in the United States.
In the face of this regulatory transition, the Canadian crude oil and natural gas industry has experienced
significant difficulty expanding the existing network of transportation infrastructure for crude oil, natural gas
and NGLs, including pipelines, rail, trucks and marine transport. Improved access to global markets,
especially the Midwest United States and export shipping terminals on the west coast of Canada, could
help to alleviate the downward pressures affecting commodity prices. Several proposals have been
announced to increase pipeline capacity out of Western Canada to reach Eastern Canada, the United
States and international markets via export terminals. While certain projects are proceeding, the regulatory
approval process and other economic and socio-political factors related to transportation and export
infrastructure has led to the delay, suspension or cancellation of many pipeline projects or their cancellation
altogether.
With respect to the current state of the transportation and exportation of crude oil from Western Canada to
domestic and international markets, the Enbridge Line 3 Replacement and Expansion from Hardisty,
Alberta, to Superior, Wisconsin, formerly expected to be in-service in late 2019, continues to experience
permitting difficulties in the United States. The Minnesota portion of the line began construction in
December of 2020 with opposition parties challenging the commencement of the construction. The
Canadian portion of the pipeline began commercial operation on December 1, 2019.
The Trans Mountain Pipeline expansion received Cabinet approval in November 2016. Following a period
of sustained political opposition in British Columbia, the federal government entered into an agreement with
Kinder Morgan Cochin ULC in May 2018 to purchase the shares and units of the entities that own and
operate the Trans Mountain Pipeline system. The shareholders subsequently voted to approve the
- 38 -
transaction in August 2018. However, the Trans Mountain Pipeline expansion experienced a setback when,
in August 2018, the Federal Court of Appeal identified deficiencies in the NEB’s environmental assessment
and the Government’s Indigenous consultations. The Federal Court of Appeal quashed the accompanying
certificate of public convenience and necessity and directed Cabinet to correct these deficiencies. Following
the Federal Court of Appeal’s direction, Cabinet ordered the NEB to reconsider its recommendation in light
of the Federal Court of Appeal decision, including the environmental effects of project-related marine
shipping. On February 22, 2019, the NEB delivered an updated report to Cabinet, recommending that
Cabinet approve the pipeline expansion, subject to 156 conditions and 16 new recommendations,
notwithstanding the fact that project-related marine shipping may have a significant adverse effect on the
marine environment. On June 18, 2019, Cabinet approved the pipeline expansion, and on July 25, 2019,
the NEB (now the CER) outlined how the regulatory process for the pipeline expansion would resume.
Construction commenced on the Trans Mountain Pipeline in late 2019, and is proceeding concurrently
alongside CER hearings with landowners and affected communities to determine the final route for the
Trans Mountain Pipeline.
In December 2019, the Federal Court of Appeal heard a judicial review application brought by six
Indigenous applicants challenging the adequacy of the federal government’s further consultation on the
Trans Mountain Pipeline expansion. Two First Nations subsequently withdrew from the litigation after
reaching a deal with Trans Mountain. On February 4, 2020, the Federal Court of Appeal dismissed the
remaining four appellants’ application for judicial review, upholding the Cabinet’s second approval of the
Trans Mountain Pipeline expansion from June 2019.
On January 16, 2020 the Supreme Court of Canada unanimously rejected British Columbia’s appeal to
regulate the flow of heavy oil in British Columbia. The Supreme Court found that interprovincial trade is
federal jurisdiction and the flow of commodities such as heavy oil and bitumen should be overseen by
federal regulators.
On April 25, 2018, the British Columbia Government submitted a reference question to the British Columbia
Court of Appeal, seeking to determine whether it has the constitutional jurisdiction to amend the
Environmental Management Act (the BC EMA) to impose a permitting requirement on carriers of heavy
crude oil within British Columbia. On January 16, 2020, the Supreme Court of Canada heard the Attorney
General of British Columbia’s appeal. The Supreme Court unanimously dismissed the appeal and adopted
the reasons of the British Columbia Court of Appeal.
Construction commenced on the Trans Mountain Pipeline throughout 2020, however, the project was halted
in December of 2020 resuming in January of 2021 with work commencing on the twinning of the existing
1,500 km line between Alberta to British Columbia.
While it was expected that construction on the Keystone XL Pipeline would commence in the first half of
2019, preconstruction work was halted in late 2018 when a U.S. Federal Court Judge determined the
underlying environmental review was inadequate. This decision has been appealed; however, in March
2019, a new permit was issued by the U.S. Government effectively lifting the injunction blocking
construction. In August 2019, the Nebraska Supreme Court affirmed the approval of the Keystone XL
Pipeline application. Construction commenced on the Alberta portion of the pipeline in summer of 2020.
The Alberta Government has invested $1.5 billion in the Keystone XL Pipeline to accelerate construction in
the hopes of having it operational by 2023. The investment by the Alberta Government includes $1.5 billion
in equity investment in 2020, followed by a $6 billion loan guarantee in 2021. On January 20, 2021, the
President of the United States revoked the permit for the Keystone XL Pipeline. Accordingly, unless a permit
for the Keystone XL Pipeline is reissued, the project will not be completed. There is no indication that the
position of the current President of the United States with respect to the Keystone XL Pipeline will be
reconsidered or reversed.
- 39 -
Bill C-48, the Oil Tanker Moratorium Act (the “OTMA”), came into force on June 21, 2019. The OTMA
imposes a moratorium on tanker traffic transporting certain crude oil and NGLs products from British
Columbia’s north coast. The OTMA is subject to a review after five (5) years. See “Industry Conditions –
Environmental Regulation – Federal”.
The Government of Alberta has also sought to alleviate these transportation constraints by pursuing
different transportation modalities and creating new markets. On February 19, 2019, the Government of
Alberta announced that it would lease 4,400 rail cars capable of transporting 120,000 bbls/d of crude oil out
of the province. Following the Alberta provincial election on April 16, 2019, the new United Conservative
Party (“UCP”) Government announced that it was in negotiations to divest the rail contracts. On February
12, 2020, the Government of Alberta announced that it had sold off $10.6 billion in crude-by-rail contracts
to the private sector. In the Government of Alberta’s August 2020 fiscal update, it was reported the Alberta
Government had lost $2.1 billion in crude-by-rail contracts.
Natural gas prices in Alberta have also been constrained in recent years due to increasing North American
supply, limited access to markets and limited storage capacity. While companies that secure firm access to
transport their natural gas production out of Western Canada may be able to access more markets and
obtain better pricing, other companies may be forced to accept spot pricing in Western Canada for their
natural gas, which in the last several years has generally been depressed (at times producers have received
negative pricing for their natural gas production). Required repairs or upgrades to existing pipeline systems
have also led to further reduced capacity and apportionment of firm access, which in Western Canada may
be further exacerbated by natural gas storage limitations. Additionally, while a number of LNG export plants
have been proposed for the west coast of Canada, government decision-making, regulatory uncertainty,
opposition from environmental and Indigenous groups, and changing market conditions have resulted in
the cancellation or delay of many of these projects. In October 2018, the proponents of the LNG Canada
liquefied natural gas export terminal announced a positive final investment decision to proceed with the
project.
Legislation and Regulation
The oil and natural gas industry is subject to extensive controls and regulations governing its operations
(including land tenure, exploration, development, production, refining, transportation and marketing)
imposed by legislation enacted by various levels of government and with respect to pricing and taxation of
oil and natural gas by agreements among the governments of Canada, Alberta and Saskatchewan, all of
which should be carefully considered by investors in the oil and natural gas industry. It is not expected that
any of these controls or regulations will affect the operations of Surge in a manner materially different than
they would affect other oil and natural gas producers of similar size. All current legislation is a matter of
public record and Surge is unable to predict what additional legislation or amendments may be enacted.
Some of the principal aspects of legislation, regulations and agreements governing the oil and natural gas
industry are described further below.
Pricing and Marketing – Oil
The producers of oil are entitled to negotiate sales contracts directly with oil purchasers, with the result that
the market determines the price of oil. Oil prices are primarily based on worldwide supply and demand. The
specific price depends in part on oil quality, prices of competing fuels, distance to market, the value of
refined products, the supply/demand balance, and contractual terms of sale. Oil exporters are also entitled
to enter into export contracts with terms not exceeding one year in the case of light crude oil and two years
in the case of heavy crude oil, provided that an order approving such export has been obtained from the
CER. Any oil export to be made pursuant to a contract of longer duration (to a maximum of 25 years)
requires an exporter to obtain an export licence from the CER and the issuance of such a licence requires
a public hearing and the approval of the Governor in Council.
- 40 -
Pricing and Marketing – Natural Gas
Alberta’s natural gas market has been deregulated since 1985. Supply and demand determine the price of
natural gas and price is calculated at the sale point, being the wellhead, the outlet of a gas processing plant,
on a gas transmission system such as the Alberta “NIT” (Nova Inventory Transfer), at a storage facility, at
the inlet to a utility system or at the point of receipt by the consumer. Accordingly, the price for natural gas
is dependent upon such producer’s own arrangements (whether long or short term contracts and the
specific point of sale). As natural gas is also traded on trading platforms such as the Natural Gas Exchange
(NGX), Intercontinental Exchange or the New York Mercantile Exchange (NYMEX) in the United States,
spot and future prices can also be influenced by supply and demand fundamentals on these platforms.
The price of natural gas is determined by negotiation between buyers and sellers. Natural gas exported
from Canada is subject to regulation by the CER and the Government of Canada. Exporters are free to
negotiate prices and other terms with purchasers, provided that the export contracts must continue to meet
certain other criteria prescribed by the CER and the Government of Canada. Natural gas (other than
propane, butane and ethane) exports for a term of less than two years or for a term of two to 20 years (in
quantities of not more than 30,000 m3/day), must be made pursuant to an CER order. Any natural gas
export to be made pursuant to a contract of longer duration (to a maximum of 25 years) or for a larger
quantity requires an exporter to obtain an export licence from the CER and the issuance of such a licence
requires a public hearing and the approval of the Governor in Council.
The government of Alberta also regulates the volume of natural gas that may be removed from the province
for consumption elsewhere based on such factors as reserve availability, transportation arrangements, and
market considerations. Natural gas prices in Alberta have been constrained in recent years due to
increasing supply in North America, limited access to markets and limited storage capacity.
Curtailment
On December 2, 2018, the Government of Alberta announced that, commencing January 1, 2019, it would
mandate an 8.7% short-term reduction in provincial crude oil and crude bitumen production. As
contemplated in the Curtailment Rules, the Government of Alberta will, on a monthly basis, direct oil
producers producing more than 10,000 bbl/d to curtail their production according to a pre-determined
formula that apportions production limits proportionately amongst those operators subject to a curtailment
order. The first curtailment order took effect on January 1, 2019 limiting province-wide production of crude
oil and crude bitumen to 3.56 million bbl/d—a reduction of approximately 8.7% from the total daily average
oil production in Alberta during December 2018As a result of decreasing price differentials and volumes of
crude oil and crude bitumen in storage, the Government of Alberta announced on January 30, 2019, that it
would ease the mandatory production curtailment beginning February 1, 2019, increasing the allowable
production cap by 75,000 bbl/d to a maximum output of approximately 3.63 million bbl/d. Surge is subject
to a curtailment order. Starting December 2020, the Government of Alberta will only put monthly oil
production limits into effect if emerging market conditions make it absolutely necessary. This means that
industry is free to produce at their discretion for the foreseeable future. The Curtailment Rules are set to be
repealed by December 31, 2021.
The North American Free Trade Agreement
The North American Free Trade Agreement (“NAFTA”) among the governments of Canada, the United
States and Mexico came into force on January 1, 1994. The three NAFTA signatories have been working
towards replacing NAFTA. On November 30, 2018, Canada, Mexico, and the United States signed a new
trade agreement, widely referred to as the United States Mexico Canada Agreement (“USMCA”),
sometimes referred to as the Canada United States Mexico Agreement (“CUSMA”). Legislative bodies in
the three signatory countries must ratify the USMCA before it comes into force. Mexico’s senate ratified the
USMCA in June 2019. In late December 2019, the United States’ House of Representatives approved the
- 41 -
USMCA and the USMCA received approval from the United States Senate on January 16, 2020. On
January 29, 2020, the Government of Canada tabled Bill C-4 to ratify the USMCA. Bill C-4 received royal
assent on March 13, 2020 and the USMCA entered into force on July 1, 2020. As the United States remains
Canada’s primary trading partner and the largest international market for the export of crude oil, natural gas
and NGL from Canada, the effects of the USMCA could have an impact on Western Canada’s petroleum
and natural gas industry at large, including the Corporation’s business.
Under the terms of NAFTA’s Article 605, a proportionality clause prevents Canada from implementing
policies that limit exports to the United States and Mexico, relative to the total supply produced in Canada.
Canada remains free to determine whether exports of energy resources to the United States or Mexico will
be allowed, provided that any export restrictions do not: (i) reduce the proportion of energy resources
exported relative to the total supply of goods of Canada as compared to the proportion prevailing in the
most recent 36 month period; (ii) impose an export price higher than the domestic price (subject to an
exception with respect to certain measures which only restrict the volume of exports); and (iii) disrupt normal
channels of supply. Further, all three signatory countries are prohibited from imposing a minimum or
maximum price requirement on exports (where any other form of quantitative restriction is prohibited) and
imports (except as permitted in the enforcement of countervailing and anti-dumping orders and
undertakings). NAFTA also requires energy regulators to ensure the orderly and equitable implementation
of any regulatory changes and to ensure that the application of such changes will cause minimal disruption
to contractual arrangements and avoid undue interference with pricing, marketing and distribution
arrangements.
The Government of Alberta’s curtailment program complies with NAFTA’s Article 605, under which Canada
must make available a consistent proportion of the crude oil and bitumen produced to the other NAFTA
signatories. As a result of the proportionality rule, reducing Canadian supply reduced the required offering
under NAFTA, with the result that the amount of crude oil and bitumen that Canada is required to offer,
while Canadian crude oil prices are depressed, may be reduced.
The USMCA does not contain the proportionality rules of NAFTA’s Article 605. The elimination of the
proportionality clause removes a barrier in Canada’s transition to a more diversified export portfolio. While
diversification depends on the construction of infrastructure allowing more Canadian production to reach
Eastern Canada, Asia, and Europe, the USMCA may allow for greater export diversification than currently
exists under NAFTA.
Other Trade Agreements
Canada has also pursued a number of other international free trade agreements with other countries around
the world. As a result, a number of free trade or similar agreements are in force between Canada and
certain other countries while in other circumstances Canada has been unsuccessful in its efforts. Canada
and the European Union recently agreed to the Comprehensive Economic and Trade Agreement (“CETA”),
which provides for duty-free, quota-free market access for Canadian crude oil and natural gas products to
the European Union. Although CETA remains subject to ratification by 14 of the 28 national legislatures in
the European Union, provisional application of CETA commenced on September 21, 2017. In light of the
United Kingdom’s official departure from the European Union on January 31, 2020, CETA ceased to apply
to Canada-United Kingdom Trade on January 1, 2021. The Canada-United Kingdom Trade Continuity
Agreement (“Canada-UK TCA”) replicates the CETA on a bilateral basis and is meant to maintain the status
quo of in the Canada-United Kingdom trade relationship.
Canada and ten other countries have agreed on the text of the Comprehensive and Progressive Agreement
for Trans-Pacific Partnership (“CPTPP”), which is intended to allow for preferential market access among
the countries that are parties to the CPTPP. The CPTPP is in force among the first seven countries to ratify
the agreement – Canada, Australia, Japan, Mexico, New Zealand, Vietnam, and Singapore. While it is
uncertain what effect CETA, CPTPP, or any other trade agreements will have on the petroleum and natural
- 42 -
gas industry in Canada, the lack of available infrastructure for the offshore export of crude oil and natural
gas may limit the ability of Canadian crude oil and natural gas producers to benefit from such trade
agreements.
Extractive Sector Transparency Measures Act
The Extractive Sector Transparency Measures Act (“ESTMA”), a federal regime for the mandatory reporting
of payments to government, came into force on June 1, 2015. ESTMA contains broad reporting obligations
with respect to payments to governments and state owned entities, including employees and public office
holders, made Canadian businesses involved in resource extraction. Under ESTMA, all payments made to
payees (broadly defined to include any government or state owned enterprise) must be reported annually
if the aggregate of all payments in a particular category to a particular payee exceeds $100,000 per financial
year. The categories of payments include taxes, royalties, fees, bonuses, dividends and infrastructure
improvement payments. Failure to comply with the reporting obligations under ESTMA are punishable upon
summary conviction with a fine of up to $250,000. In addition, each day that passes prior to a non-compliant
report being corrected forms a new offence, and therefore, a payment that goes unreported for a year could
result in over $9,000,000 in total liability.
Provincial Royalties and Incentives
General
In addition to federal regulation, each province has legislation and regulations that govern land tenure,
royalties, production rates, environmental protection and other matters. The royalty regime is a significant
factor in the profitability of crude oil, natural gas, natural gas liquids and sulphur production. Royalties
payable on production from lands other than Crown lands are determined by negotiations between the
mineral owner and the lessee, although production from such lands is also subject to certain provincial
taxes and royalties. Operations not on Crown lands and subject to the provisions of specific agreements
are also usually subject to royalties negotiated between the mineral owner and the lessee. These royalties
are not eligible for incentive programs sponsored by various governments as discussed below. Crown
royalties are determined by governmental regulation and are generally calculated as a percentage of the
value of the gross production. The rate of royalties payable generally depends in part on prescribed
reference prices, well productivity, geographical location, field discovery date, method of recovery and the
type or quality of the petroleum product produced. Other royalties and royalty-like interests are from time
to time carved out of the working interest owner’s interest through non-public transactions. These are often
referred to as overriding royalties, gross overriding royalties, net profits interests or net carried interests.
From time to time the governments of the Western Canadian provinces have established incentive
programs for exploration and development. Such programs often provide for royalty rate reductions, royalty
holidays and tax credits for the purpose of encouraging oil and natural gas exploration or enhanced
recovery projects. The programs are designed to encourage exploration and development activity by
improving earnings and cash flow within the industry.
In addition, the federal government may from time to time provide incentives to the oil and gas industry. In
November of 2018, the federal government announced its plans to implement an accelerated investment
incentive, which will provide oil and gas businesses with eligible Canadian development expenses and
Canadian oil and gas property expenses with a first year deduction of one and a half times the deduction
that is otherwise available. The federal government also announced in late 2018 that it will make $1.6 billion
available to the oil and natural gas industry in light of worsening commodity price differentials. The aid
package, however, is mostly in the form of loans and is earmarked for crude oil and natural gas projects
related to economic diversification as well as direct funding for clean growth crude oil and natural gas
projects.
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Producers and working interest owners of crude oil and natural gas rights may also carve out additional
royalties or royalty-like interests through non-public transactions, which include the creation of instruments
such as overriding royalties, net profits interests and net carried interests.
Alberta
Producers of oil and natural gas from Crown lands in Alberta are required to pay annual rental payments,
currently at a rate of $3.50 per hectare, and make monthly royalty payments in respect of oil and natural
gas produced from Crown Lands. Producers of oil and natural gas from Crown lands in Alberta are also
required to pay a royalty on substances produced from Crown lands.
On May 27, 2010, the Government of Alberta announced changes to the existing royalty framework under
the Petroleum Royalty Regulation, 2009 and the Natural Gas Royalty Regulation, 2009 which became
effective January 1, 2011 (the “Alberta Royalty Framework”). Changes include making the Natural Gas
Deep Drilling Program, which adjusts the royalties for deep gas wells, a permanent initiative under the
Alberta Royalty Framework. Qualifying wells under the Natural Gas Deep Drilling Program include natural
gas wells with gas-oil ratios of greater than 1,800:1 which have been spud or deepened on or after May 1,
2010 and have a true vertical depth greater than 2,000 metres. An Emerging Resources and Technologies
Initiative has also been created to encourage new exploration and development from higher cost and more
technically challenging resources, such as shale gas, coal seams and horizontal oil and gas wells. In
particular, pursuant to the Emerging Resource and Technologies Initiative: (a) coalbed methane wells will
receive a maximum royalty rate of 5 percent for 36 producing months on up to 750 MMcf of production,
retroactive to wells that began producing on or after May 1, 2010; (b) shale gas wells will receive a maximum
royalty rate of 5 percent for 36 producing months with no limitation on production volume, retroactive to
wells that began producing on or after May 1, 2010; (c) horizontal gas wells will receive a maximum royalty
rate of 5 percent for 18 producing months on up to 500 MMcf of production, retroactive to wells that
commenced drilling on or after May 1, 2010; and (d) horizontal oil wells and horizontal non-project oil sands
wells will receive a maximum royalty rate of 5 percent with volume and production month limits set according
to the depth (including the horizontal distance) of the well, retroactive to wells that commenced drilling on
or after May 1, 2010.
On January 29, 2016, the Alberta government announced changes to the Alberta Royalty Framework.
Under the new modern royalty framework (the “MRF”), the sliding scale royalty concept will be maintained,
but will be achieved with a greater degree of simplicity. The new royalty percentage will be applied to the
gross revenue generated from all hydrocarbons, with no differentiation between produced substances, and
wells will be charged a flat 5 percent royalty rate until revenues exceed a normalized well cost allowance,
which will be based on vertical well depth and lateral length. The calculation of this cost allowance, and
other details regarding the various parameters within the new formula under the MRF was announced in
2016 and was fully implemented as of January 1, 2017. Prior to January 1, 2017, the former royalty
framework continued to apply to any wells drilled prior to that date, and thereafter for a period of 10 years
following which, such wells will be transitioned into the MRF.
In addition to any negotiated royalty amount payable to the freehold mineral owner, producers of oil and
natural gas from freehold lands in Alberta are required to pay annual freehold mineral taxes. The freehold
mineral tax is a tax levied by the Government of Alberta on the value of oil and natural gas production from
non-Crown lands and is derived from the Freehold Mineral Rights Tax Act (Alberta). The freehold mineral
tax is levied on an annual basis on calendar year production using a tax formula that takes into
consideration, among other things, the amount of production, the hours of production, the value of each
unit of production, the tax rate and the percentages that the owners hold in the title. The basic formula for
the assessment of freehold mineral tax is: revenue less allocable costs equals net revenue divided by
wellhead production equals the value based upon unit of production. If payors do not wish to file individual
unit values, a default price is supplied by the Crown. On average, the tax levied is 4 percent of revenues
reported from fee simple mineral title properties.
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On July 18, 2019, the Government of Alberta enacted the Royalty Guarantee Act to provide certainty that
no major changes will be made to the current oil and gas royalty structure for a period of at least 10 years.
The Royalty Guarantee Act also confirms that the transition to the MRF for wells drilled on or before
December 31, 2016 will occur as planned in 2026.
Any changes to the royalty regime in Alberta may have a material effect on Surge. See “Risk Factors -
Royalty Regimes.”
Saskatchewan
In Saskatchewan, the amount payable as a Crown royalty or a freehold production tax in respect of oil
depends on the type and vintage of oil, the quantity of oil produced in a month, the value of the oil produced
and specified adjustment factors determined monthly by the provincial government.
For Crown royalty and freehold production tax purposes, conventional oil is divided into “types”, being
“heavy oil”, “southwest designated oil” or “non-heavy oil other than southwest designated oil”. The
conventional royalty and production tax classifications (“fourth tier oil”, “third tier oil”, “new oil” and “old oil”)
depend on the finished drilling date of a well and are applied to each of the three crude oil types slightly
differently.
Heavy oil is classified as third tier oil (produced from a vertical well having a finished drilling date on or after
January 1, 1994 and before October 1, 2002 or incremental oil from new or expanded water flood projects
with a commencement date on or after January 1, 1994 and before October 1, 2002), fourth tier oil (having
a finished drilling date on or after October 1, 2002 or incremental oil from new or expanded water flood
projects with a commencement date on or after October 1, 2002) or new oil (conventional oil that is not
classified as “third tier oil” or “fourth tier oil”). Southwest designated oil means oil produced within the
southwest area that is produced from an oil or gas well with a finished drilling date on or after February 9,
1998 or incremental waterflood oil that commenced operation after February 9, 1998. Southwest designated
oil uses the same definition of fourth tier oil but third tier oil is defined as conventional oil produced from a
vertical well having a finished drilling date on or after February 9, 1998 and before October 1, 2002 or
incremental oil from new or expanded water flood projects with a commencement date on or after February
9, 1998 and before October 1, 2002, and new oil is defined as conventional oil produced from a horizontal
well having a finished drilling date on or after February 9, 1998 and before October 1, 2002. For non-heavy
oil other than southwest designated oil, the same classification as heavy oil is used but new oil is defined
as conventional oil produced from a vertical well completed after 1973 and having a finished drilling date
prior to 1994, conventional oil produced from a horizontal well having a finished drilling date on or after April
1, 1991 and before October 1, 2002, or incremental oil from new or expanded water flood projects with a
commencement date on or after January 1, 1974 and before 1994 whereas old oil is defined as conventional
oil not classified as third or fourth tier oil or new oil.
Production tax rates for freehold production are determined by first determining the Crown royalty rate and
then subtracting the “Production Tax Factor” (“PTF”) applicable to that classification of oil. Currently the
PTF is 6.9 for “old oil”, 10.0 for freehold “new oil” and freehold “third tier oil” and 12.5 for freehold “fourth
tier oil”. The minimum rate for freehold production tax is zero.
Base prices are used to establish lower limits in the price-sensitive royalty structure for conventional oil and
apply at various reference well production rates (m3 per month) for old oil, new oil, third tier oil and fourth
tier oil. Where average wellhead prices are below the established base prices of $100 per m3 for third and
fourth tier oil and $50 per m3 for new oil and old oil, base royalty rates are applied. Base royalty rates are 5
percent for all fourth tier oil, 10 percent for heavy oil that is third tier oil or new oil, 12.5 percent for southwest
designated oil that is third tier oil or new oil, 15 percent for non-heavy oil other than southwest designated
oil that is third tier or new oil, and 20 percent for old oil. Where average wellhead prices are above base
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prices, marginal royalty rates are applied to the proportion of production that is above the base oil price.
Marginal royalty rates are 30 percent for all fourth tier oil, 25 percent for heavy oil that is third tier oil or new
oil, 35 percent for southwest designated oil that is third tier oil or new oil, 35 percent for non-heavy oil other
than southwest designated oil that is third tier or new oil, and 45 percent for old oil.
The amount payable as a Crown royalty or a freehold production tax in respect of natural gas production is
determined by a sliding scale based on the monthly provincial average gas price published by the
Saskatchewan government (effective February 1, 2012), the quantity produced in a given month, the type
of natural gas, and the classification of the natural gas. Like conventional oil, natural gas may be classified
as “non-associated gas” (gas produced from gas wells) or “associated gas” (gas produced from oil wells)
and royalty rates are determined according to the finished drilling date of the respective well. Non-
associated gas is classified as new gas (having a finished drilling date before February 9, 1998 with a first
production date on or after October 1, 1976), third tier gas (having a finished drilling date on or after
February 9, 1998 and before October 1, 2002), fourth tier gas (having a finished drilling date on or after
October 1, 2002) and old gas (not classified as either third tier, fourth tier or new gas). A similar
classification is used for associated gas except that the classification of old gas is not used, the definition
of fourth tier gas also includes production from oil wells with a finished drilling date prior to October 1, 2002,
where the individual oil well has a gas-oil production ratio in any month of at least 3,500 m3 of gas for every
m3 of oil, and new gas is defined as oil produced from a well with a finished drilling date before February 9,
1998 that received special approval, prior to October 1, 2002, to produce oil and gas concurrently without
gas-oil ratio penalties.
On December 9, 2010, the Government of Saskatchewan enacted the Freehold Oil and Gas Production
Tax Act, 2010 with the intention to facilitate the efficient payment of freehold production taxes by industry.
Two new regulations with respect to this legislation are: (i) The Freehold Oil and Gas Production Tax
Regulations, 2012 which sets out the terms and conditions under which the taxes are calculated and paid;
and (ii) The Recovered Crude Oil Tax Regulations, 2012 which sets out the terms and conditions under
which taxes on recovered crude oil that was delivered from a crude oil recovery facility on or after March 1,
2012 are to be calculated and paid.
Base royalty rates are 5 percent for all fourth tier gas, 15 percent for third tier or new gas, and 20 percent
for old gas. Where average well-head prices are above base prices, marginal royalty rates are applied to
the proportion of production that is above the base gas price. Marginal royalty rates are 30 percent for all
fourth tier gas, 35 percent for third tier and new gas, and 45 percent for old gas. The current regulatory
scheme provides for certain differences with respect to the administration of fourth tier gas which is
associated gas.
The Government of Saskatchewan currently provides a number of targeted incentive programs. These
include both royalty reduction and incentive volume programs, including the following:
Royalty/Tax Incentive Volumes for Vertical Oil Wells Drilled on or after October 1, 2002 providing
reduced Crown royalty (a Crown royalty rate of the lesser of “fourth tier oil” Crown royalty rate and
2.5 percent) and freehold tax rates (a freehold production tax rate of 0 percent) on incentive
volumes of 8,000 m3 for deep development vertical oil wells, 4,000 m3 for non-deep exploratory
vertical oil wells and 16,000 m3 for deep exploratory vertical oil wells (more than 1,700 metres or
within certain formations) and after the incentive volume is produced, the oil produced will be
subject to the “fourth tier” royalty tax rate;
Royalty/Tax Incentive Volumes for Exploratory Gas Wells Drilled on or after October 1, 2002
providing reduced Crown royalty (a Crown royalty rate of the lesser of “fourth tier oil” Crown royalty
rate and 2.5 percent) and freehold tax rates (a freehold production tax rate of 0 percent) on incentive
volumes of 25,000,000 m3 for qualifying exploratory gas wells;
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Royalty/Tax Incentive Volumes for Horizontal Oil Wells Drilled on or after October 1, 2002 providing
reduced Crown royalty (a Crown royalty rate of the lesser of “fourth tier oil” Crown royalty rate and
2.5 percent) and freehold tax rates (a freehold production tax rate of 0 percent) on incentive
volumes of 6,000 m3 for non-deep horizontal oil wells and 16,000 m3 for deep horizontal oil wells
(more than 1,700 metres total vertical depth or within certain formations) and after the incentive
volume is produced, the oil produced will be subject to the “fourth tier” royalty tax rate;
Royalty/Tax Incentive Volumes for Horizontal Gas Wells drilled on or after June 1, 2010 and before
April 1, 2013 providing for a classification of the well as a qualifying exploratory gas well and
resulting in a reduced Crown royalty (a Crown royalty rate of the lesser of “fourth tier oil” Crown
royalty rate and 2.5 percent) and freehold tax rates (a freehold production tax rate of 0 percent) on
incentive volumes of 25,000,000 m3 for horizontal gas wells and after the incentive volume is
produced, the gas produced will be subject to the “fourth tier” royalty tax rate;
Royalty/Tax Regime for Incremental Oil Produced from New or Expanded Waterflood Projects
Implemented on or after October 1, 2002 whereby incremental production from approved water
flood projects is treated as fourth tier oil for the purposes of Crown royalty and freehold tax
calculations;
Royalty/Tax Regime for Enhanced Oil Recovery Projects (Excluding Waterflood Projects)
Commencing prior to April 1, 2005 providing lower Crown royalty and freehold tax determinations
based in part on the profitability of EOR projects during and subsequent to the payout of the EOR
operations;
Royalty/Tax Regime for Enhanced Oil Recovery Projects (Excluding Waterflood Projects)
Commencing on or after April 1, 2005 providing a Crown royalty of 1 percent of gross revenues on
EOR projects pre-payout and 20 percent of EOR operating income post-payout and a freehold
production tax of 0 percent pre-payout and 8 percent post-payout on operating income from EOR
projects; and
Royalty/Tax Regime for High Water-Cut Oil Wells designed to extend the producing lives and
improve the recovery rates of high water-cut oil wells and granting “third tier oil” royalty/tax rates
with a Saskatchewan Resource Credit of 2.5 percent for oil produced prior to April 2013 and 2.25
percent for oil produced on or after April 1, 2013 to incremental high water-cut oil production
resulting from qualifying investments made to rejuvenate eligible oil wells and/or associated
facilities.
On June 22, 2011, the Government of Saskatchewan released the Upstream Petroleum Industry
Associated Gas Conservation Standards, which are designed to reduce emissions resulting from the flaring
and venting of associated gas (the “Associated Natural Gas Standards”). The Associated Natural Gas
Standards were jointly developed with industry and the implementation of such standards commenced on
July 1, 2012 for new wells and facilities licensed on or after such date. The new standards apply to all
existing licensed wells and facilities as of July 1, 2015.
Effective April 1, 2014, the Saskatchewan Ministry of the Economy streamlined fees related to licenses and
applications in the oil and gas sector by eliminating 10 different licensing fees, which resulted in an
aggregate of 20,000 fee transactions per year, and replacing them with a single annual levy based on a
company’s production and number of wells. While the fees have been streamlined, approvals to conduct
the relevant activities are still required. These changes to the fee structure are part of ongoing work by the
Government of Saskatchewan to streamline the licensing, regulation and monitoring processes in the oil
and gas sector.
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Climate Change Regulation
Federal
Canada is a signatory to the United Nations Framework Convention on Climate Change (the “UNFCCC”),
which was entered into in order work towards stabilizing atmospheric concentrations of greenhouse gas
(“GHG”) emissions at a level to prevent “dangerous anthropogenic interference with the climate system”.
The UNFCCC came into force on March 21, 1994. On December 12, 2015, the UNFCCC adopted the Paris
Agreement, which Canada ratified on October 5, 2016. Under the Paris Agreement, countries have
committed to an ambitious goal of holding the increase in global average temperature to well below 2°C
above pre-industrial levels, while they pursue efforts to limit the temperature increase to 1.5°C above pre-
industrial levels. To date, 189 of the 197 parties to the convention have ratified the Paris Agreement. In
December 2018, the United Nations annual Conference of the Parties took place in Katowice, Poland. The
Conference concluded with the attendees reiterating their commitment to the targets set out in the Paris
Agreement and establishing a transparency framework related to, among other matters, emissions and
climate finance reporting.
In May 2015, Canada submitted its Intended Nationally Determined Contribution (“INDC”) to the UNFCCC
Secretariat, pledging a 30 percent reduction from 2005 levels—approximately 523 Mt—by 2030. In addition,
provincial/territorial and federal leaders met and agreed that they would work together to build a national
climate change plan. At a follow-up meeting of the First Ministers and Prime Minister on March 3, 2016,
the parties agreed under the Vancouver Declaration on Clean Growth and Climate Change to launch a
process to develop the Pan-Canadian Framework on Clean Growth and Climate Change (the
“Framework”), which was released on December 9, 2016 at the First Ministers meeting. Saskatchewan
was the only province that decided not to adopt the Framework.
Prior to the release of the Framework, the federal government announced in October 2016 that it will set a
minimum price on carbon starting at $10 per tonne of CO2e in 2018, which will increase by $10 per year
until it reaches $50 per tonne of CO2e by 2022. On January 1, 2019, the federal government enacted the
Greenhouse Gas Pollution Pricing Act (the “GGPPA”). This regime has two parts: an emissions trading
system for large industry and a regulatory fuel charge imposing an initial price of $20/tonne of GHG
emissions. Under current federal plans, this price will escalate by $10 per year until it reaches a price of
$50/tonne in 2022. Starting April 1, 2020, the minimum price permissible under the GGPPA is $30/tonne of
GHG emissions. This approach will be reviewed in 2022 to confirm the path forward, including continued
increases in stringency. Under the federal plan, each province and territory will be required to implement
carbon pricing in its jurisdiction by 2018, whether in the form of a carbon tax or a cap-and-trade system. If
the carbon price in a jurisdiction does not meet the federal minimum price, the federal government will step
in and impose a carbon price that makes up the difference and return the revenue to the province or territory.
In addition, provincial and territorial goals for reducing emissions must be at least as stringent as federal
targets.
The pricing systems in Quebec, Nova Scotia, the Northwest Territories and British Columbia continue to
meet the federal benchmark requirements on stringency and the provincial systems in place in Prince
Edward Island, Alberta and Saskatchewan meet the requirements for the emission sources they cover. The
Federal backstop supplements the provincial systems by applying to other sources that the provincial
systems do not cover. New Brunswick’s carbon price system took effect on April 1, 2020. The federal
backstop is in place currently in Ontario, Manitoba, Yukon and Nunavut.
Alberta, Saskatchewan, and Ontario have challenged the constitutionality of the federal government’s
pricing regime. The Saskatchewan and Ontario references advanced in parallel where the appeal Courts
ruled in favour of the constitutionality of the GGPPA. The reference put before the Alberta Court of Appeal
was found in favour of Alberta and found the GGPPA as unconstitutional. Each of the Attorney Generals of
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Saskatchewan, Ontario and Canada (in respect of the Alberta Court of Appeal decision) appealed these
decisions to the Supreme Court of Canada (“SCC”). The SCC heard the three appeals together over two
days in September of 2020. Following the two-day hearing, the SCC reserved their right to make a decision
at that time. A decision is expected for early 2021. The Attorney General of Manitoba also appeared before
the Federal Court in December of 2020 to challenge whether the federal government properly exercised its
constitutional authority under the GGPPA to reject Manitoba’s climate change plan. A decision has not been
rendered on that matter.
In October 2018, the federal government announced an alternative pricing scheme for large electricity
generators designed to incentivize a reduction in emissions intensity, rather than encouraging a reduction
in generation rates.
On April 26, 2018, the federal government passed the Regulations Respecting Reduction in the Release
of Methane and Certain Volatile Organic Compounds (Upstream Oil and Gas Sector) (the “Federal
Methane Regulations”). The Federal Methane Regulations seek to reduce emissions of methane from the
crude oil and natural gas sector, but will not come into force until January 1, 2020. By introducing a number
of new control measures, the Federal Methane Regulations aim to reduce unintentional leaks and
intentional venting of methane, as well as ensuring that crude oil and natural gas operations use low-
emission equipment and processes. Among other things, the Federal Methane Regulations limit how much
methane upstream oil and gas facilities are permitted to vent. These facilities would need to capture the
gas and either re-use it, re-inject it, send it to a sales pipeline, or route it to a flare. In addition, in provinces
other than Alberta and British Columbia (which already regulate such activities), well completions by
hydraulic fracturing would be required to conserve or destroy gas instead of venting. The federal
government anticipates that these actions will reduce annual GHG emissions by about 20 Mt by 2030.
In March 2016, a Joint Statement on Climate, Energy, and Arctic Leadership was issued. This joint
statement sets out specific commitments on energy development, environmental protection, and Arctic
leadership. In particular, Canada and the US have made commitments to reduce methane emissions by
40-45 percent below 2012 levels by 2025 from the oil and gas sector, finalize and implement the second
phase of an aligned GHG emission standard for post-2018 model year on-road heavy duty vehicles, phase
out fossil fuel subsidies, accelerate clean energy development and foster sustainable energy development.
In December 2017, Environment and Climate Change Canada (“ECCC”) published its updated
requirements and step-by-step reporting instructions in advance of the 2017 reporting period under the
federal Greenhouse Gas Reporting Program (“GHGRP”). The Notice with respect to reporting of
greenhouse gases for 2017, which was published on December 30, 2017 in Part I of the Canada Gazette,
outlines the 2017 reporting requirements for GHG-emitting facilities. In December 2017, ECCC published
its updated requirements and step-by-step reporting instructions in advance of the 2017 reporting period
under the GHGRP. Starting with the 2017 reporting year, the GHGRP will apply to a wider range of GHG
emitting operations in Canada, as the reporting threshold was lowered from 50,000 tonnes to 10,000 tonnes
of CO2e. All facilities that emitted the equivalent of 10,000 tonnes of CO2e in 2017 were required to submit
a report by June 1, 2018.
In November 2016, the federal government announced that it would commence development of a
performance-based clean fuel standard (“CFS”) that would incent the use of a broad range of low carbon
fuels, energy sources and technologies. The objective of the CFS is to achieve 30 Mt of annual reductions
in GHG emissions by 2030, as part of efforts to achieve Canada’s commitments under the Paris Agreement.
On December 13, 2017, ECCC published a regulatory framework on the CFS, which outlines the key design
elements for the CFS regulation, including its scope, regulated parties, carbon intensity approach, timing,
and potential compliance options such as credit trading. On December 18, 2020, the Federal Government
published proposed CFS regulations, the final regulations of which are expected to be published in 2021
with the CFS regulations scheduled to come into force in 2022.
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The proposed CFS regulations take a performance-based approach to reducing greenhouse gas
emissions. The CFS regulations require suppliers of liquid fuels, such as gasoline, diesel and kerosene to
gradually cut the amount of carbon in their product. It is the goal of the program to incentivize innovation
and adoption of clean technologies while giving fuel suppliers the ability meet requirements in a cost-
effective way that works for their business. The proposed regulations also offer compliance credits to
incentive industries to innovate and adopt cleaner technologies to lower their compliance costs.
On November 19, 2020, the Federal Government announced Bill C-12, An Act respecting transparency and
accountability in Canada’s efforts to achieve net-zero greenhouse gas emissions by the year 2050. Canada
joins over 120 countries in committing to net-zero emissions by 2050, including the UK, Germany, France
and Japan. Once passed, Bill C-12 will legally bind the federal government to a process to achieve net-
zero emissions by 2050. The legislation will, among other things, set rolling five-year emissions-reduction
targets (starting in 2030) and require plans to reach each target on a reporting basis and enshrine greater
accountability and public transparency into Canada’s plan for meeting net-zero emission by 2050 by
providing for independent third-party review by the Commissioner of the Environment and Sustainable
Development.
Surge will continue to monitor the policies of the Government of Canada and any resulting legislation with
respect to GHG emissions. The US Environmental Protection Agency (“EPA”) is proceeding to regulate
GHGs under the Clean Air Act. This EPA action is subject to legal and political challenges, the outcome of
which cannot be predicted. The ultimate form of Canadian regulation is anticipated to be strongly influenced
by the regulatory decisions made within the United States. Various states have enacted or are evaluating
low carbon fuel standards, which may affect access to market for crude oils with higher emissions intensity.
Alberta
Alberta’s Climate Leadership Plan was introduced in November 2015 with the following policy objectives:
(i) putting a price on GHG emissions; (ii) phasing out coal-generated electricity by 2030; (iii) having 30
percent of electricity be generated from renewable sources by 2030; (iv) capping oil sands emissions to
100 Mt per year; and (v) reducing methane emissions by 45 percent by 2025.
On January 1, 2018, the Carbon Competitiveness Incentive Regulation (“CCI Regulation”) replaced
the Specified Gas Emitters Regulation. Under the CCI Regulation, facilities were allowed to emit a certain
amount of GHG, free of charge from the carbon levy. The CCI Regulation applied to facilities that emitted
100,000 tonnes or more of GHG in 2003, or a subsequent year. Under the CCI Regulations, a facility would
receive performance credits if its GHG emissions are less than the amount freely permitted. If its emissions
were above the amount freely permitted, they were required take one or more of the following actions to
bring the facility into compliance:
make improvements at their facility to reduce emissions intensity;
use emission performance credits generated at facilities that achieve more than the required
reductions;
purchase Alberta-based carbon offset credits; or
contribute to Alberta’s Climate Change and Emissions Management Fund.
Emissions from the oil sands sector (which account for approximately one-quarter of Alberta’s annual
emissions) have been capped at 100 Mt per year. This cap has been legislated in the Oil Sands Emissions
Limit Act (Bill 25), which was introduced on December 14, 2016. The legislation contemplates certain
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exceptions in respect of cogeneration emissions, upgrading emissions, and potential discretionary
exemptions by regulation (likely to accommodate new technological developments).
In June 2019, the Government of Alberta pivoted in its implementation of the Climate Leadership Plan and
repealed the Climate Leadership Plan. The Carbon Competitiveness Incentives Regime (“CCIR”) remained
in place. As a result, the federally imposed fuel charge took effect in Alberta on January 1, 2020, at a rate
of $20/tonne. In accordance with the GGPPA, this will increase to $30/tonne on April 1, 2020. However, on
December 4, 2019, the federal government approved Alberta’s proposed Technology Innovation and
Emissions Reduction (“TIER”) regulation intended to replace the CCIR, so the regulation of emissions from
heavy industry remains subject to provincial regulation, while the federal fuel charge still applies. The TIER
regulation came into effect on January 1, 2020.
The TIER regulation operates differently than the former facility-based CCIR, and instead applies to
industrywide to emitters that emit more than 100,000 tonnes of CO2e per year in 2016 or any subsequent
year. The 2020 target for most TIER-regulated facilities is to reduce emissions intensity by 10% as
measured against that facility’s individual benchmark (which is, generally, its average emissions intensity
during the period from 2013 to 2015), with a further 1% reduction for each subsequent year. The facility-
specific benchmark does not apply to all facilities. Certain facilities, such as those in the electricity sector,
are compared against the good-as-best gas standard, which measures against the emissions produced by
the cleanest natural gas-fired generation system. Similarly, for facilities that have already made substantial
headway in reducing their emissions, a different “high-performance” benchmark is available to ensure that
the cost of ongoing compliance takes this into account. Similar to the CCIR, the TIER regulation targets
emissions intensity rather than total emissions. Under the TIER regulation, facilities in high-emitting sectors
can opt-in to the program despite the fact that they do not meet the 100,000 tonne threshold. A facility can
opt-in to TIER regulation if it competes directly against another TIER-regulated facility or if it has annual
CO2e emissions that exceed 10,000 tonnes per year and belongs to an emissions-intensive or trade
exposed sector with international competition. In addition, the owner of two or more “conventional oil and
gas facilities” may apply to have those facilities regulated under the TIER regulation. To encourage
compliance with the emissions intensity reduction targets, TIER-regulated facilities must provide annual
compliance reports and facilities that are unable to achieve their targets may either purchase credits from
other facilities, purchase carbon offsets, or pay a levy to the Government of Alberta.
Beginning on May 30, 2019 as part of the Carbon Tax Repeal Act and ended the Alberta Climate Leadership
Adjustment Rebate. The carbon levy no longer applies to any type of fuel; however, as Alberta has no
carbon levy equivalent for fuel consumption, the federal government announced that beginning on January
1, 2020 a federal fuel charge will apply in Alberta. In December 2019, Alberta issued a Court challenge
against the federal carbon tax, which came into effect on January 1, 2020, arguing that each province has
the right to set its own policies to fight climate change. The Alberta Court of Appeal ruled in February of
2020 that the federal carbon tax in Alberta was unconstitutional. The Attorney General of Canada appealed
the decision to the SCC which was heard in September of 2020, a decision of which is expected for early
2021.
Saskatchewan
In October 2016, Saskatchewan released its Climate Change White Paper, which outlined the principles of
the province’s approach to climate change, including a focus on both mitigation and adaptation responses
to climate change. Following the release of the White Paper, the government worked on developing its
comprehensive climate change strategy, which was released in December 2017: Prairie Resilience: A
Made-in-Saskatchewan Climate Change Strategy (the “Strategy”). The Strategy focuses on the principles
of readiness and climate resilience, curbing GHG emissions, and preparing for changing conditions such
as extreme weather, drought or wildfire. Saskatchewan has decided not to sign on to the Pan-Canadian
Framework on Clean Growth and Climate Change or to adopt a carbon pricing mechanism, meaning that
it will be out of compliance with federal requirements. The Strategy proposes actions in key areas, including
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(i) natural systems; (ii) physical infrastructure; (iii) economic sustainability; (iv) community preparedness;
and (v) measuring, monitoring and reporting. Although no specific emission reduction targets are set out in
the Strategy, the Saskatchewan government has indicated that it will support Canada’s efforts to meet
national commitments under the Paris Agreement. Prior to the release of the Strategy, Saskatchewan relied
on the GoGreen Saskatchewan initiative to encourage the reduction of GHG emissions and to educate the
public about climate change. Between 2008 and 2015, the Saskatchewan government estimates that it
invested $60 million in GoGreen funding through public/private partnerships.
Saskatchewan has also identified technology as a key driver of emission reductions, including carbon
capture use and storage as well as renewable energy.
As part of the Strategy, Saskatchewan will develop annual GHG reporting regulations for facilities that emit
more than 25,000 tonnes of CO2e annually (with a voluntary opt-in for emitters over 10,000 tonnes of CO2e
annually).
On April 10, 2019, Saskatchewan produced the first annual report on climate resilience. The report
measures the Province’s progress on goals set out under Prairie Resilience: A Made-in-Saskatchewan
Climate Change Strategy. Among these goals is the aim of increasing the role of renewable energy in the
provincial energy mix to 50% by 2030.
On October 1, 2019, Bill 147 – An Act to amend the Oil and Gas Conservation Act, was proclaimed into
force that, in part, amends the Oil and Gas Conservation Act to the extent necessary to bring it into
alignment with the Saskatchewan Oil and Gas Emissions Management Regulations. The Oil and Gas
Emissions Management Regulations came into effect January 1st, 2019. The Oil and Gas Emissions
Management Regulations were introduced as a made-in-Saskatchewan results-based regulation to reduce
methane-based GHG emissions by 4.5 million tonnes of carbon dioxide equivalent (CO2e) from 2015 levels
by 2025.
Land Tenure
Crude oil and natural gas located in the Western Canadian provinces is owned both by the respective
provincial governments and by private individuals. Provincial governments grant rights to explore for and
produce oil and natural gas pursuant to leases, licenses and permits for varying periods and on conditions
set forth in provincial legislation, including requirements to perform specific work or make payments. Where
oil and natural gas is privately owned, rights to explore for and produce such oil and natural gas are granted
by lease on such terms and conditions as may be negotiated.
The respective provincial governments predominantly own the rights to crude oil and natural gas located in
the western provinces, with the exception of Manitoba where private ownership accounts for approximately
80 percent of the crude oil and natural gas rights in the southwestern portion of the province. Provincial
governments grant rights to explore for and produce oil and natural gas pursuant to leases, licences and
permits for varying terms and on conditions set forth in provincial legislation, including requirements to
perform specific work or make payments. Private ownership of oil and natural gas also exists in such
provinces and rights to explore for and produce such oil and natural gas are granted by lease on such terms
and conditions as may be negotiated.
Each of the provinces of Alberta and Saskatchewan has implemented legislation providing for the reversion
to the Crown of mineral rights to deep, non-productive geological formations at the conclusion of the primary
term of a lease or license.
Alberta also has a policy of “shallow rights reversion” which provides for the reversion to the Crown of
mineral rights to shallow, non-productive geological formations for all leases and licenses. For leases and
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licenses issued subsequent to January 1, 2009, shallow rights reversion will be applied at the conclusion
of the primary term of the lease or license. Holders of leases or licences that have been continued
indefinitely prior to January 1, 2009 will receive a notice regarding the reversion of the shallow rights, which
will be implemented three years from the date of the notice. In 2013, Alberta Energy placed an indefinite
hold on serving shallow rights reversion notices for leases and licences that were granted prior to January
1, 2009. Alberta Energy stated that it will provide the industry with notice if, in the future, a decision is made
to serve shallow rights reversion notices.
Environmental Regulation
The oil and natural gas industry is currently subject to environmental regulations pursuant to a variety of
provincial and federal legislation, all of which is subject to governmental review and revision from time to
time. Such legislation provides for restrictions and prohibitions on the release or emitting of various
substances produced in association with certain oil and gas industry operations, such as sulphur dioxide
and nitrous oxide. In addition, such legislation sets out the requirements for the satisfactory abandonment
and reclamation of well and facility sites and provides form among other things, restrictions and prohibitions
on spills, releases, discharges, or emissions of various substances produced in association with oil and gas
operations, habitat protection and minimum setbacks of oil and gas activities from fresh water bodies.
Compliance with such legislation can require significant expenditures and a breach of such requirements
may result in suspension or revocation of necessary licenses and authorizations, civil liability for pollution
damage, and the imposition of material fines and penalties. Certain environmental protection legislation
may subject Surge to statutory strict liability in the event of an accidental spill or discharge from a licensed
facility, meaning that fault need not be established by claimants affected by such a spill or discharge.
Further, as Canadian environmental legislation evolves, the use of administrative penalties by the
imposition of fines for the commission of environmental offences on an absolute liability basis has grown.
Environmental legislation is evolving in a manner that has and is expected to continue to result in stricter
standards and enforcement, larger fines, liabilities and sanctions, and potentially increased capital
expenditures and operating costs. To mitigate potential environmental liabilities, Surge in addition to
implementing policies and procedures designed to prevent an accidental spill or discharge, maintains
insurance at industry standards.
Federal
Canadian environmental regulation is the responsibility of the federal government and provincial
governments. Where there is a direct conflict between federal and provincial environmental legislation in
relation to the same matter, the federal law will prevail, however, such conflicts are uncommon. The federal
government has primary jurisdiction over federal works, undertakings and federally regulated industries
such as railways, aviation and interprovincial transport. The Canadian Environmental Protection Act and
the Canadian Environmental Assessment Act, provide the foundation for the federal government to protect
the environment and cooperate with provinces to do the same.
On June 21, 2019 Bill C-48 (the Oil Tanker Moratorium Act), came into force. This legislation is aimed at
providing coastal protection in northern British Columbia by prohibiting crude oil tankers carrying more than
12,500 metric tonnes of crude oil or persistent crude oil products from stopping, loading, or unloading crude
oil in that area. This legislation may prevent the building of pipelines to, and export terminals located on,
the portion of the British Columbia coast subject to the moratorium and, as a result, negatively affect the
ability of producers to access global markets.
As previously discussed in Industry Conditions – Restrained Pipeline Capacity and Differential Volatility,
the CERA and the IAA came into force and the NEB was replaced with the CER. In addition, the Impact
Assessment Agency (“IA Agency”) replaced the Canadian Environmental Assessment Agency (“CEA
Agency”).
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Bill C-69 introduced a number of important changes to the regulatory regime for federally regulated major
projects and associated environmental assessments. Designated projects will require an impact
assessment as part of their regulatory review. The impact assessment, conducted by a review panel, jointly
appointed by the CER and the IA Agency, includes expanded criteria the review panel may consider when
reviewing an application. The impact assessment also requires consideration of the project’s potential
adverse effects, the overall societal impact and the expanded public interest that a project may have. The
IA must look at the direct result of the project’s construction and operation, including environmental,
biophysical and socio-economic factors, including consideration of a gender-based analysis, climate
change, and impacts to Indigenous rights. Designated projects include pipelines that require more than 75
kilometers of new right of way and pipelines located in national parks. Large scale in situ oil sands projects
not regulated by provincial greenhouse gas emissions and certain refining, processing and storage facilities
will also require an impact assessment.
As stated, the objective of the legislative changes was to improve decision certainty and turnaround times.
Once a review or assessment is commenced under either the CERA or IAA, there are time limits the
relevant regulatory authority will have to issue its report and recommendation. Designated projects will go
through a planning phase to determine the scope of the impact assessment, which the federal government
has stated should provide more certainty as to the length of the full review process. Applications for non-
designated projects will follow a similar process as under the NEB Act. There is significant uncertainty
surrounding the impact of Bill C-69 on oil and natural gas projects. The Minister of Natural Resources has
a mandate to implement the CER efficiently and effectively, but the CER’s ability to expedite the project
approval process has yet to be substantially tested.
On July 17, 2020, the Federal government published its Strategic Assessment of Climate Change (“SACC”)
to assess the impacts of climate change in federal impact assessments conducted under the federal IAA.
The SACC applies to designated projects under the IAA. Guidance for projects regulated by the CER will
consider the principles and objectives of the SACC. The SACC may also apply to environmental reviews
by other federal lifecycle regulators, and be used in regional assessments. Environment and Climate
Change Canada has indicated it plans to review and update the SACC every 5 years. Proponents will be
required to provide information about the emissions intensity of their projects, and this information will be
compared to national and international projects of a similar scope and nature. A description of mitigation
measures and the plan for the project to achieve net-zero emission by 2050 will also be required, as is
information on the project’s ability to scope with the physical impacts of climate change.
Alberta
Environmental legislation in the Province of Alberta is, for the most part, set out in the Environmental
Protection and Enhancement Act (“EPEA”), the Water Act and the Oil and Gas Conservation Act
(“ABOGCA”). EPEA, the Water Act and the ABOGCA impose strict environmental standards with respect
to releases of effluents and emissions, require stringent compliance, reporting and monitoring obligations,
and impose significant penalties for non-compliance.
The regulatory landscape in Alberta has undergone a transformation from multiple regulatory bodies to a
single regulator for upstream oil and gas, oil sands and coal development activity. On June 17, 2013, the
Alberta Energy Regulator (the “AER”) assumed the functions and responsibilities of the former Energy
Resources Conservation Board, including those found under the ABOGCA. On November 30, 2013, the
AER assumed the energy related functions and responsibilities of Alberta Environment and Parks (“AEP”)
in respect of the disposition and management of public lands under the Public Lands Act. On March 29,
2014, the AER assumed the energy related functions and responsibilities of AEP in the areas of
environment and water under EPEA and the Water Act, respectively. The AER’s responsibilities exclude
the functions of the Alberta Utilities Commission and the Surface Rights Board, as well as Alberta Energy’s
responsibility for mineral tenure. The objective behind the transformation to a single regulator is the creation
of an enhanced regulatory regime that is efficient, attractive to business and investors, and effective in
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supporting public safety, environmental management and resource conservation while respecting the rights
of landowners.
In December 2008, the Government of Alberta released a new land use policy for surface land in Alberta,
the Alberta Land Use Framework (the “ALUF”). The ALUF sets out an approach to manage public and
private land use and natural resource development in a manner that is consistent with the long-term
economic, environmental and social goals of the province. It calls for the development of seven region-
specific land use plans in order to manage the combined impacts of existing and future land use within a
specific region and the incorporation of a cumulative effects management approach into such plans.
The Alberta Land Stewardship Act (the “ALSA”) provides the legislative authority for the Government of
Alberta to implement the policies contained in the ALUF. Regional plans established under the ALSA are
deemed to be legislative instruments equivalent to regulations and will be binding on the Government of
Alberta and provincial regulators, including those governing the oil and gas industry. In the event of a
conflict or inconsistency between a regional plan and another regulation, regulatory instrument or statutory
consent, the regional plan will prevail. Further, the ALSA requires local governments, provincial
departments, agencies and administrative bodies or tribunals to review their regulatory instruments and
make any appropriate changes to ensure that they comply with an adopted regional plan. The ALSA also
contemplates the amendment or extinguishment of previously issued statutory consents such as regulatory
permits, licenses, registrations, approvals and authorizations for the purpose of achieving or maintaining
an objective or policy resulting from the implementation of a regional plan. Among the measures to support
the goals of the regional plans contained in the ALSA are conservation easements, which can be granted
for the protection, conservation and enhancement of land, and conservation directives, which are explicit
declarations contained in a regional plan to set aside specified lands in order to protect, conserve, manage
and enhance the environment.
On August 22, 2012, the Government of Alberta approved the Lower Athabasca Regional Plan (“LARP”)
which came into force on September 1, 2012. The LARP is the first of seven regional plans developed
under the ALUF. LARP covers a region in the northeastern corner of Alberta that is approximately 93,212
square kilometres in size. The region includes a substantial portion of the Athabasca oilsands area, which
contains approximately 82 percent of the province’s oilsands resources and much of the Cold Lake oilsands
area. LARP establishes six new conservation areas and nine new provincial recreation areas. In
conservation and provincial recreation areas, conventional oil and gas companies with pre-existing tenure
may continue to operate. Any new petroleum and gas tenure issued in conservation and provincial
recreation areas will include a restriction that prohibits surface access.
The South Saskatchewan Regional Plan (“SSRP”) was approved by the Government of Alberta on July 23,
2014 and became effective on September 1, 2014. The SSRP is the second regional plan developed under
the ALUF and covers approximately 83,764 square kilometres and includes 44 percent of the province’s
population.
The SSRP creates four new and four expanded conservation areas, and two new and six expanded
provincial parks and recreational areas. Similar to LARP, the SSRP will honour existing petroleum and
natural gas tenure in conservation and provincial recreational areas. However, oil and gas companies must
nonetheless minimize impacts of activities on the natural landscape, historic resources, wildlife, fish and
vegetation when exploring, developing and extracting the resources. Any new petroleum and natural gas
tenures sold in conservation areas, provincial parks, and recreational areas will prohibit surface access.
Freehold mineral rights will not be subject to this restriction. With the implementation of the new Alberta
regulatory structure under the AER, AEP will remain responsible for development and implementation of
regional plans. However, the AER will take on some responsibility for implementing regional plans in respect
of energy related activities.
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Pursuant to several ministerial orders passed pursuant to s. 52.1(2) of the Alberta Public Health Act which
declared a state of public health emergency in Alberta due to the COVID-19 pandemic, certain industrial
environmental reporting requirements including the extension of deadlines or the suspension of reporting
requirements under EPEA and the Water Act. The ministerial orders expired on August 14, 2020 and all
environmental reporting should resume in accordance with the prescribed deadlines and requirements.
Saskatchewan
Saskatchewan’s Ministry of the Economy and the Oil and Gas Conservation Board collectively regulate oil
and gas activities in the province, which is primarily governed by the Natural Resources Act and The Oil
and Gas Conservation Act (“SKOGCA”).
The Environmental Management and Protection Act (“EMPA”) regulates the protection of the environment
in Saskatchewan, including among others the designation of environmentally impacted sites, issuance of
environmental protection orders, and obligations to report releases of substances. Most importantly, the
EMPA prohibits the discharge of substances causing adverse effects to the environment, and assigns
responsibility for such adverse effects to a broad category of “persons responsible.” This includes the
person who caused or contributed to the discharge (i.e. fugitive release of sour gas or flaring in excess of
the permitted levels), had possession or control of the substance, as well as every owner and occupier of
the land, including subsequent owners and occupiers and any person transporting the substance.
In May 2011, Saskatchewan passed changes to SKOGCA. Although the associated Bill received Royal
Assent on May 18, 2011, it was not proclaimed into force until April 1, 2012, in conjunction with the release
of The Oil and Gas Conservation Regulations, 2012 (“OGCR”) and The Petroleum Registry and Electronic
Documents Regulations (“Registry Regulations”). The aim of the amendments to the SKOGCA, and the
associated regulations, is to provide resource companies investing in Saskatchewan’s energy and resource
industries with the best support services and business and regulatory systems available. With the
enactment of the Registry Regulations and the OGCR, Saskatchewan has implemented a number of
operational aspects, including the increased demand for record-keeping, increased testing requirements
for injection wells and increased investigation and enforcement powers, and procedural aspects, including
those related to Saskatchewan’s participation as partner in the Petroleum Registry of Alberta.
On June 22, 2011, the Government of Saskatchewan released the Upstream Petroleum Industry
Associated Gas Conservation Standards, which are designed to reduce emissions resulting from the flaring
and venting of associated gas (the “Associated Natural Gas Standards”). The Associated Natural Gas
Standards were jointly developed with industry and the implementation of such standards commenced on
July 1, 2012 for new wells and facilities licensed on or after such date. The new standards will apply to
existing licensed wells and facilities on July 1, 2015.
Liability Management Rating Programs
Alberta
On June 20, 2016, the AER issued Bulletin 2016-16, Licensee Eligibility—Alberta Energy Regulator
Measures to Limit Environmental Impacts Pending Regulatory Changes to Address the Redwater Decision
(“Bulletin 16”) in an urgent response to a decision from the Alberta Court of Queen’s Bench, which was
affirmed by a majority at the Alberta Court of Appeal. In Redwater Energy Corporation (Re), 2016 ABQB
278 (“Redwater”), Chief Justice Wittman found that there was an operational conflict between the
abandonment and reclamation provisions of the Oil and Gas Conservation Act (Alberta) and the Bankruptcy
and Insolvency Act (“BIA”), and that receivers and trustees have the right to renounce assets within
insolvency proceedings. Such a conflict renders the AER’s legislated authority unenforceable to impose
abandonment orders against licensees or to require a licensee to pay a security deposit before approving
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a transfer when such a licensee is insolvent. Effectively, this means that abandonment costs will be borne
by the industry-funded Orphan Well Fund or the province in these instances because any resources of the
insolvent licensee will first be used to satisfy secured creditors under the BIA.
On January 31, 2019, the Supreme Court of Canada ruled on the appeal of Redwater in Orphan Well
Association v. Grant Thornton Limited, 2019 SCC 5 in favour of the AER and Orphan Well Association.
Specifically, the SCC held that while trustees will not be personally liable for abandonment and reclamation
obligations, the estate will remain liable for such obligations. As a result, reclamation and abandonment
liabilities must be dealt with before there can be any distribution to the insolvent parties’ creditors, including
its secured creditors.
In response to the SCC’s decision in Redwater, the AER began working on an improved liability
management framework. On July 30, 2020, the Government of Alberta announced that it will introduce a
new Liability Management Framework (“LMF”) for the oil and gas industry. The changes seek to introduce
a system to actively manage the reclamation of oil and gas sites through the entire life-cycle.
Prior to the change, the AER administered the Licensee Liability Rating Program (the “AB LLR Program”)
as part of the Liability Management Rating Assessment Process. The AB LLR Program was a liability
management program governing most conventional upstream oil and gas wells, facilities and pipelines. In
short, the AB LLR Program required a licensee whose deemed liabilities exceed its deemed assets (and
therefore the licensee has a resulting LLR of less than 1.0) to provide the AER with a security deposit. In
certain circumstances, for example during the transfer of AER licenses between parties, the AER required
that the transferee must achieve an LLR of 2.0 or higher immediately following the proposed transfer of the
applicable licenses. The ratio of deemed liabilities to deemed assets was assessed once each month and
upon the submission of a license transfer application, and failure to post the required security deposit could
result in the initiation of enforcement actions by the AER.
The new LMF is expected to be a more fulsome assessment to assess the capabilities of oil and gas
operators to meet their regulatory obligations with expanded powers to the AER.
The LMF will contain a Licensee Capability Assessment system which will look at companies’ records
including quarterly financials and the AER will have the ability to exchange data to track payments with the
Ministry of Environment and Parks who can ensure landowners are being paid. The Orphan Well
Association (“OWA”) will also have a larger role in conducting abandonment and reclamation work. The
Alberta Government will set the policy direction while the AER will administer the program though
monitoring, enforcement and working with the industry.
Since early 2020, the Government of Alberta has signalled their interest to actively reduce the inventories
of orphan and inactive well sites in the province. The OWA is an industry-funded, non-profit organization
that operates under authority given by the AER. Originally, the OWA’s role was restricted to overseeing the
closure of oil and gas properties, however, in June 2020, the Liabilities Management Statutes Act expanded
the role of the OWA which included the OWA to act as a commercial oil and gas operator in certain
scenarios and play a more active role in the life-cycle management of struggling or abandoned oil and gas
assets.
In April of 2020, the Federal Government also announced that up to $1 billion in funding would be available
to Alberta’s oilfield service contractors to perform reclamation work as part of the Federal Government’s
COVID-19 Economic Response Plan and $200 million would be offered to the OWA as a repayable loan.
In May of 2020, the Government of Alberta launched SRP which was funded primarily by the Federal
Government’s COVID-19 Economic Response Plan. Pursuant to the program, contractors are provided
with grants to perform well, pipeline and oil and gas site closure and reclamation work. The Government of
Alberta also announced the extension of a $100 million repayable loan to the OWA.
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On December 17, 2020 the AER announced the steps it had taken to introduce and implement the new
framework which include the Alberta Government approving changes to the Oil and Gas Conservation
Rules (“OGCR”) and Pipeline Rules which allow the AER to develop new liability management programs.
The following is a summary of the changes that are expected to be implemented by the LMF:
The Licensee Capability Assessment system will replace the AB LLR Program and will take into
account a wider variety of assessment parameters to enable a more comprehensive and accurate
corporate health assessment.
An inventory reduction program will also be established to help reduce inactive well inventory and
will include an area-based closure program for companies to work together to share the cost of
cleanup.
A panel will be created to determine how to bring sites that were abandoned, remediated or
reclaimed before the current standards into line with current environmental requirements.
To promote the timely reclamation of wells, facilities and infrastructure, the AER may set closure
targets (or quotas) for licensees. Licensees may now be required to complete a specific amount of
work or spend a specific amount with respect to the closure of the licensee’s wells, facilities and
pipelines.
Priority and timeline to complete the work with respect to closure of a licensee’s wells, facilities and
pipelines may be directed by the AER.
An “eligible requestor” which includes private landowners and the Ministry of Energy and public
lands disposition holders, in the case of private and public lands, respectively, may nominate
inactive or abandoned wells and facilities for closure.
A licensee may be required to provide closure plan on request from the AER and such plans are to
be approved by the AER and subject to any further conditions as the AER deems fit in the
circumstance.
Financial and reserves information shall be provided by a licensee to the AER upon request for the
purposes of assessing licensee eligibility, administering liability management programs or ensuring
the safe, orderly and environmental responsible development and closure of energy resources.
The implementation of the LMF is still ongoing and the AER has announced that several changes are still
expected to improve existing liability programs and implement the new LMF. No timeline has been
committed to for the implementation of the LMF, however, further developments are expected in early 2021.
The Corporation cannot predict what the AER’s LMF may look like but the implementation of the LMF and
the new regulatory framework will have an impact on crude oil and natural gas production in Alberta,
including Surge’s business.
Saskatchewan
In Saskatchewan, the Ministry of Economy implements the Licensee Liability Rating Program (the “SK LLR
Program”). The SK LLR Program is designed to assess and manage the financial risk that a licensee’s well
and facility abandonment and reclamation liabilities pose to an orphan well fund (the “Oil and Gas Orphan
Well Fund”). The Oil and Gas Orphan Well Fund is responsible for carrying out the abandonment and
reclamation of wells and facilities contained within the SK LLR Program when a licensee or WIP is defunct
or missing. The SK LLR Program requires a licensee whose deemed liabilities exceed its deemed assets
to post a security deposit. The ratio of deemed liabilities to deemed assets is assessed each month for all
licensees of oil, gas and service wells and upstream oil and gas facilities.
On August 19, 2016, the Saskatchewan Ministry of the Economy released a notice to all operators
introducing interim measures in response to Redwater. Among other things, the Saskatchewan Ministry of
the Economy announced that it considers all license transfer applications non-routine as it does not strictly
rely on the standard LLR calculation in evaluating deposit requirements. In addition to increased security
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deposit requirements, the Saskatchewan Ministry of the Economy at that time announced in 2016 that it
may incorporate additional conditions with license transfer approvals.
RISK FACTORS
The business of exploring for, developing and producing oil and natural gas reserves is inherently risky.
The following information is a summary only of certain risk factors relating to the Corporation and should
be read in conjunction with the detailed information appearing elsewhere in this Annual Information Form.
Prospective investors should carefully consider the risk factors set out below and consider all other
information contained in this Annual Information Form and in the Corporation’s other public filings before
making an investment decision. The risks set out below are not an exhaustive list, nor should be taken as
a complete summary or description of all the risks associated with the Corporation’s business and the oil
and natural gas business generally.
COVID-19
Global or national health concerns, including the outbreak of pandemic or contagious diseases such as
COVID-19, have, and may continue to adversely affect the Corporation by: (i) reducing global economic
activity thereby resulting in lower demand for crude oil and natural gas and reduced commodity prices; (ii)
impairing the Corporation’s supply chain (for example, by limiting the manufacturing of materials or the
supply of services used in the Corporation’s operations); and (iii) affecting the health of the Corporation’s
workforce, rendering employees unable to work or travel.
Going Concern
As at December 31, 2020, the Corporation had $260.9 million drawn on a total commitment of $335.0 million
available under its syndicated credit agreement with a syndicate of lenders led by National Bank of Canada.
This credit facility is comprised of a $155.0 million revolving term commitment, a $167.5 million non-
revolving term commitment, and a $12.5 million operating loan facility. The revolving term commitment will
continue to revolve until the next scheduled borrowing base redetermination date of June 30, 2021. The
further extension of this credit facility is dependent on the Corporation's ability to repay or extend the term
of the $167.5 million non-revolving term commitment that matures and requires repayment on December
31, 2021. Should the Corporation fail to secure an extension, it could result in a failure to meet the terms of
the credit agreement and the lenders would have the right, but not the obligation, to demand repayment of
amounts drawn under the credit facility. If the amount drawn is demanded and not repaid, this would
constitute a default under the Credit Facilities. A default under the Credit Facilities would also constitute a
default under the Indenture as a result of which the principal of and interest and premium, if any, on all
Debentures then outstanding, together with any other monies outstanding under the Indenture, would
immediately become due and payable by the Corporation.
The Corporation's ability to continue as a going concern is dependent upon the Corporation's ability to
maintain the Credit Facilities at or above amounts currently drawn and its ability to renew the Credit
Facilities prior to their respective repayment or maturity date. There can be no assurances that the Credit
Facilities will be renewed or additional sources of funding will be available for the Corporation. These
matters cause material uncertainty which may cast significant doubt on the Corporation’s ability to continue
as a going concern.
Credit Facilities Risks
The Corporation currently has the Credit Facilities and the amounts authorized thereunder is dependent on
the borrowing base determined by its lenders. The Corporation is required to comply with covenants under
the Credit Facilities which may affect the availability, or price, of additional funding and in the event that the
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Corporation does not comply with these covenants, the Corporation’s access to capital could be restricted
or repayment could be required. Events beyond the Corporation’s control may contribute to the failure of
the Corporation to comply with such covenants. A failure to comply with covenants could result in default
under the Credit Facilities, which could result in the Corporation being required to repay amounts owing
thereunder. Even if the Corporation is able to obtain new financing, it may not be on commercially
reasonable terms or terms that are acceptable to the Corporation. If the Corporation is unable to repay
amounts owing under the Credit Facilities, the lenders under the Credit Facilities could proceed to foreclose
or otherwise realize upon the collateral granted to them to secure the indebtedness. The acceleration of
the Corporation’s indebtedness under one agreement may permit acceleration of indebtedness under other
agreements that contain cross default or cross-acceleration provisions. In addition, the Credit Facilities
may impose operating and financial restrictions on the Corporation that could include restrictions on the
payment of dividends, repurchase or making of other distributions with respect to the Corporation’s
securities, incurring of additional indebtedness, the provision of guarantees, the assumption of loans,
making of capital expenditures, entering into of amalgamations, mergers, take-over bids or disposition of
assets, among others.
The impact of the Supreme Court of Canada’s decision in the Redwater case on lending practices in the
crude oil and natural gas sector and actions taken by secured creditors and receivers/trustees of insolvent
borrowers has the effect of adjusting lending practices to account for end-of-life obligations that were
thought to be subordinate to secured debt and will be subject to prior satisfaction of abandonment and
restoration claims which may not be capable of quantification at the time credit is advanced. See “Industry
Conditions – Liability Management Rating Programs”.
The Corporation’s lenders use the Corporation’s reserves, commodity prices, applicable discount rate and
other factors, to periodically determine the Corporation’s borrowing base. A material decline in commodity
prices could reduce the Corporation’s borrowing base, reducing the funds available to the Corporation
under the Credit Facilities. This could result in the requirement to repay a portion, or all, of the Corporation’s
bank indebtedness.
Operational Risks
Oil and natural gas exploration operations are subject to all the risks and hazards typically associated with
such operations, including hazards such as fire, explosion, blowouts, cratering and oil spills, each of which
could result in substantial damage to oil and natural gas wells, producing facilities, other property and the
environment or in personal injury. In accordance with industry practice, Surge is not fully insured against
all of these risks, nor are all such risks insurable. Although Surge maintains liability insurance in an amount
which it considers adequate, the nature of these risks is such that liabilities could exceed policy limits, in
which event Surge could incur significant costs that could have a materially adverse effect upon its financial
condition. Oil and natural gas production operations are also subject to all the risks typically associated with
such operations, including premature decline of reservoirs and the invasion of water into producing
formations.
Oil and natural gas exploration and development activities are dependent on the availability of drilling and
related equipment in the particular areas where such activities will be conducted. Demand for such limited
equipment or access restrictions may affect the availability of such equipment to Surge and may delay
exploration and development activities.
Oil and natural gas exploration and development activities are dependent on access to areas where
operations are to be conducted. Seasonal weather variations, including freeze-up and break-up, affect
access in certain circumstances. Unexpected adverse weather conditions, such as flooding or prolonged
break-up, can have a significant negative impact on capital expenditures, operations and costs.
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To the extent Surge is not the operator of its oil and natural gas properties, it is dependent on such operators
for the timing of activities related to such properties and is largely unable to direct or control the activities
of the operators. Payments from production generally flow through the operator and there is a risk of delay
and additional expense in receiving such revenues if the operator becomes insolvent. Although Surge
intends to operate the majority of its properties, there is no guarantee that it will remain operator of such
properties or that Surge will operate other properties it may acquire in the future.
In addition, the success of Surge will be largely dependent upon the performance of its management and
key employees. Surge does not have any key man insurance policies and, therefore, there is a risk that the
death or departure of any member of management or any key employee could have a material adverse
effect on Surge.
Surge’s ability to market oil and natural gas from its wells also depends upon numerous other factors
beyond its control, including, among other things, the availability of natural gas processing and storage
capacity, the availability of pipeline capacity, the price of oilfield services and the effects of inclement
weather. Because of these factors, Surge may be unable to market some or all of the oil and natural gas it
produces or to obtain favourable prices for the oil and natural gas it produces.
Volatility of Oil and Natural Gas Prices and Markets
Surge’s financial performance and condition are substantially dependent on the prevailing prices of oil and
natural gas which are unstable and subject to fluctuation. Fluctuations in oil or natural gas prices could
have an adverse effect on Surge’s operations and financial condition and the value and amount of its
reserves. Prices for crude oil fluctuate in response to global and North American supply of and demand for
oil, market performance and uncertainty and a variety of other factors which are outside the control of Surge
including, but not limited, to the world economy and the OPEC’s ability to adjust supply to world demand,
government regulation, political stability and the availability of alternative fuel sources. In addition, the
prices received by Surge for its oil are subject to differentials against such benchmarks as WTI and
Edmonton Par which can fluctuate substantially and result in Surge realizing prices substantially below such
benchmarks. Oil and natural gas producers in Western Canada may receive significantly discounted prices
for some of their production due to regional constraints on their ability to transport and sell such production,
including to international markets. Natural gas prices are influenced primarily by factors within North
America, including North American supply and demand, economic performance, weather conditions and
availability and pricing of alternative fuel sources.
Decreases in oil and natural gas prices realized by Surge will result in reduced net production revenue and
may change the economics of producing from some wells, which could result in a reduction in the volume
of Surge’s reserves. Any further substantial declines in the prices of crude oil or natural gas could also
result in delay or cancellation of existing or future drilling, development or construction programs or the
curtailment of production. All of these factors could result in a material decrease in Surge’s net production
revenue, cash flows and profitability causing a reduction in its oil and gas acquisition and development
activities. In addition, bank borrowings available to Surge will in part be determined by Surge’s borrowing
base. A sustained material decline in prices from historical average prices could further reduce such
borrowing base, therefore reducing the bank credit available, including under the Credit Facilities, and could
require that a portion of its bank debt be repaid.
Surge may enter into agreements to receive fixed prices on its oil and natural gas production to offset the
risk of revenue losses if commodity prices decline; however, if commodity prices increase beyond the levels
set in such agreements, Surge will not benefit from such increases.
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Weakness in the Oil and Gas Industry
Recent market events and conditions, including global excess oil and natural gas supply, actions taken by
OPEC, slowing growth in emerging economies, market volatility and disruptions in Asia, sovereign debt
levels and political upheavals in various countries have caused significant weakness and volatility in
commodity prices. These events and conditions have caused a significant decrease in the valuation of oil
and gas companies and a decrease in confidence in the oil and gas industry. These difficulties have been
exacerbated in Canada by certain changes in government at a federal level and, in the case of Alberta, at
the provincial level, and the resultant uncertainty surrounding regulatory, tax, royalty changes and
environmental regulation that have been announced or may be implemented by the new governments. In
addition, the inability to get the necessary approvals to build pipelines and other facilities to provide better
access to markets for the oil and gas industry in Western Canada has led to additional downward price
pressure on oil and gas produced in Western Canada and uncertainty and reduced confidence in the oil
and gas industry in Western Canada. Lower commodity prices may also affect the volume and value of the
Corporation’s reserves, rendering certain reserves uneconomic. In addition, lower commodity prices have
restricted, and may continue to restrict, the Corporation’s cash flow resulting in a reduced capital
expenditure budget. Consequently, the Corporation may not be able to replace its production with additional
reserves and both the Corporation’s production and reserves could be reduced on a year over year basis.
Political Uncertainty
In the last several years, the United States and certain European countries have experienced significant
political events that have cast uncertainty on global financial and economic markets. Since the 2016 U.S.
presidential election, the U.S. administration has begun taking steps to implement a certain of its promises
made during the campaign. The administration has withdrawn the U.S. from the TPP and Congress has
passed sweeping tax reform, which, among other things, significantly reduces U.S. corporate tax rates.
This may affect competitiveness of other jurisdictions, including Canada. In addition, NAFTA has been
renegotiated and on December 10, 2019, and Canada, the U.S. and Mexico signed the USMCA which will
replace NAFTA once ratified by the three signatory countries. See “Industry Conditions – The North
American Free Trade Agreement”. The U.S. administration has also taken action with respect to reduction
of regulation, which may also affect relative competitiveness of other jurisdictions. It is unclear exactly what
other actions the U.S. administration will implement, and if implemented, how these actions may impact
Canada and in particular the oil and natural gas industry. Any actions taken by the new U.S. administration
may have a negative impact on the Canadian economy and on the businesses, financial conditions, results
of operations and the valuation of Canadian oil and gas companies, including Surge.
In addition to the political disruption in the United States, on January 31, 2020 the United Kingdom officially
withdrew from the European Union. Since the United Kingdom’s departure, it remains unclear what the
effects of this will be as a final deal was reached between the European Union and the United Kingdom
which came into effect on December 31, 2020. Some European countries have also experienced the rise
of anti-establishment political parties and public protests held against open-door immigration policies, trade
and globalization. To the extent that certain political actions taken in North America, Europe and elsewhere
in the world result in a marked decrease in free trade, access to personnel and freedom of movement it
could have an adverse effect on Surge’s ability to market products internationally, increase costs for goods
and services required for operations, reduce access to skilled labour and negatively impact business,
operations, financial conditions and the market value of the Common Shares.
A change in federal, provincial or municipal governments in Canada may have an impact on the directions
taken by such governments on matters that may impact the oil and natural gas industry including the
balance between economic development and environmental policy.
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Climate Change
Public support for climate change action and receptivity to new technologies has grown in recent years.
Governments in Canada and around the world have responded to these shifting societal attitudes by
adopting ambitious emissions reduction targets and supporting legislation, including measures relating to
carbon pricing, clean energy and fuel standards, and alternative energy incentives and mandates. There
has also been increased activism, including threats of culpability, legal action against oil and gas producers,
and public opposition to fossil fuels and the oil and gas industry in which the Corporation operates. In
November 2018, ENvironment JEUnesse, a Quebec advocacy group, applied to the Quebec Superior Court
to certify a class action against the Government of Canada for climate related matters. In January 2019,
the City of Victoria became the first municipality in Canada to endorse a class action lawsuit against oil and
natural gas producers for climate-related harms.
Public and government hostility toward the oil and gas industry could reduce demand for oil and gas and,
therefore, adversely affect market prices for the Corporation’s production. Existing and future laws and
regulations may impose additional costs on companies operating in the oil and gas industry or significant
liabilities for failure to comply with their requirements. Concerns over climate change and fossil fuel
extraction could lead governments to enact additional or more stringent laws and regulations applicable to
the Corporation and other companies in the energy industry in general.
Surge’s exploration and production facilities and other operations and activities emit GHGs which may
require us to comply with GHG emissions legislation at the provincial or federal level. Climate change policy
is evolving at regional, national and international levels, and political and economic events may significantly
affect the scope and timing of climate change measures that are ultimately put in place. As a signatory to
the UNFCCC and a signatory to the Paris Agreement, which was ratified in Canada on October 3, 2016,
the Government of Canada pledged to cut its GHG emissions by 30 per cent from 2005 levels by 2030.
One of the pertinent policies announced to date by the Government of Canada to reduce GHG emission is
the planned implementation of a nation-wide price on carbon emissions. The federal carbon levy came into
effect on April 1, 2019 and affects provinces which have not implemented their own carbon taxes, cap-and-
trade systems or other plans for carbon pricing, namely Ontario, Manitoba, Saskatchewan and New
Brunswick. The federal carbon levy will be at an initial rate of $20 per tonne. Beginning on May 30, 2019
as part of the Carbon Tax Repeal Act and ended the Alberta Climate Leadership Adjustment Rebate. The
carbon levy no longer applies to any type of fuel; however, as Alberta has no carbon levy equivalent for fuel
consumption, the federal government announced that beginning on January 1, 2020 a federal fuel charge
will apply in Alberta. In December 2019, Alberta issued a Court challenge against the federal carbon tax,
which came into effect on January 1, 2020, arguing that each province has the right to set its own policies
to fight climate change. In February of 2020 the Alberta Court of Appeal determined the carbon tax and the
GGPPA was unconstitutional. Each of the Attorney Generals of Saskatchewan, Ontario and Canada
appealed the Court of Appeal decisions from Saskatchewan, Ontario and Alberta to the SCC which were
heard in September of 2020. A decision is expected from the SCC on the three matters in early 2021, the
outcome of which may affect the Corporation’s business. The direct or indirect costs of compliance with
GHG-related regulations may have a material adverse effect on our business, financial condition, results of
operations and prospects. Some of our significant facilities may ultimately be subject to future regional,
provincial and/or federal climate change regulations to manage GHG emissions.
Given the evolving nature of the debate related to climate change and the control of GHG and resulting
requirements, it is expected that current and future climate change regulations will have the effect of
increasing our operating expenses and in the long-term reducing the demand for oil and natural gas
production, resulting in a decrease in our profitability and a reduction in the value of our assets or asset
write-offs.
See “Industry Conditions – Climate Change Regulation”.
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Environmental Concerns
Many aspects of the oil and natural gas business present environmental risks and hazards, including the
risk that Surge may be in noncompliance with an environmental law, regulation, permit, licence, or other
regulatory approval, possibly unintentionally or without knowledge. Such risks may expose Surge to fines
or penalties, third party liabilities or to the requirement to remediate, which could be material.
The operational hazards associated with possible blowouts, accidents, oil spills, natural gas leaks, fires, or
other damage to a well or a pipeline may require Surge to incur costs and delays to undertake corrective
actions, could result in environmental damage or contamination or could result in serious injury or death to
employees, consultants, contractors or members of the public, creating the potential for significant liability
to Surge. Also, the occurrence of any such incident could damage Surge’s reputation in the surrounding
communities and make it more difficult for Surge to pursue its operations in those areas.
Compliance with environmental laws and regulations could materially increase Surge’s costs. Surge may
incur substantial capital and operating costs to comply with increasingly complex laws and regulations
covering the protection of the environment and human health and safety. In particular, Surge may be
required to incur significant costs to comply with future federal or provincial greenhouse gas emissions
reduction requirements or other regulations, if enacted. See “Industry Conditions – Environmental
Regulation”.
The oil and natural gas industry elicits concerns about climate change, as well as general public opposition
to the industry. As a result, industry participants may be subject to increased public activism, which could
result in increased costs due to delays or damage.
Although Surge maintains insurance consistent with prudent industry practice, it is not fully insured against
certain environmental risks, either because such insurance is not available or because of high premium
costs. In particular, insurance against risks from environmental pollution occurring over time (as opposed
to sudden and catastrophic damages) is not available on economically reasonable terms. Accordingly,
Surge’s properties may be subject to liability due to hazards that cannot be insured against, or that have
not been insured against due to prohibitive premium costs or for other reasons. It is also possible that
changing regulatory requirements or emerging jurisprudence could render such insurance of less benefit
to Surge.
Dividends
The Credit Facilities contain restrictions on Surge’s ability to pay dividends. In addition, the payment of
dividends by a corporation is governed by the liquidity and insolvency tests described in the ABCA.
Pursuant to the ABCA, after the payment of a dividend, a corporation must be able to pay its liabilities as
they become due and the realizable value of the assets of the corporation must be greater than the liabilities
and the legal stated capital of its outstanding securities.
On March 9, 2020, the Corporation announced it was reducing monthly dividend by 90%, from $0.10 per
Common Share per year to $0.01 per Common Share per year, effective with the March 2020 dividend
payable in April 2020. On April 14, 2020, the Corporation suspended the Corporation’s dividend program
in its entirely. The final cash dividend payment prior to suspension was made on April 15, 2020 for
Shareholders of record as at March 31, 2020, as declared on March 16, 2020.
The amount of future cash dividends, if any, will be subject to the discretion of the Board of Directors and
will otherwise depend on a variety of factors, including the removal of the restrictions on the payment of
dividends contained in the Credit Facilities, prevailing economic and competitive environment, results of
operations, fluctuations in working capital, the price of oil and gas, the taxability of the Corporation, the
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Corporation’s ability to raise capital, the amount of capital expenditures, the satisfaction of solvency tests
imposed by the ABCA for the declaration and payment of dividends, applicable law and other factors. See
“Dividend Policy.”
Royalty Regimes
There can be no assurance that the federal government and the provincial governments in the jurisdictions
in which the Corporation operates will not adopt new royalty regimes or modify the existing royalty regimes
which may have an impact on the economics of the Corporation’s projects. The royalty regime in Alberta,
Saskatchewan and any other jurisdictions in which the Corporation’s oil and natural gas assets are located
may be subject to further review and changes which could adversely impact the Corporation’s financial
condition and operations. An increase in royalties would reduce the Corporation’s earnings and could make
future capital investments, or the Corporation’s operations, less economic. See “Industry Conditions -
Provincial Royalties and Incentives”.
Gathering and Processing Facilities, Pipeline Systems and Rail
Surge delivers its products through gathering and processing facilities, pipeline systems and, in certain
circumstances, by rail. The amount of oil and natural gas that Surge can produce and sell is subject to the
accessibility, availability, proximity and capacity of these gathering and processing facilities, pipeline
systems and railway lines. Notwithstanding the Government of Alberta’s plans to purchase or lease 4,400
rail cars and the implementation of production curtailment in Alberta, the ongoing lack of availability of
capacity in any of the gathering and processing facilities, pipeline systems and railway lines could result in
the inability to realize the full economic potential of Surge’s production or in a reduction of the price offered
for its production. The lack of firm pipeline capacity continues to affect the oil and natural gas industry and
limit the ability to transport produced oil and gas to market. In addition, the pro-rationing of capacity on inter-
provincial pipeline systems continues to affect the ability to export oil and natural gas. Unexpected shut
downs or curtailment of capacity of pipelines for maintenance or integrity work or because of actions taken
by regulators could also affect Surge’s production, operations and financial results. As a result, producers
are increasingly turning to rail as an alternative means of transportation. In recent years, the volume of
crude oil shipped by rail in North America has increased dramatically. Any significant change in market
factors or other conditions affecting these infrastructure systems and facilities, as well as any delays or
uncertainty in constructing new infrastructure systems and facilities could harm Surge’s business and, in
turn, its financial condition, operations and cash flows. Announcements and actions taken by the federal
government and the Government of Alberta relating to approval of infrastructure projects may continue to
intensify, leading to increased challenges to interprovincial and international infrastructure projects moving
forward. In addition, while the federal government has introduced Bill C-69 to overhaul the existing
environmental assessment process and replace the NEB with a new regulatory agency, the impact of the
new proposed regulatory scheme on proponents and the timing of receipt of approvals of major projects
remains unclear.
Following major accidents in Lac-Megantic, Quebec and North Dakota, the Transportation Safety Board of
Canada and the U.S. National Transportation Board have recommended additional regulations for railway
cars carrying crude oil. In June 2015, as a result of these recommendations, the Government of Canada
passed the Safe and Accountable Rail Act which increased insurance obligations on the shipment of crude
oil by rail and imposed a per tonne levy of $1.65 on crude oil shipped by rail to compensate victims and for
environmental cleanup in the event of a railway accident. In addition to this legislation, new regulations
have implemented the TC-117 standard for all rail tank cars carrying flammable liquids which formalized
the commitment to retrofit, and eventually phase out DOT-111 tank cars carrying crude oil. The increased
regulation of rail transportation may reduce the ability of railway lines to alleviate pipeline capacity issues
and adds additional costs to the transportation of crude oil by rail. On July 13, 2016, the Minister of Transport
(Canada) issued Protective Direction No. 38, which directed that the shipping of crude oil on DOT-111 tank
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cars end by November 1, 2016. Tank cars entering Canada from the United States will be monitored to
ensure they are compliant with Protective Direction No. 38.
A portion of Surge’s production may, from time to time, be processed through facilities owned by third
parties and over which it does not have control. From time to time, these facilities may discontinue or
decrease operations either as a result of normal servicing requirements or as a result of unexpected events.
A discontinuation or decrease of operations could have a materially adverse effect on Surge’s ability to
process its production and deliver the same for sale. Midstream and pipeline companies may take actions
to maximize their return on investment which may in turn adversely affect producers and shippers,
especially when combined with a regulatory framework that may not always align with the interests of
particular shippers.
Fixed Price Hedging
From time to time, the Corporation may enter into agreements to receive fixed prices on its oil and natural
gas production to offset the risk of revenue losses if commodity prices decline. However, to the extent that
the Corporation engages in price risk management activities to protect itself from commodity price declines,
it may also be prevented from realizing the full benefits of price increases above the levels of the derivative
instruments used to manage price risk. In addition, the Corporation’s hedging arrangements may expose
it to the risk of financial loss in certain circumstances, including instances in which: production falls short
of the hedged volumes; there is a widening of price-basis differentials between delivery points for production
and the delivery point assumed in the hedge arrangement; the counterparties to the hedging arrangements
or other price risk management contracts fail to perform under those arrangements; or a sudden
unexpected event materially impacts oil and natural gas prices.
Similarly, from time to time the Corporation may enter into agreements to fix the exchange rate of Canadian
to United States dollars in order to offset the risk of revenue losses if the Canadian dollar increases in value
compared to the United States dollar. However, if the Canadian dollar declines in value compared to the
United States dollar, the Corporation will not benefit from the fluctuating exchange rate.
Industry Regulation and Competition
There is strong competition relating to all aspects of the oil and natural gas industry. Surge will actively
compete for capital, skilled personnel, undeveloped land, reserve acquisitions, access to drilling rigs,
service rigs and other equipment, access to processing facilities and pipeline and refining capacity, and in
all other aspects of its operations with a substantial number of other organizations, many of which may
have greater technical and financial resources than Surge. Some of those organizations not only explore
for, develop and produce oil and natural gas but also carry on refining operations and market petroleum
and other products on a world-wide basis and as such have greater and more diverse resources on which
to draw. Surge’s ability to increase reserves and production in the future will depend not only on its ability
to develop its present properties, but also on its ability to select and acquire suitable producing properties
or prospects for exploratory drilling.
The marketability of oil and natural gas acquired or discovered will be affected by numerous factors beyond
the control of Surge. These factors include reservoir characteristics, market fluctuations, the proximity and
capacity of oil and natural gas pipelines and processing equipment and government regulation. Oil and
natural gas operations (exploration, production, pricing, marketing, transportation and royalty rates) are
subject to extensive controls and regulations imposed by various levels of government, including those
described above under the heading “Industry Conditions”, which may be amended from time to time.
Surge’s oil and natural gas operations may also be subject to compliance with federal, provincial and local
laws and regulations controlling the discharge of materials into the environment or otherwise relating to the
protection of the environment. Changes to the regulation of the oil and gas industry in jurisdictions in which
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Surge operates may adversely impact Surge’s ability to economically develop existing reserves and add
new reserves.
Variations in Foreign Exchange Rates and Interest Rates
Surge’s expenses will be denominated in Canadian dollars, while the price of oil and natural gas will
generally be denominated in U.S. dollars or impacted by the Canadian dollar to U.S. dollar exchange rate.
As the exchange rate for the Canadian dollar versus the U.S. dollar increases, Surge will generally receive
fewer Canadian dollars for its production. If the value of the Canadian dollar against the U.S. dollar
increases, the financial results of Surge may be negatively affected. Future fluctuations in the
Canadian/United States foreign exchange rate may impact the future value of Surge’s reserves as
determined by independent evaluators. In addition, variations in interest rates could result in a significant
change in the amount Surge will pay to service debt, potentially adversely affecting the value of the
Common Shares. Surge’s management may hedge interest rates to mitigate these risks.
Price Volatility of Publicly Traded Securities
In recent years, the securities markets in Canada and the United States have experienced a high level of
price and volume volatility, and the market price of securities of many companies, particularly those
considered to be development stage companies, has experienced wide fluctuations in price which have not
necessarily been related to the operating performance, underlying asset values or prospects of such
companies. There can be no assurance that continual fluctuations in price will not occur. It is likely that the
market price for the Common Shares will be subject to market trends generally, notwithstanding the
financial and operational performance of Surge.
Abandonment and Reclamation Costs
As a general rule, the current oil and gas asset abandonment, reclamation and remediation (“A&R”) liability
regime in Alberta limits each party’s liability to its proportionate ownership of an asset. In the case where
one joint owner of an oil and gas asset becomes insolvent and is unable to fund the required A&R activities
associated with such asset, the solvent working interest counterparties can recover the insolvent party’s
share of the remediation costs from the Orphan Well Fund. See “Industry Conditions – Liability Management
Ratings Programs”.
As a result of the Supreme Court of Canada’s January 2019 decision in the Redwater case, a trustee in
bankruptcy is not permitted to renounce uneconomic oil and gas assets and leave these assets to be
remediated by the Orphan Well Fund, thereby avoiding the environmental liabilities of the estate it is
administering. Accordingly, the AER may now use Alberta’s provincial legislative scheme to prevent the
repudiation or renunciation of an insolvent company’s assets by a trustee and require the trustee to satisfy
certain environmental obligations in priority to the claims of secured and unsecured creditors. In response
to the Supreme Court’s decision, the AER and the Government of Alberta began revising Alberta’s current
liability framework with the introduction of the LMF in July 2020. Surge cannot predict how the Government
of Alberta or the AER will seek to implement the LMF in the coming months, however, the LMF framework
will have an impact on crude oil and natural gas production in Alberta, including Surge’s business.
The AER’s new LMF may impact the Corporation’s ability to transfer its licences, approvals or permits in
the course of a divestment, and may result in increased costs and delays or require changes to or
abandonment of projects and transactions. As a result of the decision in Redwater, lenders may reduce the
availability of credit to oil and gas issuers that utilize secured loans, thereby negatively affecting the financial
capacity of such issuers, including potential partners and counterparties of the Corporation. Lenders also
may generally increase their scrutiny of oil and gas assets held by producers, including the Corporation,
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and the associated A&R liabilities in determining whether to provide credit, may require borrowers to adhere
to more stringent A&R-related operational covenants, and may increase the cost of providing credit.
While the impact on the Corporation of any legislative, regulatory or policy decisions as a result of the
Redwater decision cannot be reliably or accurately estimated, any cost recovery or other measures taken
by applicable regulatory bodies may impact the Corporation and materially and adversely affect, among
other things, the Corporation’s business, financial condition, results of operations and cash flow.
There remains a great deal of uncertainty as to what new regulatory measures will be developed by the
provinces or jointly with the federal government, as the new LMF is implemented in the province.
Substantial Capital Requirements; Liquidity
Surge may have to make substantial capital expenditures for the acquisition, exploration, development and
production of oil and natural gas reserves in the future. If revenues or reserves decline, Surge may have
limited ability to expend the capital necessary to undertake or complete future drilling programs. There can
be no assurance that debt or equity financing or cash generated by operations will be available or sufficient
to meet these requirements or for other corporate purposes or, if debt or equity financing is available, that
it will be on terms acceptable to the Corporation. Moreover, future activities may require Surge to alter its
capitalization significantly. The inability of the Corporation to access sufficient capital for its operations could
have a material adverse effect on its financial condition, results of operations or prospects.
Reserve Estimates
There are numerous uncertainties inherent in evaluating quantities of reserves and the net present value
of future net revenue to be derived therefrom, including many factors beyond the control of Surge. The
reserves information contained in the Reserves Report and set forth herein, including information respecting
the net present value of future net revenue from reserves, represents an estimate only. This estimate is
based on a number of assumptions relating to factors such as initial production rates, production decline
rates, ultimate recovery of reserves, timing and amount of capital expenditures, marketability of production,
future prices of oil and natural gas, operating costs and royalties and other government levies that may be
imposed over the producing life of the reserves. These assumptions were based on price forecasts in use
at the date the Reserves Report were prepared and many of these assumptions are subject to change and
are beyond the control of Surge. Ultimately, the actual reserves attributable to Surge’s properties will vary
from the estimates contained in the Reserves Report and those variations may be material and affect the
market price of the Common Shares.
Reserve Replacement
Surge’s future oil and natural gas reserves and production and the cash flows to be derived therefrom are
highly dependent on successfully acquiring or discovering new reserves. Without the continual addition of
new reserves, any existing reserves Surge may have at any particular time and the production therefrom
will decline over time as such existing reserves are exploited. A future increase in reserves will depend not
only on Surge’s ability to develop any properties it may have from time to time, but also on its ability to
select and acquire suitable producing properties or prospects. There can be no assurance that Surge’s
future exploration and development efforts will result in the discovery and development of additional
commercial accumulations of oil and natural gas.
Sour Natural Gas
Some of the Corporation’s current or future properties include wells that produce sour natural gas and
facilities that process sour natural gas. An accidental discharge or leak of sour natural gas can be fatal or
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cause serious injury. The dangers associated with drilling for, producing, processing and transporting sour
natural gas necessitate increased environmental, health and safety compliance costs to Surge and any
accidental discharge or leak of sour natural gas could lead to significant liabilities to Surge. Surge has
implemented policies and protocols to address this risk, but it is not possible for any issuer to eliminate all
of the risks associated with producing, processing and transporting sour natural gas.
Delay in Cash Receipts and Credit Worthiness of Counterparties
In addition to the usual delays in payment by purchasers of oil and natural gas to the operators of Surge’s
properties, and by the operator to Surge, payments between any of such parties may also be delayed by
restrictions imposed by lenders, delays in the sale or delivery of products, delays in the connection of wells
to a gathering system, blowouts or other accidents, recovery by the operator of expenses incurred in the
operation of Surge’s properties or the establishment by the operator of reserves for such expenses. In
addition, the insolvency or financial impairment of any counterparty owing money to Surge, including
industry partners and marketing agents, could prevent Surge from collecting such debts.
Geopolitical Risks
Political events throughout the world that cause disruptions in the supply of oil continuously affect the
marketability and price of oil and natural gas acquired or discovered by the Corporation. Conflicts, or
conversely peaceful developments, arising outside of Canada have a significant impact on the price of oil
and natural gas. Any particular event could result in a material decline in prices and result in a reduction
of the Corporation’s net production revenue.
In addition, the Corporation’s oil and natural gas properties, wells and facilities could be the subject of a
terrorist attack. If any of the Corporation’s properties, wells or facilities are the subject of terrorist attack it
may have a material adverse effect on the Corporation’s business, financial condition, results of operations
and prospects. The Corporation does not have insurance to protect against the risk from terrorism.
Issuance of Debt
From time to time Surge may enter into transactions to acquire assets or shares of other corporations.
These transactions may be financed partially or wholly through debt, which may increase debt levels above
industry standards. Surge’s articles and by-laws do not limit the amount of indebtedness it may incur. The
level of Surge’s indebtedness from time to time could impair its ability to obtain additional financing in the
future on a timely basis to take advantage of business opportunities that may arise.
Possible Failure to Realize Anticipated Benefits of Acquisitions and Dispositions
The Corporation has recently completed a number of acquisitions and dispositions and may complete future
acquisitions and dispositions to strengthen its position in the oil and natural gas industry and to create the
opportunity to realize certain benefits including, among other things, potential cost savings. Achieving the
benefits of recent and any future acquisitions the Corporation may complete will depend in part on
successfully consolidating functions and integrating operations and procedures in a timely and efficient
manner, as well as the Corporation’s ability to realize the anticipated growth opportunities and synergies
from combining the acquired assets and operations with those of the Corporation. The integration of
acquired assets requires the dedication of substantial management effort, time and resources which may
divert management’s focus and resources from other strategic opportunities and from operational matters
during this process. The integration process may result in the loss of key employees and the disruption of
ongoing business, customer and employee relationships that may adversely affect the Corporation’s ability
to achieve the anticipated benefits of recent and any future acquisitions. Management continually assesses
the value and contribution of services provided by third parties and assets required to provide such services.
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In this regard, non-core assets may be periodically disposed of so that the Corporation can focus its efforts
and resources more efficiently. Depending on the state of the market for such non-core assets, certain of
Surge’s non-core assets may realize less on disposition than their carrying value on the consolidated
financial statements of the Corporation.
Cost of New Technologies
The petroleum industry is characterized by rapid and significant technological advancements and
introductions of new products and services utilizing new technologies. Other companies may have greater
financial, technical and personnel resources that allow them to enjoy technological advantages and may in
the future allow them to implement new technologies before the Corporation. There can be no assurance
that Surge will be able to respond to such competitive pressures and implement such technologies on a
timely basis or at an acceptable cost. If Surge implements such technologies, there is no assurance that it
will do so successfully. One or more of the technologies currently utilized by Surge or implemented in the
future may become obsolete. In such case, Surge’s business, financial condition and results of operations
could be affected adversely and materially. If Surge is unable to utilize the most advanced commercially
available technology, or is unsuccessful in implementing certain technologies, Surge’s business, financial
condition and results of operations could also be adversely affected in a material way.
Information Technology Systems and Cyber-Security
Surge has become increasingly dependent upon the availability, capacity, reliability and security of its
information technology infrastructure and its ability to expand and continually update this infrastructure, to
conduct daily operations. Surge depends on various information technology systems to estimate reserve
quantities, process and record financial data, manage the land base, analyze seismic information,
administer contracts with operators and lessees and communicate with employees and third-party partners.
Further, Surge is subject to a variety of information technology and system risks as a part of its normal
course operations, including potential breakdown, invasion, virus, cyber-attack, cyber-fraud, security
breach, and destruction or interruption of its information technology systems by third parties or insiders.
Unauthorized access to these systems by employees or third parties could lead to corruption or exposure
of confidential, fiduciary or proprietary information, interruption to communications or operations or
disruption to Surge’s business activities or competitive position. Further, disruption of critical information
technology services, or breaches of information security, could have a negative effect on Surge’s
performance and earnings, as well as on Surge’s reputation. Surge has technical and process controls in
line with industry-accepted standards to protect its information assets and systems; however, these controls
may not adequately prevent cyber-security breaches. The significance of any such event is difficult to
quantify, but may in certain circumstances be material and could have a material adverse effect on Surge’s
business, financial condition and results of operations.
Hydraulic Fracturing
The proliferation of the use of hydraulic fracturing as a recovery technique employed in oil and natural gas
drilling has given rise to increased public scrutiny of its environmental aspects, particularly with respect to
its potential impact on local aquifers. Surge utilizes hydraulic fracturing in a significant portion of the light
oil wells it drills and completes. Negative public perception of hydraulic fracturing may place pressure on
governments in the jurisdictions where Surge operates to implement additional regulatory requirements or
limitations on the utilization of hydraulic fracturing, which in turn could restrict Surge’s operations and
increase its costs.
Any new laws, regulations or permitting requirements regarding hydraulic fracturing could lead to
operational delays, increased operating costs, third party or governmental claims, and could increase costs
- 70 -
of compliance and doing business as well as delay the development of oil and natural gas resources from
shale formations, which are not commercial without the use of hydraulic fracturing. Restrictions on hydraulic
fracturing could also reduce the amount of oil and natural gas that Surge is ultimately able to produce from
its reserves.
Dilution
Common Shares, including rights, warrants, special warrants, subscription receipts and other securities to
purchase, to convert into or to exchange into Common Shares, may be created, issued, sold and delivered
on such terms and conditions and at such times as the Board may determine. In addition, Surge may issue
additional Common Shares from time to time pursuant to Surge’s stock option plan and stock incentive
plan. The issuance of these Common Shares would result in dilution to holders of Common Shares.
Net Asset Value
Surge’s net asset value will vary depending upon a number of factors beyond the control of Surge’s
management, including oil and natural gas prices. The trading price of the Common Shares is also
determined by a number of factors which are beyond the control of management and such trading price
may be greater than or less than the net asset value of Surge.
Reliance on Management
Shareholders will be dependent on the management of Surge in respect of the administration and
management of all matters relating to Surge and its properties and operations. Investors who are not willing
to rely on the management of Surge should not invest in Common Shares.
Permits and Licenses
The operations of Surge may require licenses and permits from various governmental authorities. There
can be no assurance that Surge will be able to obtain all necessary licenses and permits that may be
required to carry out exploration and development at its projects.
Title to Properties
Although title reviews will be done according to industry standards prior to the purchase of most oil and
natural gas producing properties or the commencement of drilling wells as determined appropriate by
management, such reviews do not guarantee or certify that an unforeseen defect in the chain of title will
not arise to defeat a claim of Surge which could result in a reduction of Surge’s interest in a property or well
and the revenue received by Surge therefrom.
Litigation
In the normal course of the Corporation’s operations, it may become involved in, named as a party to, or
be the subject of, various legal proceedings, including regulatory proceedings, tax proceedings and legal
actions, related to personal injuries, property damage, property tax, land rights, the environment and
contract disputes. The outcome of outstanding, pending or future proceedings cannot be predicted with
- 71 -
certainty and may be determined adversely to the Corporation and as a result, could have a material
adverse effect on the Corporation’s assets, liabilities, business, financial condition and results of operations.
Aboriginal Claims
Aboriginal peoples have claimed aboriginal title and rights to resources and various properties in Western
Canada. Such claims, in relation to any of Surge’s lands, if successful, could have an adverse effect on its
operations.
Income Taxes
The Corporation files all required income tax returns and believes that it is in full compliance with the
provisions of the Tax Act and all other applicable provincial tax legislation. However, such returns are
subject to reassessment by the applicable taxation authority. In the event of a successful reassessment of
the Corporation, whether by re-characterization of exploration and development expenditures or otherwise,
such reassessment may have an impact on current and future taxes payable.
Income tax laws relating to the oil and natural gas industry, such as the treatment of resource taxation or
dividends, may in the future be changed or interpreted in a manner that adversely affects the Corporation.
Furthermore, tax authorities having jurisdiction over the Corporation may disagree with how the Corporation
calculates its income for tax purposes or could change administrative practices to the Corporation’s
detriment.
Corporate Matters
Certain of the directors and officers of Surge are also directors and officers of other oil and gas companies
involved in natural resource exploration and development, and conflicts of interest may arise between their
duties as officers and directors of Surge, as the case may be, and as officers and directors of such other
companies.
Failure to Maintain Listing of the Common Shares and the Debentures
The Common Shares and the Debentures are currently listed for trading on the facilities of the TSX. The
failure of Surge to meet the applicable listing or other requirements of the TSX in the future may result in
the Common Shares and/or the Debentures ceasing to be listed for trading on the TSX, which would have
a material adverse effect on the value of the Common Shares and/or Debentures. There can be no
assurance that the Common Shares and Debentures will continue to be listed for trading on the TSX.
Structure of Surge
From time to time, Surge may take steps to organize its affairs in a manner that minimizes taxes and other
expenses payable with respect to the operation of Surge and its subsidiaries. If the manner in which Surge
structures its affairs is successfully challenged by a taxation or other authority, Surge and the holders of
Common Shares may be adversely affected.
Changes in Legislation
It is possible that the Canadian federal and provincial government or regulatory authorities could choose to
change the Canadian federal income tax laws, royalty regimes, liability management, environmental and
climate change laws or other laws applicable to oil and gas companies and that any such changes could
materially adversely affect Surge, its shareholders and the market value of the Common Shares.
- 72 -
Additional information on the risks, assumptions and uncertainties are found in this Annual Information
Form under the heading “Special Note Regarding Forward Looking Statements”.
Alternatives to and Changing Demand for Petroleum Products
Full conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to
oil and natural gas and technological advances in fuel economy and renewable energy generation devices
could reduce the demand for oil, natural gas and liquid hydrocarbons. Recently, certain jurisdictions have
implemented policies or incentives to decrease the use of fossil fuels and encourage the use of renewable
fuel alternatives, which may lessen the demand for petroleum products and put downward pressure on
commodity prices. In addition, advancements in energy efficient products have a similar effect on the
demand for oil and gas products. Surge cannot predict the impact of changing demand for oil and natural
gas products, and any major changes may have a material adverse effect on its business, financial
condition, results of operations and cash flows by decreasing profitability, increasing costs, limiting access
to capital and decreasing the value of Surge’s assets.
Global Events Outside of the Corporation’s Control, such as Natural Disasters, Wars or Health
Epidemics
The Corporation may be impacted by business interruptions resulting from pandemics and public health
emergencies, including those related to COVID-19 coronavirus, geopolitical actions, including war and
terrorism or natural disasters including earthquakes, typhoons, floods and fires. An outbreak of infectious
disease, a pandemic or a similar public health threat, such as the recent outbreak of the novel coronavirus
known as COVID-19, or a fear of any of the foregoing, could adversely impact us by causing operating,
manufacturing supply chain, clinical trial and project development delays and disruptions, labour shortages,
travel and shipping disruption and shutdowns (including as a result of government regulation and prevention
measures). It is unknown whether and how the Corporation may affected if such an epidemic persists for
an extended period of time. The Corporation may incur expenses or delays relating to such events outside
of our control, which could have a material adverse impact on our business, operating results and financial
condition.
Forward-Looking Information
Shareholders and prospective investors are cautioned not to place undue reliance on Surge’s forward-
looking information. By its nature, forward-looking information involves numerous assumptions, known and
unknown risks and uncertainties, of both a general and specific nature, that could cause actual results to
differ materially from those suggested by the forward-looking information or contribute to the possibility that
predictions, forecasts or projections will prove to be materially inaccurate.
Additional information on the risks, assumption and uncertainties are found under the heading “Special
Note Regarding Forward Looking Statements” of this Annual Information Form.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
There are no outstanding legal proceedings material to the Corporation to which the Corporation is a party
or in respect of which any of its properties are subject, nor are there any such proceedings known to the
Corporation to be contemplated.
During the year ended December 31, 2020, there were (i) no penalties or sanctions imposed against the
Corporation by a court relating to securities legislation or by a securities regulatory authority; (ii) no other
penalties or sanctions imposed by a court or regulatory body against the Corporation that it believes would
likely be considered important to a reasonable investor in making an investment decision; and (iii) no
- 73 -
settlement agreements entered into by the Corporation with a court relating to securities legislation or with
a securities regulatory authority.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
James Pasieka, a director of the Corporation, and Michael Bennett, the Corporate Secretary of the
Corporation, are, respectively, counsel to and a partner of the national law firm McCarthy Tétrault LLP,
which law firm renders legal services to the Corporation.
Except as disclosed above or as may be disclosed elsewhere in this AIF, none of the directors, executive
officers or principal shareholders of the Corporation, and no associate or affiliate of any of them, has or has
had any material interest in any transaction or any proposed transaction which has materially affected or is
reasonably expected to materially affect the Corporation or any of its affiliates.
AUDITOR, TRANSFER AGENT AND REGISTRAR
KPMG LLP are the auditors of the Corporation and have confirmed with respect to the Corporation, that
they are independent within the meaning of the relevant rules and related interpretations prescribed by the
relevant professional bodies in Canada and any applicable legislation or regulations.
The transfer agent and registrar for the Common Shares is Odyssey Transfer Agent & Trust Company at
its principal offices in Calgary, Alberta and Toronto, Ontario.
INTEREST OF EXPERTS
The Reserves Report and certain reserves estimates contained in filings made by the Corporation under
National Instrument 51-102 – Continuous Disclosure Requirements during the year ended December 31,
2020 were prepared by Sproule. As at the date of this Annual Information Form, the directors, officers,
employees and consultants of Sproule who participated in the preparation of the Reserves Report or such
reserves estimates or who were in a position to directly influence the preparation or outcome of the
preparation of the Reserves Report or such reserves estimates, as a group, owned, directly or indirectly,
less than 1% of the outstanding Common Shares.
KPMG LLP are independent of the Corporation pursuant to the rules of professional conduct of the Institute
of Chartered Accountants of Alberta.
ADDITIONAL INFORMATION
Additional information concerning the Corporation may be found under the Corporation’s profile on SEDAR
at www.sedar.com. Additional information, including information concerning directors’ and officers’
remuneration and indebtedness, principal holders of the Corporation’s securities and securities authorized
for issuance under equity compensation plans, will be contained in the information circular of the
Corporation for the annual general meeting of the holders of Common Shares scheduled to be held in 2021.
Additional financial information is provided in the Corporation’s comparative financial statements and
management’s discussion and analysis for the year ended December 31, 2020.
- 74 -
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\
Executed as to our report referred to above:
Sproule Associates Limited
Calgary, Alberta
Sproule Associates Limited
APEGA Permit Number 00417
Original Signed by Gary R. Finnis, P.Eng.
Gary R. Finnis, P.Eng.
Senior Manager, Engineering
Date: Mar. 02, 2021
Membership: 62965
Original Signed by Alec Kovaltchouk, P.Geo.
Alec Kovaltchouk, P.Geo.
VP, Geoscience
Date: Mar. 02, 2021
Membership: 72150
2629.110581.Rev1
Summary
National Instruments 51-101
3
Page
SCHEDULE “B”
FORM 51-101F3
Report of Management and Directors on Reserves Data and Other Information
Terms to which a meaning is ascribed in National Instrument 51-101 - Standards of Disclosure for Oil and Gas
Activities have the same meaning herein.
Management of Surge Energy Inc. (the “Corporation”) are responsible for the preparation and disclosure of
information with respect to the Corporation’s oil and gas activities in accordance with securities regulatory
requirements. This information includes reserves data, which are estimates of proved reserves and probable
reserves and related future net revenue as at December 31, 2020, estimated using forecast prices and costs.
Sproule Associates Limited, an independent qualified reserves evaluator, has evaluated and reviewed the
Corporation’s reserves data. The report of the independent qualified reserves evaluator is presented in
Schedule ”A” to the Annual Information Form of the Corporation for the year ended December 31, 2020 (the
“AIF”).
The Reserves Committee of the Board of Directors of the Corporation has:
(a)
(b)
reviewed the Corporation’s procedures for providing information to the independent qualified reserves
evaluator;
met with the independent qualified reserves evaluator to determine whether any restrictions affected
the ability of the independent qualified reserves evaluator to report without reservation; and
(c)
reviewed the applicable reserves data with management and with Sproule Associates Limited.
The Reserves Committee of the Board of Directors has reviewed the Corporation’s procedures for assembling
and reporting other information associated with oil and gas activities and has reviewed that information with
management. The Board of Directors has, on the recommendation of the Reserves Committee, approved:
(a)
(b)
the content and filing with securities regulatory authorities of Form 51-101F1, incorporated into the
AIF, containing reserves data and other oil and gas information;
the filing of Form 51-101F2, which is the report of the independent qualified reserves evaluators on
the reserves data; and
(c)
the content and filing of this report.
[Balance of Page Intentionally Left Blank.]
B - 2
Because the reserves data are based on judgements regarding future events, actual results will vary and the
variations may be material. However, any variations should be consistent with the fact that reserves are
categorized according to the probability of their recovery.
(signed) “Paul Colborne”
Paul Colborne, President & Chief Executive Officer
(signed) “Jared Ducs”
Jared Ducs, Chief Financial Officer
(signed) “Daryl Gilbert”
Daryl Gilbert, Director & Chair of the Reserves
Committee
(signed) “P. Daniel O’Neil”
P. Daniel O’Neil, Director
March 9, 2021
B - 2
SCHEDULE “C”
Audit Committee Charter
Role and Objective
The Audit Committee is a committee of the Board of Directors of Surge Energy Inc. (the “Corporation”) to
which the Board has delegated its responsibility for oversight of the nature and scope of the annual audit,
management’s reporting on internal accounting standards and practices, financial information and
accounting systems and procedures, financial reporting and statements and recommending, for Board
approval, the audited consolidated financial statements and other mandatory disclosure releases containing
financial information of the Corporation. The objectives of the Audit Committee are as follows:
1.
2.
3.
4.
5.
to assist directors in fulfilling their legal and fiduciary obligations (especially for accountability) in
respect of the preparation and disclosure of the financial statements of the Corporation and related
matters;
to oversee the audit efforts of the external auditors of the Corporation;
to maintain free and open means of communication among the directors, the external auditors, the
financial and senior management of the Corporation;
to satisfy itself that the external auditors are independent of the Corporation; and
to strengthen the role of the outside directors by facilitating in depth discussions between directors
on the Committee, management and external auditors.
The function of the Committee is one of oversight of management and the external auditors in the execution
of their responsibilities. Management is responsible for the preparation, presentation and integrity of the
financial statements of the Corporation, maintaining appropriate accounting and financial reporting
principles and policies and implementing appropriate internal controls and procedures. The external
auditors are responsible for planning and carrying out a proper audit of the annual financial statements of
the Corporation and reviewing the interim financial statements of the Corporation prior to their filing with
securities regulatory authorities and other procedures.
Composition of the Committee
1.
2.
3.
4.
The Audit Committee shall consist of at least three directors. The Board shall appoint one member
of the Audit Committee to be the Chair of the Audit Committee.
Each director appointed to the Audit Committee by the Board must be independent. A director is
independent if the director has no direct or indirect material relationship with the Corporation. A
material relationship means a relationship which could, in the view of the Board, reasonably
interfere with the exercise of the director’s independent judgment. In determining whether a director
is independent of management, the Board shall make reference to National Instrument 52-110 –
Audit Committees or the then current legislation, rules, policies and instruments of applicable
regulatory authorities.
Each member of the Audit Committee shall be “financially literate”. In order to be financially literate,
a director must be, at a minimum, able to read and understand financial statements that present a
breadth and complexity of accounting issues generally comparable to the breadth and complexity
of issues expected to be raised by the Corporation’s financial statements.
A director appointed by the Board to the Audit Committee shall be a member of the Audit Committee
until replaced by the Board or until his or her resignation.
Meetings of the Committee
1.
2.
The Audit Committee shall convene a minimum of four times each year at such times and places
as may be designated by the Chair of the Audit Committee and whenever a meeting is requested
by the Board, a member of the Audit Committee, the auditors, or a senior officer of the Corporation.
Meetings of the Audit Committee shall correspond with the review of the quarterly financial
statements and management discussion and analysis of the Corporation.
Notice of each meeting of the Audit Committee shall be given to each member of the Audit
Committee. The auditors shall be given notice of each meeting of the Audit Committee at which
financial statements of the Corporation are to be considered and such other meetings as
determined by the Chair and shall be entitled to attend each such meeting of the Audit Committee.
3.
Notice of a meeting of the Audit Committee shall:
(a)
(b)
(c)
(d)
be in writing;
state the nature of the business to be transacted at the meeting in reasonable detail;
to the extent practicable, be accompanied by copies of documentation to be considered at
the meeting; and
be given at least two business days prior to the time stipulated for the meeting or such
shorter period as the members of the Audit Committee may permit.
4.
5.
6.
7.
8.
A quorum for the transaction of business at a meeting of the Audit Committee shall consist of a
majority of the members of the Audit Committee. However, it shall be the practice of the Audit
Committee to require review, and, if necessary, approval of certain important matters by all
members of the Audit Committee.
A member or members of the Audit Committee may participate in a meeting of the Audit Committee
by means of such telephonic, electronic or other communication facilities, as permits all persons
participating in the meeting to communicate adequately with each other. A member participating in
such a meeting by any such means is deemed to be present at the meeting.
In the absence of the Chair of the Audit Committee, the members of the Audit Committee shall
choose one of the members present to be Chair of the meeting. In addition, the members of the
Audit Committee shall choose one of the persons present to be the Secretary of the meeting.
The Chairman of the Board, senior management of the Corporation and other parties may attend
meetings of the Audit Committee; however the Audit Committee (i) shall meet with the external
auditors independent of management as necessary, in the sole discretion of the Committee, but in
any event, not less than quarterly; and (ii) may meet separately with management.
Minutes shall be kept of all meetings of the Audit Committee and shall be signed by the Chair and
the Secretary of the meeting.
Duties and Responsibilities of the Committee
1.
It is the responsibility of the Audit Committee to oversee the work of the external auditors, including
resolution of disagreements between management and the external auditors regarding financial
reporting. The external auditors shall report directly to the Audit Committee.
C - 2
2.
3.
The Audit Committee shall, in the exercise of its powers, authorities and discretion so authorized,
conform to any regulations or restrictions that may from time to time be made or imposed upon it
by the Board or the legislation, policies or regulations governing the Corporation and its business.
It is the responsibility of the Audit Committee to satisfy itself on behalf of the Board that the
Corporation’s system of internal controls over financial reporting and disclosure controls and
procedures are satisfactory for the purpose of:
(a)
(b)
identifying, monitoring and mitigating the principal risks;
ensuring compliance with legal, ethical and regulatory requirements;
and to review with the external auditors their assessment of the internal controls over financial
reporting and the disclosure controls of the Corporation, their written reports containing
recommendations for improvement, and management’s response and any follow-up to any
identified weaknesses.
4.
It is the responsibility of the Audit Committee to review the annual financial statements of the
Corporation and, if deemed appropriate, recommend the financial statements to the Board for
approval. This process should include but be not to be limited to:
(a)
(b)
(c)
(d)
reviewing and accepting, if appropriate, the annual audit plan of the external auditors of
the Corporation, including the scope of audit activities, and monitor such plan’s progress
and results during the year;
reviewing changes in accounting principles, or in their application, which may have a
material impact on the current or future years’ financial statements;
reviewing significant accruals, reserves or other estimates such as any impairment
calculation;
reviewing the methods used to account for significant unusual or non-recurring
transactions;
(e)
ascertaining compliance with covenants under loan agreements;
(f)
(g)
reviewing disclosure requirements for commitments and contingencies;
reviewing adjustments raised by the external auditors, whether or not included in the
financial statements;
(h)
reviewing unresolved differences between management and the external auditors;
(i)
(j)
obtain explanations of significant variances with comparative reporting periods;
review of business systems changes and implications;
(k)
review of authority and approval limits;
(l)
review the adequacy and effectiveness of the accounting and internal control policies of
the Corporation and procedures through inquiry and discussions with the external auditors
and management;
(m)
confirm through private discussion with the external auditors and the management that no
management restrictions are being placed on the scope of the external auditors’ work;
C - 3
(n)
(o)
(p)
review of tax policy issues; and
review of emerging accounting issues that could have an impact on the Corporation; and
understand bias in decision-making and areas where significant judgment is applied.
5.
It is the responsibility Audit Committee to review the interim financial statements of the Corporation
and, if deemed appropriate, to recommend the financial statements to the Board for approval and
to review all related management discussion and analysis. The Audit Committee must be satisfied
that adequate procedures are in place for the review of the Corporation’s disclosure of all other
financial information and shall periodically assess the accuracy of those procedures.
6.
The Audit Committee shall have the authority to:
(a)
(b)
(c)
inspect any and all of the books and records of the Corporation, its subsidiaries and
affiliates;
discuss with the management and senior staff of the Corporation, its subsidiaries and
affiliates, any affected party and the external auditors, such accounts, records and other
matters as any member of the Audit Committee considers necessary and appropriate;
engage independent counsel and other advisors as it determines necessary to carry out
its duties; and
(d)
to set and pay the compensation for any advisors employed by the Audit Committee.
7.
With respect to the appointment of external auditors by the Board, the Audit Committee shall:
(a)
(b)
(c)
(d)
(e)
recommend to the Board the appointment of the external auditors;
review the performance of the external auditors and make recommendations to the Board
regarding the replacement or termination of the external auditors when circumstances
warrant;
oversee the independence of the external auditors by, among other things, requiring the
external auditors to deliver to the Audit Committee, on a periodic basis, a formal written
statement delineating all relationships between the external auditors and the Corporation
and its subsidiaries;
recommend to the Board the terms of engagement of the external auditor, including the
compensation of the auditors and a confirmation that the external auditors shall report
directly to the Committee; and
when there is to be a change in auditors, review the issues related to the change and the
information to be included in the required notice to securities regulators of such change.
8.
9.
Audit Committee shall review annually with the external auditors their plan for their audit and, upon
completion of the audit, their reports upon the financial statements of the Corporation and its
subsidiaries.
The Audit Committee must pre-approve all non-audit services to be provided to the Corporation or
its subsidiaries by external auditors. The Audit Committee may delegate, to one or more members,
the authority to pre-approve non-audit services, provided that the member report to the Audit
Committee at the next scheduled meeting and such pre-approval and the member comply with
such other procedures as may be established by the Audit Committee form time to time.
C - 4
10.
11.
The Audit Committee shall review the Enterprise Risk Management framework and procedures of
the Corporation (i.e. hedging, litigation and insurance), including the annual review of insurance
coverage and make appropriate recommendations to the Board with respect thereto.
The Audit Committee shall receive regular updates with respect to information technology matters,
including with respect to the Corporation’s cyber security programs to address potential cyber-
related risks.
12.
The Audit Committee shall establish and maintain procedures for:
(a)
(b)
the receipt, retention and treatment of complaints received by the Corporation regarding
accounting controls, or auditing matters; and
the confidential, anonymous submission by employees of the Corporation of concerns in
accordance with the Corporation’s Whistleblower Policy.
13.
14.
15.
16.
The Audit Committee shall review and approve the Corporation’s hiring policies regarding
employees and former employees of the present and former external auditors or auditing matters.
The Chairman of the Audit Committee shall review and approve the expenses incurred by the
President and Chief Executive Officer.
The Audit Committee shall periodically report the results of reviews undertaken and any associated
recommendations to the Board.
The Audit Committee shall assess, on an annual basis, the adequacy of this Mandate and the
performance of the Audit Committee.
C - 5