We Produce Value I Growth I Innovation Annual Report

Transcription

1 We Produce Value I Growth I Innovation 2012 Annual Report

2 This is Laricina From prospects to recognized assets. From simulation and testing to drilling and production. From ideas to innovation. From resources to reserves. Since its founding in 2005, Laricina s story has been one of acting on ideas, of fulfilling commitments of producing. Germain Commercial Demonstration Project (CDP) Forward-Looking Statements This annual report contains certain forward-looking statements under applicable securities laws and includes such statements about Laricina Energy Ltd. s plans that are based on assumptions and that involve risk and uncertainties. Actual results may differ materially. Refer to page 46 for additional information on forward-looking statements. Contents 2 We Produce Value 4 We Define Growth 6 We Foster Innovation 11 We Create Decades of Future Growth and Value 12 President s Letter 18 We Produce Bitumen from the Grosmont at Saleski 26 We Are Building at Germain 34 We Unlock Growth Opportunities 36 We Advance In Situ Technologies and Innovation 38 We Engage Communities and Operate Safe Projects 40 We Have Built a Dedicated Team 41 Reserves and Resources 46 Management s Discussion and Analysis 67 Independent Auditors Report 68 Consolidated Financial Statements 72 Notes to the Consolidated Financial Statements 96 Laricina Mangement Team 97 Laricina Board of Directors 98 Corporate Information IBC Glossary and Abbreviations

3 We are an in situ oil sands producer, a pioneer in our two current project areas. At Saleski, Laricina has demonstrated commercial production from the Grosmont carbonate formation. At Germain, we are among the first movers in the Grand Rapids sands, with commercial operations targeted for start-up in Our growth properties are located in established and emerging plays. Saleski pilot project Gord Rouse, Team Lead, Production Operations Engineering 1

4 We Produce Value 500,000 bbls/d net production potential bbls probable reserves 466 Million (1) 4.2 Billion bbls contingent resources (best estimate) (1) $543 Million PV10 before tax future net revenue of probable reserves (1) future net revenue of contingent resources (best estimate) $8.5 Billion PV10 before tax (1) This is Laricina s path to value creation. Our asset base holds 466 million net barrels of probable reserves (1), 4.2 billion net barrels of contingent resources (best estimate) (1) and 0.3 billion net barrels of prospective resources (best estimate) (1) at year-end 2012 (as determined by GLJ Petroleum Consultants Ltd. (GLJ)). The cyclic steam-assisted gravity drainage (C-SAGD) recovery process at Saleski is delivering commercial well productivity. The Germain commercial demonstration project (CDP) is on schedule and budget, targeting start-up in mid Future expansion phase designs will be refined based on what we observe and what we learn. Value-enhancing innovations are being tested, patented and field-proven. Major infrastructure including roads, natural gas and electrical power is complete or in progress, and we are advancing plans on a pipeline system. (1) GLJ Report effective December 31, See Reserves and Resources starting on page 41 and Glossary and Abbreviations on the inside back cover Annual Report

5 Resources are transformed into reserves, new reservoirs are proven, drilling, extraction and development models are substantiated by performance, infrastructure is put in place, bitumen is produced and marketed throughout North America, uncertainties and risks are reduced. Lane Becker, Director, Drilling, Completions & Logistics Laricina Energy Laricina LtD. Energy 3 LtD. 3

6 We DEFINE Growth Grand Rapids bitumen trend > 10 metres McMurray bitumen trend > 10 metres Grosmont subcrop Nisku subcrop Grosmont bitumen trend > 40 metres The reservoir is the foundation for growth. Laricina s assets include the familiar McMurray oil sands, the emerging Grand Rapids oil sands and two carbonate formations the Grosmont and Winterburn. Once resources are delineated and tested, development begins at a relatively small scale, in order to manage capital risk and to apply what is learned to future phases. Meanwhile, future phases are being advanced at the regulatory and engineering levels. Laricina s growth is focused on its two current project areas, Saleski and Germain. The Saleski pilot is producing bitumen from the Grosmont carbonate formation and construction of the 10,700-barrel-perday Phase 1 commercial phase is expected to begin this year. Construction of Germain s first phase, a 5,000-barrel-per-day project, is nearing completion and steam injection into the Grand Rapids sands is scheduled for mid-2013 with production commencing later in the year Annual Report

7 Laricina s asset portfolio has been shaped to provide exposure to multiple large oil sands opportunities. All properties are held at high working interest with operatorship and contain high-quality reservoirs capable of driving our growth. Burnt Lakes Future Roadway Boiler Rapids Conn Creek Poplar Creek Fort McMurray Saleski Chip Lake Road Germain House River Cheecham Terminal Wabasca-Desmarais Proposed Stony Mountain Pipeline Thornbury West Thornbury Portage Laricina properties Imagery 2013 TerraMetrics Map data 2013 Google Gordon Lee, Senior Geologist Laricina Energy LtD. 5

8 We FOSTER Innovation All of the Company s assets are commercially viable using established, available technology. Technological edge is not about getting at the asset, it is about getting more from the asset. Our innovations are directed at generating measurable, sustainable economic uplift from our assets. Laricina s approach to innovation and technology focuses on achieving economic efficiencies for our shareholders. Reducing the steam-tooil ratio (SOR) by adding solvents or capturing surplus heat from adjoining zones saves on energy input costs. Improvements in well pad design drive down our costs throughout the supply chain. Lower energy usage per barrel of bitumen produced improves environmental performance Annual Report

9 We are leaders in innovation and have been since the Company s beginning. Continuous improvements to bitumen extraction models, processes, design and equipment are key to reducing costs, maximizing productivity and long-term resource recovery, and commercializing new opportunities. Kevin Meyer, Manager, Drilling and Completions Laricina Energy LtD. 7

10 Laricina founded Raised $77 million in private equity Built solid management team and Board of Directors; staff count of 8 personnel Poplar Creek lease purchased as first asset 2005 Raised $198 million from two equity financings Added $70 million to capital assets Submitted regulatory applications for Germain pilot and Saleski non-thermal solvent recovery field test Physical site work began at Germain First seismic program initiated, acquiring more than 190 km of 2-D seismic First core drilling program, comprised of 71 delineation wells across asset base 2007 Prudently managed capital through worldwide economic storm Began Saleski pilot construction: completed well pad, drilled service wells, prepared plant site and began placing facility components; construction workforce peaked at 350 Amended Germain plan to become a 5,000-barrel-per-day CDP with solvent injection and recycling Completed $84 million equity financing Drilled three delineation wells at Burnt Lakes, a new Grosmont carbonate prospect Raised $95 million from two equity financings Acquired Germain property, Laricina s largest asset and a pioneering Grand Rapids Formation oil sands play Acquired Saleski and began study and analysis of the Grosmont carbonate reservoir Completed first resource assessment of asset portfolio, with 1.2 billion barrels of net contingent resources Research and development projects began with the University of Calgary 2008 Invested $133 million in capital assets Expanded team to 46 employees and opened Wabasca office Built 21-km all-weather road to Germain Submitted application for 1,800-barrel-perday Grosmont pilot at Saleski Drilled first horizontal well at Saleski pilot, initiated drilling of second horizontal well Became a founding member of In Situ Oil Sands Alliance (IOSA) Annual Report

11 Produced bitumen from the Grosmont C and D zones Commenced drilling two additional wells at Saleski in the Grosmont C Received first patent for the Passive Heat- Assisted Recovery Method (PHARM) process Drilled six horizontal well-pairs at Germain CDP, completed civil construction Raised approximately $520 million through two private equity financings Bitumen blend sales from Saleski were approximately 55,500 gross barrels at year-end At year-end, probable reserves increased for Germain Grand Rapids to 387 million net barrels 2011 First steam at Germain CDP scheduled for mid-year, with first production to follow shortly thereafter Complete winter 3-D seismic program at Conn Creek and Burnt Lakes growth properties Continue pilot optimization, debottlenecking and production ramp-up at Saleski Saleski Phase 1 front-end engineering and design study scheduled to be complete; detailed engineering and design, ordering of long-lead items, drilling and construction scheduled to commence Regulatory approval for Saleski Phase 1, Germain Phase 2 and the Stony Mountain Pipeline expected Filed regulatory application for Phase 1 expansion of 10,700 barrels per day at Saleski Completed nearly $342 million equity financings Laricina executive representative became Chair of University of Calgary s Solvent Heat- Assisted Recovery Program (SHARP) Filed patent application for in situ Enhanced Solvent Extraction Incorporating Electromagnetic Heating (ESEIEH) recovery processes Initiated steam injection in first well-pair at Saleski to test Grosmont D zone First recognition of reserves: 36 million net barrels of probable reserves assigned to Germain Grand Rapids 2012 Demonstrated commerciality in the carbonates through C-SAGD at Saleski Saleski achieved milestone of 100,000th gross barrel of bitumen in August, with cumulative total of 186,000 gross barrels reached by year-end Began solvent testing at Saleski Filed regulatory update for Saleski Phase 1 to use C-SAGD, with first steam and production targeted for late 2015 Drilled and completed remaining four well-pairs at Germain, achieving 20 percent capital cost reduction Filed regulatory application for the Stony Mountain Pipeline Ramped up staffing and ended the year with 154 full-time employees Filed patent application for well pad modularization At year-end, Saleski assigned first probable reserves, totalling 76 million net barrels This timeline represents Laricina s view of its future plans that are based on assumptions that involve risks and uncertainties. Refer to page 46 for additional information. Laricina Energy LtD. 9

12 Completion of Saleski Phase 1 construction targeted for mid-year, followed by steam injection and production, with gross installed production capacity at Saleski now 12,500 barrels per day Continue facility and process optimization at all projects including focus on innovation and technology to reduce operating costs and environmental footprint Target combined net installed capacity of 100,000 barrels per day at Germain and Saleski Continue all aspects of technical and field work for further expansion to 500,000 barrels per day gross production Continue development of remaining growth properties Saleski Phase 1 construction continues, start to increase staff in anticipation of start-up the following year Ramp-up SAGD production at Germain CDP, establish production parameters and implement solvent-cyclic SAGD (SC-SAGD) Scheduled launch of detailed engineering and design for Germain Phase 2 File regulatory application for Saleski Phase 2 Expect first proved reserves at Germain CDP Production ramp-up at Saleski Phase 1 expected First production at Germain Phase 2 targeted Advance understanding of Winterburn carbonates at Germain Future phases at Saleski and Germain advance Advance SC-SAGD understanding and improve recovery Advance development at other core properties Continue exploration and resource validation at Burnt Lakes This timeline represents Laricina s view of its future plans that are based on assumptions that involve risks and uncertainties. Refer to page 46 for additional information. Laricina Energy LtD. 10

13 We CREATE Decades of Future Growth and Value Laricina has created a platform for growth and value creation since its founding in 2005, and we believe our phased approach to expansion at Saleski and Germain creates a visible pathway for adding production and reserves. Targeted milestones include 42,500 barrels per day of net installed capacity in 2016, with regulatory applications in progress and 100,000 barrels per day net capacity targeted in 2020 at Germain and Saleski alone. Laricina believes it has a world-class resource base with existing and potential in situ projects in four sand and two carbonate formations. Our growth platform includes extraction methods and operating facilities that improve with each iteration, innovations that lever productivity and installed capacity, and steadily improving infrastructure to support future expansions at high capital efficiency. The longer we operate the better we become. Growth and value. Laricina Energy LtD. 11

14 president s letter From left to right: Dean Setoguchi (seated), Senior Vice President and Chief Financial Officer; David Safari, Vice President Facilities; Derek Keller (seated), Vice President Production; James Hand, Senior Vice President Operations and Chief Operating Officer; Glen Schmidt (seated), President and Chief Executive Officer; Marla Van Gelder (seated), Vice President Corporate Development; Karen Lillejord, Vice President Finance and Controller Annual Report

15 We have created an economic case in the Grosmont where our initial performance has been enhanced through refinement, resulting in a new, competitive energy supply. Our vision to establish Laricina as a leader in advancing the commercialization of the Grosmont and Grand Rapids in west Athabasca resulted in several significant steps taken in 2012, from the demonstration of commercial rates in the Grosmont carbonate formation at Saleski, to advancing our construction at Germain, accessing the Grand Rapids sand formation. Saleski Catalyst Demonstration of Commercial Rates The defining moment at Saleski during 2012 was the demonstration of commercial rates from the Grosmont carbonate formation at our Saleski pilot. The Grosmont is one of the largest oil-bearing resources in Alberta, second only to the McMurray sands. Gravity drainage is the recovery mechanism used for in situ bitumen extraction. Heat is delivered and the oil is mobilized and drained. Each reservoir requires a particular engineering approach to deliver the heat and extract the oil using vertical or horizontal wells, single or separate injection and production wells, and various steaming models. Different operators are applying different configuration and extraction methods in various geological horizons. Our work in the Grosmont is groundbreaking. Results from our pilot have enabled us to put the pieces of the puzzle together. There is no question the reservoir is of high quality, but the missing piece until now was a commercial design for oil extraction. At Saleski, the character of the Grosmont has determined that a single horizontal well operated cyclically is best. We have moved beyond traditional dual-well steamassisted gravity drainage (SAGD), adapting our drilling and completions model and steam injection method, to fit the unique characteristic of the rock. We have confirmed that C-SAGD is best for start-up and initial production of bitumen from the Grosmont at Saleski. Along with C-SAGD, other modifications to our design include moving away from over-balanced drilling with a cased-hole completion (standard in the oil sands), to near-balanced drilling with open-hole completion and stimulation to remove formation damage around the wellbore (a simplification we learned from our first wells when drilling over-balanced). As we optimized our well design and thermal recovery scheme for C-SAGD, production from the wells at our pilot increased, as evidenced by peak rate production exceeding 1,200 gross barrels per day in our second well in the Grosmont C Formation. We have created an economic case in the Grosmont where our initial performance has been enhanced through refinement, resulting in a new, competitive energy supply. At Saleski, we have an achievable and economic vision that includes continued production, testing and optimization at the pilot, and a 10,700-barrelper-day gross production expansion targeted to be onstream in The Saleski-Germain Platform Scale, resource quality and infrastructure drive competitive advantage in a resource play, particularly an oil sands resource play. With gross production potential of more than 500,000 barrels per day in two neighbouring projects, Saleski and Germain provide one of the industry s largest in situ platforms. The pending approval of Laricina s Stony Mountain Pipeline (along with the Grand Rapids Pipeline, a crude oil and diluent pipeline jointly proposed by TransCanada Corporation and Phoenix Energy Holdings Limited), ownership in the road system from Wabasca to our projects, and steady progress of main-line power supply are paving the way for these projects to be fully serviced by infrastructure. This will benefit both our projects and the greater west Athabasca area for decades. Laricina Energy LtD. 13

16 A fundamental principle at Laricina is to identify, develop, and apply innovation and technology. it is about getting more from the assets. Work at the Germain CDP steadily progressed during 2012 and we continue on schedule and budget, with first steam targeted for mid-2013 and first production estimated for later in the year. Our work at the Germain CDP has reinforced our step-wise and continuous approach to execution. We have achieved a cost reduction of 20 percent in the last four well-pairs of the ten well-pairs drilled at Germain. Well pad optimization led to improvements in the manifold system and pipe rack/module design, for which a patent application has been filed. The more efficient sizing that resulted allows us to expand our module sourcing and transportation options beyond the province to eastern Canada, the United States and overseas. We estimate that by accessing different markets, we can achieve savings in the range of 15 to 30 percent, which will have significant positive impact on capital costs. Along with first production at Germain, we anticipate regulatory approval for our proposed cumulative 150,000 barrel-per-day expansion through Phase 2, 3 and 4 later in We also anticipate that other regional operators in the Grand Rapids will advance their projects, setting the stage for the Grand Rapids to be widely recognized as one of the province s major clastic bitumen plays. Five regional operators are advancing projects in the Grand Rapids, attracted by the formation s geological consistency and continuity, and the opportunity. Because of the Grand Rapids lower geological risk and lateral continuity, operators are able to use considerably longer well bores. Piloting of 1,200-m laterals, 50 percent longer than a standard horizontal well-pair in the Grand Rapids, is underway by one operator, creating potential for the Grand Rapids to achieve upper-quartile SAGD rates. Future synergies between Germain and Saleski include levering the scale of the neighbouring projects and coordinating infrastructure and shared services such as operations and marketing. We also foresee increased efficiency in combined operations staffing and spreading fixed costs across both projects, which is expected to provide Laricina with a competitive advantage over stand-alone projects. Innovation A fundamental principle at Laricina is to identify, develop, and apply innovation and technology to improve the in situ recovery process. Commercial production at our projects does not depend on future commercialization of technology. Rather, the role of technology is to enhance the value of our projects. It is not about getting at the assets, it is about getting more from the assets. Our innovation record began with asset prospecting and capture in the Grosmont and Grand Rapids. It has continued in repeated cycles of learning and adaptation, and can be seen in every part of our business, particularly our approach to drilling and completions, where we have made significant strides in efficiency and cost reductions. With each well, we seek improvements over the last. Beyond drilling, our focus on innovation can be seen in how we understand a reservoir using our proprietary, in-house engineering modelling software, known as the Open-Access Simulation Integrated System (OASIS). It can be seen in how we are looking at the delivery of energy, with our work in moving away from conventional steam application to the use of radio frequency heating and solvents, particularly how we seek to enhance the efficiency of that energy, with PHARM and SC-SAGD Annual Report

17 Laricina s safety performance and environmental impact successes are based on operational integrity, process safety and the protection of our workers, other individuals and the environment. Team The energy sector is a business of competitive advantage, where ideas are created and acted upon. We are fortunate that experienced professionals, field operators and new graduates have chosen to work at Laricina. The attraction of Laricina is our commitment to act on ideas, develop and steer them, to add economic efficiencies to our assets. We continue to build our team. At the executive level, 2012 additions included Dean Setoguchi, Senior Vice President and Chief Financial Officer; David Safari, Vice President Facilities; and in 2013, James Hand, Senior Vice President Operations and Chief Operating Officer. In the field we added 12 personnel to support the Germain start-up, and in the Calgary corporate office we have grown to 116 staff. And as always, we continued an active student program, with 21 students in Environment, Health and Safety Laricina s safety performance and environmental impact successes are based on operational integrity. Operational integrity means avoiding shortcuts and ensuring that process safety and the protection of our workers, other stakeholders and the environment are priorities. Much like our approach to innovation, we learn and improve as we go along. Failure in safety is often a failure to learn or modify an item, process or procedure. Learning from what we do enhances operational integrity. Laricina s 2012 environmental, health and safety performance was excellent: zero lost-time injuries, a decrease in our total recordable injury frequency, and no material environmental or regulatory compliance issues. Community Relations Our approach to community engagement is based on mutual respect. Respect means that we strive to understand our impacts on the community and take an active role as a community participant. The community in which we operate understands our commitments and contributions. This mutual understanding forms the basis for a sustained relationship which, over time, develops into an effective partnership. We have engaged community-based businesses with right-sized contracts, where the scale enables local business to participate, succeed and develop into a competitive supplier. Laricina s business development contracts in our operating area totalled $8 million in Laricina also supports the local community s review of regulatory applications. The Company s contributions in 2012 to social agencies focused on education, health, recreation and culture. They included research and scholarship support at the university level, plus donations and employee matching to social agencies in Calgary and Wabasca, the main community in our operating area. Capital How and when Laricina raises capital reflects our approach to managing growth, and our focus on private equity thus far has been strategic and has resulted in high-quality investors who appreciate the strength of our assets and team. Respect for our investors and their objectives, and our commitment to steward each dollar raised, has influenced our approach to financing. Each equity issuance has provided funds to advance our projects, and each advancement increases project clarity, certainty and value. Laricina Energy LtD. 15

18 in addition to private equity, we are considering debt, joint ventures, and the ever-elusive initial public offering as possible sources of capital. Going forward, in addition to private equity, we are considering debt, joint ventures, and under favourable market conditions an initial public offering (IPO) as possible sources of capital. Having advanced our operations to the commercial stage, having demonstrated our ability to execute projects at Saleski and Germain, and nearing the completion of infrastructure, we are well-positioned for other sources of financing. Our growth as a company makes public markets an option and a potential IPO will be determined by the broader economic environment as we continue to achieve operational milestones. We will continue to evaluate our financing options and will select what we see as the best combination given our progress and the economic environment. Following capital spending of $261 million in 2012, we began the year with almost $346 million in working capital and no debt. With capital expenditures of more than $500 million expected over to advance future expansions, additional capital will be required. Regardless of private or public equity, debt or joint venture funding, our main financing principle will continue to partner with high-quality capital. Commodity Market Conditions Two-thousand twelve was more uncertain for the oil sands industry than prior years with differentials dampening prices for Canadian oil, poor public equity market performance and international political and monetary uncertainty. Market access for Canadian crude oil remains a critical factor. Advancing domestic export pipeline options to Canada s west and east coasts and into the United States is the critical near-term issue. Expanded export transportation to markets in the United States, eastern Canada and the Pacific Rim would greatly reduce or even collapse the large regional differential in oil pricing. There has been a great deal of discussion around exporting crude oil by rail. We see rail playing a complementary role in some areas, and indeed Laricina is transporting some Saleski pilot volumes via rail as we seek to test all transportation options. Rail can help producers to reduce the price differential currently depressing intra-alberta oil prices by adding incremental export capacity. It also provides the potential to source and backhaul diluent from refining and natural gas liquids processing regions at a transportation-adjusted discount to the current premium prices at Edmonton. But given its cost and complexity, rail is ultimately a marginal transportation mode. For projects with large scale and long reserve life, pipelines are the most cost-effective and safest way to move crude oil. That is why the Stony Mountain Pipeline is a strategic asset for Laricina. Oil export capacity is a key concern to the Alberta and federal governments. Both recognize that the energy sector is our country s largest economic driver and wish to avoid reductions in capital investment and missed opportunity for public revenues. We are grateful for the policy stances of both governments and their active support for responsible crude oil export solutions. Outlook The advancements of 2012 set the stage for our operational goals in Achieving key operational milestones, receiving regulatory approvals for expansions, securing ongoing financing for our future projects, and the impact of the political and economic environments, will dictate Laricina s pace of growth in The Germain Annual Report

19 Combined, Germain and Saleski have more than 500,000 barrels per day in gross production potential, and by 2020 we will be only 20 percent of the way there. and Saleski projects, where we have infrastructure coming into place, scale firmly established and design optimization being demonstrated, will remain our primary focus as we drive towards our net installed production capacity milestone of 42,500 barrels per day in We will also continue to advance our understanding of two other project areas with winter seismic programs at Burnt Lakes and Conn Creek, and the pursuit of innovations that enhance asset value will remain a high priority as we look towards our longer term goal of net installed production capacity of 100,000 barrels per day in Laricina s activities in 2013 are focused on advancing our two current projects. Operations: Deliver the Germain CDP on schedule and budget and achieve first production. Applying what we have learned through experience at the Germain CDP towards cost containment and improvements for Germain Phase 2; Advance Saleski Phase 1 with continued engineering, procurement, and drilling; and Enhance Saleski pilot performance, including demonstrated repeatability of the C-SAGD process, growing production, evaluating solvent performance through further testing cycles, and determining the extent of communication between the C and D zones in the Grosmont Formation. Regulatory: Receive anticipated regulatory approvals for Saleski Phase 1, Germain Phase 2, and the Stony Mountain Pipeline. Capital: The decision on how best to structure our financial needs will be positioned by our performance, achieving key milestones throughout the year, and of course, the impact of general economic conditions outside our control. Germain and Saleski are Laricina s current projects. Combined, they have more than 500,000 barrels per day in gross production potential, and by 2020 we will be only 20 percent of the way there based on our current plans. Our years of cumulative knowledge and experience, combined with established infrastructure, will mean that the highest returns on new capital will very likely be from these two assets. Laricina has other prospects as well. The Winterburn carbonates at Germain will be developed based on what we learn at Saleski in the Grosmont. The Burnt Lakes carbonate prospects and other growth properties like Poplar and Conn Creek provide optionality, including monetization opportunities. Each step we take at Saleski and Germain advances our longer-term goals, building on what we already have achieved and what we have learned. Two-thousand thirteen promises to be another exciting year for Laricina and, notwithstanding the expected challenges, I look forward to charting our progress as we make our next big steps. (signed) Glen C. Schmidt President, Chief Executive Officer and Director April 4, 2013 Laricina Energy LtD. 17

20 Operations Review We Produce Bitumen from the grosmont at Saleski Saleski pilot plant Our teams have continued to respond and understand the challenge of the Grosmont reservoir, where we are now leading the commercialization of this huge carbonate resource. Steven Brand, Team Lead, Saleski Pilot From left to right: Martin Belanger, Director, Production Operations; Christina Bell, Senior Geological Technologist; Steven Brand, Team Lead, Saleski Pilot Annual Report

21 76 million net bbls probable reserves (1) 1.6 million net bbls best estimate contingent resources (1) 197 km 2-D seismic Application update filed for Phase 1 commercial project of 10,700 gross bbls/d 282,500 bbls/d gross production potential (1) 60% working interest in 42,880 acres 64 delineation wells 42 square-km 3-D seismic 2.3 square-km 4-D seismic (1) GLJ Report effective December 31, See Reserves and Resources starting on page 41 and the Glossary and Abbreviations on the inside back cover. 2012: Advancing the Saleski Pilot Since initiating production from the Grosmont in 2011, Laricina s central objective at Saleski during 2012 was to demonstrate that the reservoir was commercial, meaning it could achieve sustained production rates so that, if replicated over many wells, a scaled-up project would be economic. In other words, the goal was to see how Saleski could make money. Laricina succeeded in demonstrating commerciality in the Grosmont in This is a major milestone in de-risking not only the Saleski project, but the wider Grosmont Formation. With over 400 billion barrels of bitumen in place according to the Alberta Energy Resources Conservation Board (ERCB), widespread commercialization of this reservoir could provide significant long-term benefits to Alberta s economy. Two adaptations in particular were key to achieving commercial production rates. First, we developed and implemented near-balanced drilling (with reservoir pressure matching drilling fluid pressure) to reduce cuttings induced well bore damage. We also completed the wells open-hole (no liner). The early wells we drilled were over-balanced (with fluid pressure exceeding reservoir pressure) and completed with a slotted liner, and we found that near well bore cuttings damaged the formation and affected the production performance of these wells. The revised approach has delivered muchimproved production performance. Our second adaptation was to modify the bitumen recovery method to C-SAGD, in order to maximize the effects of steam in the reservoir (see sidebar on next page for definition of C-SAGD). The change to C-SAGD ensured that the injected steam was effectively heating the rock and oil while alternating injection and production. The benefit of high permeability in the Grosmont Formation means that high-pressure steam above the fracture pressure is not required to force heat into the reservoir during injection. During production, gravity does its job of delivering the mobilized oil through the formation fracture system to the horizontal well. SAGD production from 1D First shipment of dilbit leaves Saleski Pilot First C-SAGD production from 1C Drilling commences on 2C Both 1C and 1D on cyclic production First production from 2C Solvent injection with steam tested on 1C March 2011 May 2011 December 2011 March-April 2012 June 2012 September 2012 Dec Jan SAGD warm-up on 1C and 1D well-pairs April 2011 SAGD production from 1C Sept.-Nov Stimulations on 1C and 1D wells January 2012 Commissioned second once-through steam generator increasing the pilot s steam capacity May 2012 Commence first cyclic steam injection on 2C August 2012 Begin second production cycle on 2C Laricina Energy LtD. 19

22 Operations Review The pilot was modified to C-SAGD and four of the eight wells were converted. Although the pilot was not designed for C-SAGD, the conversion did not require major modification of the well pad or central processing facility (CPF). Cyclic steaming of our first well in the C zone of the Grosmont Formation (1C) began in December The well achieved a peak rate of 800 barrels per day in each of its first two production cycles, delivering Laricina s sought-after breakthrough in this carbonate reservoir. Steaming of the second C zone well (2C) began in May This second well was drilled using the nearbalanced technique, completed open hole without a slotted liner, and stimulated prior to starting operation. The production response was tremendous, climbing to a daily peak rate of more than 1,200 barrels per day within one week, from a horizontal leg of only 450 m (typical SAGD wells have horizontal legs of 800-1,200 m). The 2C well is the basis for Laricina s Phase 1 commercial development at Saleski. The Grosmont s higher and thicker D zone was also tested under C-SAGD. The first D zone producing well achieved a peak daily rate of approximately 600 barrels in August Although our priority at the pilot has been the C zone, the production experience from the D zone was very encouraging through Laricina expects its understanding of this zone to progress further through During the 1C well s fourth cycle in September 2012, Laricina initiated testing solvent injection into the Grosmont. The well was switched to production in late Well Placement in the Grosmont AT SALESKI Caprock Grosmont D Marl Grosmont C 2D 2C Producing well Suspended well 1D 1C 26m September and Laricina monitored the bitumen production rates and solvent return over the following months. The recovery process remains at an early stage, but initial results include a peak bitumen rate higher than in the previous cycle and production occurring at a lower temperature than under steam alone. The addition of solvents to the C-SAGD process is an important longterm goal to improve economics and environmental benefits by reducing heat and energy inputs, thereby lowering the SOR and improving recovery at Saleski and Germain. By year-end, the Saleski pilot had delivered cumulative bitumen production of 186,000 gross barrels. In December 2012 the pilot averaged 915 gross barrels per day, its best monthly performance to that date. Going into 2013, the wells have continued to perform as expected and are producing through longer cycles. 1m 18m N C-SAGD Cyclic steam-assisted gravity drainage is an in situ process used to recover bitumen from the Grosmont carbonates. It involves alternating cycles of steam injection and bitumen production from a single horizontal well Annual Report

23 Saleski: What We demonstrated IN 2012 Commercial steam injection and bitumen production rates have been achieved from the Grosmont carbonate formation; We have drilled, completed, stimulated and produced horizontal wells on a sustained basis without a liner in the C zone, avoiding reservoir damage, improving injectivity and productivity and reducing costs; Demonstrated reservoir steam injectivity of greater than 700 m 3 per day in a 450 m-long horizontal well, indicating that greater than 1,200 m 3 per day should be possible in commercial-length horizontal wells; Produced Grosmont bitumen has been treated, blended, transported and sold to markets across North America; Produced water analyzed from the pilot confirms that the water can be treated and recycled on a commercial basis; and Data from monitoring wells indicates localized temperature and pressure communication between the Grosmont C and D zones. Porosity and permeability Laricina has been keen to demonstrate that the Grosmont reservoir will yield bitumen not only from the secondary porosity such as natural fractures, but also from the primary matrix porosity of the carbonate rock itself. Unloading of matrix porosity has been clearly demonstrated at Saleski. As for permeability, observed flow rates at relatively low reservoir temperature indicate good permeability for long-term production and recovery Saleski Pilot Objectives This year s objectives at Saleski are to continue to prove technologies for advancing the Grosmont s development and moving to Phase 1 commerciality. Specific goals include: Continuing to grow the pilot s average daily bitumen production, to a 2013 average range of gross barrels per day, demonstrating the ability of C-SAGD wells to deliver a sustained average rate; Continued testing of C-SAGD recovery in the Grosmont D zone; Evaluating solvent performance and determining next steps; Determining the extent of thermal interaction between the Grosmont C and D zones and how we operate these zones as a system rather than individual wells; and Continuing to refine the marketing process, including bitumen blending, trucking and rail transportation. Saleski Pilot 4-d Seismic Image Showing HEAT AFFECTED REGION Communication between the Grosmont C and D zones We have monitored and found evidence of localized heat transfer between the wells in the C and D zones, and initial evidence of pressure and fluid communication. Gathering further evidence from the 1C/1D and 2C/2D wells is a goal for D seismic The objective of time-lapse or 4-D seismic is to determine the changes occurring in the reservoir as a result of hydrocarbon production or injection of steam into the reservoir over time by comparing the repeated datasets. It provides valuable information, including confirming well conformance, which means that the entire well is contributing to production and the steam influence is relatively uniform and contained. Observation well Horizontal well 2C 1C Laricina Energy LtD. 21

24 Operations Review Saleski Phase 1 In October 2012 Laricina filed a regulatory application update with the ERCB and Alberta Environment and Sustainable Resource Development (AESRD) to construct Saleski s first commercial phase. The strong performance of C-SAGD pilot wells provided the technical data to support the Saleski Phase 1 application update, which includes added steam capacity for C-SAGD operations and single horizontal wells instead of well-pairs. As before, Phase 1 will have licensed production capacity of 10,700 barrels per day. This will be the industry s first commercial-scale bitumen project in the Grosmont carbonate. Regulatory approval for Phase 1 is anticipated in mid-2013, with drilling starting as early as October, and first steam targeted for late An optimized well pad design, a smaller footprint for the CPF, the reduced expense of drilling single wells rather than well-pairs, along with greater project control and Saleski Phase 1 Design Summary Installed SOR 3.9 Steam Capacity Bitumen Capacity 41,728 bbls/d 10,700 bbls/d Well Design Up to 32 Targeted Formation Recovery Method Well Spacing Initially Grosmont C C-SAGD ~60 metres detailed planning, have enabled a further reduction in the Phase 1 cost estimate from $600 million to $550 million. This yields a capital cost of approximately $51,500 per installed daily barrel of production, representing acceptable capital efficiency for a project of this scale and stage of development. Laricina is working on engineering and execution strategies, as well as phasing the initial well Saleski Phase 1 Development Plan R19 R18 W4 N T85 3-D seismic area 4-D seismic area Phase 1 project area Phase 1 plant and well pad Pilot plant and well pad Camp site Borrow pit Road Gas pipeline Gas pipeline Proposed Stony Mountain Pipeline and terminal Road and pipeline Water disposal well Water source well Proposed powerline and substation ATCO 240kV powerline Annual Report

25 Saleski PHASE 1 forecasted Timeline CURRENT SCHEDULE to 2010 Public Consultation Process Regulatory Review Engineering and Module Fabrication Construction Drilling and Completions Commissioning and Start-up Note: There is not necessarily a consistent level of activity throughout the range of task completion. drilling to further reduce and manage the capital required to deliver the project. Our goal is to save another 5-10 percent of project capital costs going forward. Phase 1 operations will include recycling water produced from the C-SAGD wells in order to reduce non-potable makeup water volume obtained from deep underground water-source wells. The Saleski pilot s performance suggests there could be advantages in the treatment and re-use of water produced from the Grosmont carbonates, something not done with sand reservoirs. Advantages could include a reduction in treatment equipment and associated capital, along with significant environmental benefits. The facility will meet regulatory water recycle requirements. Laricina is targeting late 2015 to initiate steam injection at Saleski Phase 1, depending on the timing of additional financing for project drilling and construction. A staggered start-up of producing wells is expected to ramp production up to the licensed bitumen output within six to 12 months of initial steam injection. This is a faster start-up than under SAGD, due to the plant s added steam capacity and our learnings from the high initial bitumen rates from the Saleski C-SAGD wells. Initial Phase 1 development, as currently applied for, will focus on recovery from the Grosmont C zone. We expect, however, to add wells in the D zone in Phase 1 and future phases at Saleski as further understanding of the D zone is gained. Additionally, solvents are expected to be injected within two years of initial C-SAGD production. It s great to be a part of a team working on such a significant project. We are learning and challenging each other every day. Everyone here is committed to getting successful results. Darcy Riva, Manager, Saleski Assets From left to right: Darcy Riva, Manager, Saleski Assets; Wei Wei, Engineer in Training Laricina Energy LtD. 23

26 Operations Review Saleski Long-term Development Plan Laricina s long-term plan is to develop the Saleski project over six commercial phases, achieving gross installed capacity of 282,500 barrels per day. Following the 10,700-barrel-per-day commercial Phase 1, the subsequent phase is planned to be 30,000 gross barrels per day. Phases 3 through 6 would each add approximately 60,000 barrels per day of gross bitumen production. Capital management, cost control and efficient execution of every element will be key areas of focus throughout Saleski s multi-phase development. Progressing the development in phases allows Laricina to manage the capital requirements and incorporate operating insights and efficiencies into the subsequent phases. Each phase will be planned with sufficient steam capacity to meet an operating SOR target of 3.0 to 3.5 under steam alone, with the goal being to operate with a considerably lower SOR following the addition of solvents. MARKETING AND INFRASTRUCTURE Since 2008 Laricina has been working to plan and assemble the required road, electricity, natural gas and, most recently, takeaway pipeline infrastructure to support the Saleski and Germain projects. The past five years have seen this region transformed from a virtual frontier into a development area with nearly complete infrastructure for commercial-scale oil sands operations. This is a major step in the de-risking of Saleski and Germain. Wherever possible, infrastructure is sized robustly to support both projects and their expansion phases. Saleski Bitumen Marketing Pilot production continues to be trucked to regional terminals. The sales price for Grosmont blended bitumen has achieved similar pricing to product from McMurray projects. Laricina dilutes Grosmont bitumen with condensate from the Edmonton area. Volumes and scheduling for early-stage marketing have been uneven as TITLE Saleski-Germain Infrastructure Platform R25 R24 R23 R22 R21 R20 R19 R18 R17 R16 T86 T85 Germain Saleski T84 T83 Wabasca-Desmarais Athabasca River T82 T T80 Proposed Stony Mountain Pipeline and terminal Gas pipeline ATCO 240kV powerline and substation Proposed powerline and substation Highway Road Bridge Plant site Annual Report

27 the few producing wells at Saleski continue testing and go through alternating cycles of steam injection and bitumen production. With limited tankage at the Saleski pilot, trucks are mobilized as necessary, taking advantage of the all-weather road from Wabasca. Laricina commenced trial runs of rail shipments out of the Lynton rail terminal on a spot basis in the fourth quarter of The sales have demonstrated that Grosmont bitumen is not only marketable but in fact may have some advantage over rail barrels originating from the McMurray Formation, as it requires less condensate for shipment. The trials have also shown that rail shipments can receive at times pricing better than intra-alberta barrels. Laricina will continue to experiment with rail transportation as the Company develops its long-term marketing strategy. Saleski Infrastructure Electricity for the pilot is produced on-site using natural gas-powered generators, and a fuel-gas line to the site was installed in Regulatory applications for power supply to Saleski Phase 1 (scaled to service Phase 2) have been filed with the Alberta Utilities Commission, with approval expected in mid-2013 and construction to begin thereafter. Power is anticipated to be in-service prior to the Phase 1 start-up in late Road System Saleski and Germain are serviced by 130 km of Laricinaowned all-weather access roads. Our road network now includes the first 76 km of the Chip Lake road (formerly the Al-Pac road) running north from Wabasca. After contributing to the road s maintenance and upgrading for several years, in 2012 Laricina acquired 40 percent ownership and operatorship in this section. Upgrades in 2012 included replacing five single-lane bridges with concrete-decked, two-lane, high-load-rated bridges, and widening the road itself, leading to increased safety and travelling efficiency. Stony Mountain Pipeline As Laricina s bitumen production is scaled up, a permanent pipeline connection to its projects becomes essential for efficient, cost-effective and safe marketing. When daily production reaches roughly 10,000 barrels, we want to be pipeline-connected. With this in mind, Laricina advanced its own initiative the Stony Mountain Pipeline system to coincide with its longer-term marketing needs. The 187-km Stony Mountain Pipeline is proposed to run from Saleski in a broad U-shape to the Cheecham terminal area south of Fort McMurray. A future extension would connect Germain as well. The Stony Mountain Pipeline is the first regional pipeline initiative in the west Athabasca region, and Laricina anticipates interest from other parties. The pipeline s key elements consist of a 200,000 barrel-per-day, 24-inch diameter blended crude bitumen line, a 70,000 barrel-per-day, 12-inch diameter diluent return line, and a tank farm approximately 2 km northeast of the Saleski pilot. The Stony Mountain Pipeline s regulatory application was filed with the ERCB in September While carrying out regulatory and consultation activities, and identifying areas of concern such as impacts on traditional land use and caribou habitat, Laricina advanced preliminary engineering and design work. Following further stakeholder consultation and review by the ERCB, approval is anticipated by mid Construction could begin in late 2013, subject to additional funding or other commercial arrangements, with the system s 200,000-barrel-per-day blend line entering service in mid-to-late 2015, servicing Saleski Phase 1. Laricina s diluent requirements will still be provided via trucking until the diluent return line goes into service roughly a year later. Laricina is considering a range of commercial structures and financing sources to maximize the Stony Mountain Pipeline s strategic benefits. Laricina Energy LtD. 25

28 Operations Review We are building at Germain Germain CDP under construction Start-up at the Germain CDP will open up an entirely new region in Alberta for oil sands production and will begin to shift roughly 150 billion barrels of bitumen from ultimate potential to established reserves. Sandeep Solanki, Director, Germain Asset and Innovation Annual Report From left to right: Jessica Norman, Operations Analyst; David Stachniak, Team Lead, Germain; Sandeep Solanki, Director, Germain Asset and Innovation

29 389 million net bbls probable reserves (1) 205,000 bbls/d gross production potential Grand Rapids (1) 934 million net bbls best estimate contingent resources Grand Rapids (1) 40,000 bbls/d gross production potential Winterburn (1) 433 million net bbls best estimate contingent resources Winterburn (1) 100% working interest in 44,161 acres 172 delineation wells Grand Rapids Application filed for Germain Phases ,000 gross bbls/d 90.1 km 2-D seismic Winterburn 12.8 square-km 3-D seismic Grand Rapids (1) GLJ Report effective December 31, See Reserves and Resources starting on page 41 and the Glossary and Abbreviations on the inside back cover. Germain Commercial Demonstration Project Progress at the Germain CDP accelerated in 2012, with construction reaching peak manpower late in the year at 208 in mid-winter The remaining four of 10 horizontal SAGD well-pairs were drilled (six drilled for start-up and four for sustaining production), and infrastructure continued to be built. Laricina exited 2012 with the project on-budget at $435 million and with first steam scheduled to commence in mid-2013 as planned. First bitumen production is expected to follow roughly three months later, and will be Laricina s first production from the Grand Rapids sands Accomplishments As of year-end 2012: Construction Philosophy Germain s development is being staged over six phases, with the CDP being Phase 1. The staged approach is being done to manage technical risk, to distribute capital requirements while achieving economies of scale, to manage the marketing of incremental production volumes and, above all, to ensure that innovations and optimization achieved in one phase are transferred to subsequent phases. Optimization areas include our well drilling and completions approach, well pad design, the use of solvents, well placement in relation to basal formation water, and the CPF s size. Even prior to startup, Laricina has identified improvements to well drilling and well pad design that will be applied to future phases. Engineering complete; Module fabrication and piping pre-fabrication 98 percent complete; 72 of 81 modules delivered to site; Construction 44 percent complete; Completion of the final four well-pairs underway; Non-potable water source wells completed and equipped; Water Act application and Ground Water Management Plan update submitted; 3-D seismic baseline acquisition started; and Surface heave monitors installed and baseline survey conducted. Our phased approach has allowed us to take advantage of standard equipment and module sizing, which in turn expands our options for transportation and logistics. It allows us to better address any stakeholder concerns, and allows for continuous employment of a roughly equal-sized workforce. This greatly contributes to site administration and a manageable flow of work. The CDP s initial budget was conservative to ensure that this critical first phase went smoothly as well as pre-investing for future phases. Going forward, we feel confident we will be able to reduce costs at every opportunity. Because the CPF represents the largest cost at each phase, a smaller physical footprint can lead to much lower costs. Future phases will aim for greater capital and operating efficiencies, as well as higher well productivity in a drive to maximize cash flow and net present value. Laricina Energy LtD. 27

30 Operations Review Infrastructure Electrical power and fuel gas are in place and will be commissioned in The 22-km fuel-gas line was laid in 2011 and the metering station was installed in the third quarter of Utility power infrastructure was completed in This includes new ATCO substations at Livock and Germain, the Livock to Germain 144 kv transmission line and the 25 kv local distribution line from the Germain substation to the CPF. The Germain substation will service the CDP and Phase CDP Start-up Plan The planned operating staff requirement is approximately 40. After construction is complete, the construction team will hand over the facility to the operations team for plant commissioning. Commissioning will include first fills, priming tanks and piping to test operational readiness. Laricina anticipates first oil in late Once production starts, the steam injection rate will be increased to promote vertical and lateral growth of the steam chamber, and our modeling shows that production should ramp-up under SAGD over the subsequent months. During the ramp-up phase Laricina will implement SC-SAGD and begin adding solvent to steam and expects production to rise another 25-30% and reach project capacity over a month period. This should occur before year-end 2014 under our current plan. Germain Phase 1 (CDP) Design Summary Installed SOR 2.1 Steam Capacity 10,500 bbls/d Bitumen Capacity 5,000 bbls/d Well Design 10 well-pairs Targeted Formation Grand Rapids Recovery Method SC-SAGD Well Spacing 60 metres Solvents Laricina expects to be the industry s first operator to inject solvents into the Grand Rapids. We see great potential in supplementing the SAGD process with hydrocarbon solvents. Laricina s full project development SOR is projected to be 2.2 with SC-SAGD. The benefits of solvents would be substantial, including a significant down-sizing of the CPF for each phase, reducing capital needs and increasing the capital efficiency per unit of reserves and daily production. Solvents should also drive higher per-well productivity, achieving faster reservoir drainage, and increasing ultimate resource recovery. SC-SAGD In the solvent-cyclic steam-assisted gravity drainage process, steam injection is quickly followed by solvent to further reduce bitumen viscosity. The initial solvent is typically heavier, followed by lighter solvents in later cycles. Throughout the process, the amount of steam utilized decreases Annual Report

31 Other operators have reported good results from adding solvents in the McMurray oil sands, including successful well start-ups and enhanced performance. Laricina hopes to improve on the current per-well production forecast of approximately 500 barrels per day (with SAGD), to rates similar to those found in the McMurray when using solvents, which can range between 700 and 1,200 barrels per day. Well Placement in the Grand rapids AT GERMAIN CDP Bitumen Sand 17m Basal Water The majority of oil sands reservoirs have a layer of water at the bottom of the bitumen zone, known as basal water. The industry s historical aversion to water in reservoirs has dictated placement of SAGD producing wells above the basal water. This approach has been found to reduce ultimate bitumen recovery because a portion of the bitumen mobilized drains into the basal water below the producing well. This bitumen is forever stranded. Ultimate bitumen recovery is reduced and a portion of the thermal energy injected into the reservoir is wasted. Laricina is of the view that placing the producing well in the basal water can maximize ultimate bitumen recovery. To compare performance over time and optimize placement of the well bore for future phases, six producing wells at Germain s CDP were placed in the basal water and the other four in the bitumen zone. In both cases, the injectors are 4-6 metres above the producers, all in the bitumen zone. What We have Learned The CDP has already delivered critical knowledge and understanding that will be applied to reduce capital and operating costs in future phases. Basal Water (Illustration not to scale) Injection well Producing well Even more important, however, is the well manifold s smaller size, enabling the placement of all components on standard truckloads and in standard-sized shipping containers, eliminating the need for over-sized loads. This reduces shipping costs and in turn expands our choices for module fabrication beyond the Alberta market, including substantial opportunities with manufacturers in eastern Canada. With steam generation and water handling representing approximately 60 percent of the CPF s costs, a significant opportunity for cost reduction comes from reducing the steam requirement. Laricina s goal to reduce the SOR to as low as 2.2 would enable a 30 percent reduction in CPF capital costs for future phases. 4m Following the first six well-pairs, Laricina implemented improvements to the drilling process, wellhead design and sub-surface thermal connections, and achieved greater efficiency from a centralized drilling fluid or mud system. This resulted in a 20 percent cost reduction to the remaining four well-pairs, already achieving costs we had been targeting for Phase 2. Additionally, we have identified future cost reductions by rationalizing, simplifying and down-sizing the well pad and manifold design, and automating more of the processes on the next set of well pads. Slant horizontal well drilling at Germain CDP Laricina Energy LtD. 29

32 Operations Review Industry Activity at Germain Grand Rapids projects totalling more than 600,000 barrels per day planned by industry operators More than 400,000 barrels per day of production capacity pending regulatory approval or approved BlackPearl Resources Inc. has an operating pilot at Blackrod and has applied for a project of 80,000 barrels per day production capacity with start-up in 2015 Cenovus Energy Inc. has an operating pilot at Pelican Lake and has applied for a project of 180,000 barrels per day production capacity with start-up in 2017 Cavalier Energy Inc. has applied for a project of 10,000 barrels per day production capacity at Hoole with start-up in 2015 Koch Exploration Canada has applied for a project of 10,000 barrels per day production capacity at Muskwa with start-up in 2015 Industry activity targeting the Grand Rapids oil sands has accelerated. The Grand Rapids regional extent and consistency as a shoreface deposit poses lower geological risk than channel sands such as the McMurray, and allows for efficient project planning and forecasting of well performance. The Grand Rapids Formation represents a massive, unrealized oil sands resource, with an estimated 150 billion barrels of originalbitumen-in-place (according to ERCB estimates). Hundreds of well cores and logs show it to be a clean, predictable sand reservoir, with far fewer shale barriers and overall variability than the McMurray. GRAND RAPIDS DEVELOPMENTS Grand Rapids bitumen trend > 10 metres McMurray bitumen trend > 10 metres Grosmont subcrop Laricina Germain (205,000 bbls/d capacity with start-up in 2013) Nisku subcrop Grosmont bitumen trend > 40 metres Koch Exploration Canada Muskwa (40,000 bbls/d capacity with start-up in 2015) Cenovus Energy Ltd. Pelican Lake (up to 180,000 bbls/d capacity with start-up in 2017) Cavalier Energy Inc. Hoole (80,000 bbls/d capacity with start-up in 2015) BlackPearl Resources Inc. Blackrod (up to 80,000 bbls/d capacity with start-up in 2015) Canadian Natural Resources Ltd. Wolf Lake Producing since 2004 (~2,000 bbls/d) Note: Information on this page is based on publicly available information, ERCB filings, company reports and Laricina estimates Annual Report

33 PEER GROUP COMPARABLES BlackPearl Resources Inc. Cenovus Energy Ltd. Canadian Natural Resources Ltd. Laricina Laricina Blackrod Pelican Lake Wolf Lake Germain CDP Germain Phase 2 Depth (m) Porosity (%) Permeability (D) k V =2.1, k H =3.3 k V =2.5, k H =2.9 k V =1.9, k H =2.8 k V =2.5, k H =3.5 k V =2.5, k H =3.5 Initial pressure (MPa) Initial temperature ( o C) API gravity (in degrees) Operating pressure (MPa) Saturation in oil zone (%) Bitumen pay (m) Bitumen pay above producer (m) Note: Information in this table is based on publicly available information, ERCB filings, company reports and Laricina estimates. Laricina s acquisition of the Germain leases in 2006 placed it among the pioneering wave of companies actively developing projects in the Grand Rapids. To date, Germain is the largest Grand Rapids project in terms of planned production capacity, with sufficient resource to deliver over 200,000 net barrels per day from that formation alone. The industry s cumulative work has moved the Grand Rapids from an exploration prospect to the reserves stage. Production is being proved and moved to commercial levels, and additional pilots and commercial project phases are in the planning stages. The Grand Rapids is clearly amenable to SAGD extraction using standard horizontal well-pairs, enabling it to be economically developed using proven technologies. Industry activity around Germain has been very useful in de-risking Laricina s CDP. Laricina Energy LtD. 31

34 germain phase 2 FORECASTED timeline CURRENT SCHEDULE to 2010 Public Consultation Process Regulatory Review Engineering and Module Fabrication Construction Drilling and Completions Commissioning and Start-up Note: There is not necessarily a consistent level of activity throughout the range of task completion. GERMAIN PHASES 2-4 In November 2011 Laricina submitted a regulatory application with AESRD and the ERCB for a three-phase, 150,000-barrel-per-day expansion of the Germain Grand Rapids development. Phase 2 is currently planned as a 30,000-barrel-per-day facility. We subsequently received and answered one set of supplemental information requests. Regulatory approval for Phase 2 is anticipated in mid Phases 3 and 4 will each add capacity of 60,000 barrels per day under the current filing and will progress based on managing capital requirements and incorporating what we have learned from earlier phases. Phase 2 WORK PLAN Before the end of 2012, Laricina completed a detailed review of the reservoir and subsequently began work on Germain s Phase 2 design basis memorandum (DBM). The front-end engineering and design (FEED) study is scheduled to be initiated this year, subject to additional capital availability. Once completed, drafts of the Phase 2 DBM and FEED study will be refined based on the CDP s initial performance, and construction will follow. Phase 2 will require an estimated 40 initial horizontal well-pairs drilled from four well pads with 10 well-pairs each. Drilling is anticipated to commence in Germain CDP storage tanks and water treatment facility under construction (February 2013) Annual Report

35 Subject to regulatory approvals and financing, Phase 2 is expected to commence commissioning late in the fourth quarter of 2015, with first bitumen anticipated in Laricina s Phase 2 regulatory application took a comprehensive approach to cover many variations, allowing design optimization without an application amendment. The capital cost is estimated at $1.2 billion which generates a capital intensity of $40,000 per installed daily barrel of production, in line with other commercial in situ oil sands projects. Winterburn Carbonate Opportunity Potential development of the Winterburn carbonate formation represents a future phase at Germain. The Winterburn carbonates underlie the Grand Rapids and we anticipate that it could be efficiently developed using well pads and processing facilities built for earlier Grand Rapids phases. Reservoir engineering studies over the past year have not changed Laricina s view of the Winterburn and our C-SAGD experience at Saleski is expected to be applicable to its development. Alberta s Winterburn carbonates remain completely undeveloped, and we are not aware of exploration or testing by other companies. Germain Planned Marketing Initial bitumen production from the CDP will be trucked to regional terminals. Marketing and logistics will be integrated with the Saleski marketing program to exploit synergies, and will be scaled up as expansion phases enter service. As most regional oil terminals have limited tankage, Laricina may examine opportunities to participate in a dedicated terminal with tankage to eliminate the costs of truck waiting times. Germain Development Plan R23 R22 R21 W4M T85 EIA local study area Phase 1 plant, well pad and existing infrastructure Phase 2 plant and well pad Phase 3 plant and well pad Phase 4 plant and well pad Camp site Borrow pit Pipeline tankage Sustaining well pad, road and pipeline Powerline and substation Road Road and pipeline Water disposal well Water source well N T84 Laricina Energy LtD. 33

36 Operations Review We unlock Growth Opportunities Laricina s growth properties add scope and optionality to our asset portfolio. The bitumen resource at Conn Creek and Poplar Creek consists of McMurray Formation sands, the mainstay reservoir for SAGD development. The Grosmont carbonates at Burnt Lakes represent a large future growth opportunity, one whose risk profile and value will evolve as the Grosmont at Saleski continues to be established. Investment in Laricina s growth properties is occurring at a pace that is prudent and appropriate to the Company s year-to-year priorities and capital availability. The primary focus continues to be internal development over the medium to longer term, with monetization a secondary option. The period was devoted to internal work including a feasibility study for advancing Conn Creek that examined delineation requirements, environmental impacts, infrastructure needs and reservoir simulation for planning future facilities. Field activity has resumed over winter , with $6 million budgeted for Conn Creek and $7 million for Burnt Lakes seismic programs. These programs are aimed at advancing resource delineation for planning the size and scope of projects to support future regulatory applications. Conn Creek Covering 24,320 acres at 100 percent working interest and lying just west of Fort McMurray, Conn Creek is a promising McMurray oil sands deposit with 214 million barrels of best estimate contingent resources and 65 million barrels of best estimate prospective resources (1). In August 2012 Laricina shot 22 km of 2-D seismic, tying into previous core drilling. The new survey s technically ambitious goals were, first, to determine whether seismic could distinguish between an existing well with thick bitumen-bearing sands and a well with poor sand development and, if so, to use seismic reflection to distinguish high and low-quality reservoir in undrilled areas. This is important in the McMurray, a channel deposit sand that varies laterally. Both objectives were realized and interpretation of the new 2-D data strongly suggests extensive area on our leases with the desired reservoir qualities of thickness, continuity and low inter-bedding of mud. These positive results led to a follow-on 3-D seismic program in March 2013, covering 5.1 square-km. The 3-D seismic will provide detailed insight into the extent of high-quality channel areas, facilitating selection of future drilling locations. (1) GLJ Report effective December 31, See Reserves and Resources on page 41. OTHER GROWTH PROPERTIES Fort McMurray Burnt Lakes Boiler Rapids Conn Creek Poplar Creek Peace River Alberta Red Earth Wabasca-Desmarais Saleski Germain Wabasca Desmarais Fort McMurray House River Thornbury West Core projects Growth properties Edmonton Portage Thornbury Annual Report

37 R11 R10W4 Laricina continues to work with the Regional Municipality of Wood Buffalo and the Government of Alberta to ensure compatibility between Laricina s development plans and city growth. The property is situated close to existing road, electrical power and pipeline infrastructure. Poplar Creek In February 2012 Laricina acquired the remaining 50 percent working interest in the Poplar Creek property and now holds 5,840 acres at 100 percent working interest in a McMurray resource with 129 million barrels of best estimate contingent resources. (1) This property lies near Fort McMurray and is close to existing road, electrical power and pipeline infrastructure, with one additional bridge required for permanent access. Delineation drilling to date averages approximately four wells per section, providing good indication of the resource and how to set up the initial development area. Preparing a regulatory application will require increasing the drilling density to eight wells per section and obtaining 3-D seismic to create a detailed picture of the reservoir for optimized well placement and bitumen drainage. Burnt Lakes This large property covers 41,548 acres at 100 percent working interest and is estimated to contain 567 million barrels of best estimate contingent resources and 73 million barrels of best estimate prospective resources (1) in the Grosmont carbonates, which could support future production of 60,000 barrels per day. Laricina s success in moving the Grosmont to commercial production at Saleski strengthens the understanding for developing Burnt Lakes. T89 Conn Creek Seismic (1) GLJ Report effective December 31, See Reserves and Resources starting on page 41. Conn Creek lease boundary 2-D seismic 3-D seismic Delineation well Two 3-D seismic programs, covering 13.9 square-km in the lease s south portion and 9.6 square-km in the northeast portion, were completed in March The 3-D seismic will be used to select future well locations at this sparsely delineated and relatively remote property, where seasonal operations require temporary work camps. Environmental and engineering studies have been completed for a key creek crossing in preparation for a 60-km road to facilitate year-round access. Future drilling will depend on capital availability. We have two good-sized McMurray properties in Poplar Creek and Conn Creek that provide optionality, either to add low-risk production or to monetize the assets. Marnie Connelly, Manager, Asset Development and Growth From left to right: Marnie Connelly, Manager, Asset Development and Growth; Kent Barrett, Senior Staff Carbonate Geologist; Deepa Thomas, Director, Regulatory and Environmental Performance Laricina Energy LtD. 35

38 Operations Review we advance in situ technologies and INNOVATION From the beginning, we have regarded technical innovation as a strategic tool for enhancing the in situ recovery process and the per barrel value of the resource. While all of Laricina s projects are viable under existing technology, we aim to increase productivity and ultimate resource recovery through development and application of new technologies. Reducing the SOR is central to many of the Company s innovation initiatives. Steam-related operating efficiency improvements typically also increase environmental performance by lowering energy usage per barrel of bitumen produced. Laricina s large resource base means significant incremental value is generated for every $1 per-barrel increase in future production netback or for every million barrels of incremental recovery. Laricina is advancing innovative designs, processes and materials in its approach to drilling and completions, bitumen production, well pad configuration and central processing facilities in a number of ways: Reducing drilling times and avoiding formation damage through near-balanced drilling with open-hole well completions has provided great results at Saleski, and will be applied at Phase 1; 3-D displacement modelling to achieve industry-leading cement placement design; Engineering of next-generation casing design, de-risking of foam-based cement placement through successful tests and application at Saleski; Construction performance improvement study; and Continued industry benchmarking. Well pad containerization We have redesigned and filed a patent application for well pads at Germain. The redesign has led to substantial reductions in cost estimates for future well pads and will be applied at Saleski Phase 1 and future Germain phases. Communication between zones Initial findings at the Saleski pilot provide evidence for the conceptual validity of Laricina s Passive Heat-Assisted Recovery Method (PHARM), which received its Canadian and United States patents in The PHARM concept is based on a well in one bitumen-bearing zone benefiting from the energy added to a neighbouring zone. This would sharply reduce or eliminate the need to inject further steam in the benefiting zone, potentially averting the need for a second injection well in that zone. Laricina s innovative container well pad design enables the container-sized modules to be fabricated in a cost-competitive region, then delivered to site as standard containers at reduced transportation cost Annual Report

39 ESEIEH The Enhanced Solvent Extraction Incorporating Electromagnetic Heating (ESEIEH) process aims to combine solvents with heat generated through electromagnetic waves emanating from antennae placed in horizontal wells. The ultimate goal of this experimental process is to eliminate the need for steam for in situ bitumen extraction. Laricina is participating in a consortium to conduct a field trial as part of the ESEIEH testing program. The program s first stage, an antenna design performance test on a bitumen ore mine face, was completed in Phase 1 testing was technically successful and generated valuable data. Phase 2 testing, which will focus on underground testing, is set to begin within the next year and will take place at an ESEIEH operating partner s oil sands facilities. The consortium is supported by the Climate Change and Emissions Management Corporation (CCEMC), a notfor-profit organization that supports and builds on the province s climate change strategy to reduce emissions. OASIS Laricina has developed its own engineering modelling system the Open-Access Simulation Integrated System (OASIS) which was put into operation during The goal is to develop a flexible, robust and accurate thermal reservoir model. Standard commercial oil and natural gas software is typically aimed at one specific process. The power of OASIS is its applicability to multiple tasks. OASIS is a tool for rapidly building computer simulators, from spreadsheet-scale problems up to advanced thermal reservoir codes with complex physics. Laricina anticipates that OASIS will be a useful tool in learning about radio frequency and solvent processes through sub-surface modelling, and to collect and analyze data from the Saleski pilot to fully understand the reservoir, well performance and process control. Research partnerships A portion of Laricina s reservoir research has been done in university labs and the Company has a strong relationship with the University of Calgary. In addition to co-sponsoring the Industrial Research Chair in Reservoir Simulation at the University of Calgary beginning in 2011, the Company co-sponsored an additional Industrial Research Chair in Modeling Fundamentals of Unconventional Resources starting in The most exciting thing about innovation at Laricina is that we test and implement new technology and ideas in our reservoirs, remembering that this is a business and our projects need to be economic. Daniel Yang, Director Reservoir Engineering From left to right: Carolina Diaz-Goano, Advisor Enhanced Oil Recovery and In Situ; Daniel Yang, Director Reservoir Engineering; Neil Edmunds, Director Enhanced Oil Recovery Advisory Laricina Energy LtD. 37

40 Operations Review We engage COMMUNITIES and operate SAFE PROJECTS When engaging with its neighbours in Wabasca, Laricina strives to do so with mutual respect. In 2012, community residents attended open houses sponsored by Laricina, traditional land users participated actively with Laricina on Bigstone Cree Nation (BCN)-led traditional land use assessments, community leaders attended presentations, and face-to-face meetings occurred throughout the year to ensure continuous dialogue between Laricina and the Wabasca community. The Company s community engagement team facilitated educational institutions, governments, local agencies and other oil sands developers in coming together to begin building a sustainable local workforce. More than 20 local companies are contributing to Laricina s operations. The Company has awarded approximately $8 million in contracts to businesses in During the past two years, more than 470 Wabasca-area residents worked on the Saleski and Germain projects. After announcing the proposed Stony Mountain Pipeline project in February 2012, Laricina conducted extensive local consultation and engagement on the potential impacts with Aboriginal groups, trappers, companies and municipalities. In autumn 2012, Laricina hosted two information-sharing open houses in Wabasca and another in Lac la Biche. In May 2012 Laricina facilitated the meeting of community agencies and representatives from local businesses, industry and the municipal and provincial governments to discuss how workforce opportunities could be enhanced for local residents. Following this event, a community-led committee was formed that includes representatives from government, local agencies, educational institutions and oil sands companies. The committee will identify innovative ways to enhance education, training and employment-related initiatives as all parties work together to create positive conditions for a sustainable workforce in the Wabasca region. We are proud of Laricina s work and believe that the many benefits of our industry need to be clearly communicated. Yvonne Walsh, Manager Community Engagement From left to right: Yvonne Walsh, Manager Community Engagement; Ariella Calin, Corporate Communications Analyst; Steve Bater, Manager, Marketing and Logistics Annual Report

41 WABASCA CONNECTING WITH THE COMMUNITY The Company s local staff, consultants and contractors are dedicated to contributing to the quality of life in the region. In 2012, they volunteered their time on the local Gang Task Force, helped the Municipal District of Opportunity #17 organize a successful Business Expo, and spoke to students at career fairs, with a focus on staying in school and understanding career options in the oil sands industry. In December 2012, Laricina, its contractors and contract workers all joined the local Lions Club in organizing a Christmas gift toy drive that resulted in toys being distributed to nearly 100 local families. In all, Laricina supported approximately 30 local agencies and community events in Ray Yellowknee, Community Engagement Coordinator Health, Safety and Environment Laricina strives to achieve continuous improvement in health, safety and environmental (HSE) performance. The key principle of Laricina s HSE approach is operational integrity, in which the Company ensures that physical equipment, processes and procedures are all designed and operated to the highest standards, without shortcuts. This is complemented by a focus on learning and improvement, so that shortcomings are resolved and lessons learned are implemented. The delivery of safe projects that manage our environmental footprint also depends on the dedication of our workers, supervisors, managers and executive team. It was through their constant efforts in 2012 that we delivered significant improvements to Laricina s HSE system and overall performance. In addition to tracking actual performance through what are known as lagging indicators, Laricina focuses on leading indicators that help to shape future performance. This enables a more proactive approach to incident prevention, advancing the promotion of an increasingly effective health, safety and environmental culture. Our field teams at Saleski and Germain worked a total of 843,698 man-hours in 2012 with zero lost-time injuries. This is a true milestone that resulted directly from actions taken to improve Laricina s use of leading indicators. A core goal of our operations is to protect the health and safety of our people, stakeholders, assets and environment. Erika Löf, Health, Safety and Environment Coordinator From left to right: Matt Saunders, Senior Analyst; Erika Löf, Senior Health, Safety and Environment Coordinator Laricina Energy LtD. 39

42 Operations Review We have built A Dedicated Team Laricina has experienced tremendous growth since its founding in The number of personnel has increased considerably in a short time, and the need for qualified professionals continues. Entering 2013, Laricina had 38 people working in the field and 116 in the Calgary head office. Throughout 2012, Laricina continued to have an active student co-op program totalling 21 students. We have succeeded in attracting and retaining individuals who align with our culture, enabling us to build a base of high-quality employees at a rate that keeps pace with our growing needs. All staff members are required to take initiative and are held accountable. The Company seeks to develop highly interactive and effective individuals, with emphasis on teamwork within a respectful environment. Laricina s emphasis on innovation, which includes the support structure not merely to generate ideas but to act on them, is an enduring strength in attracting people of the highest quality. When recruiting for a new position, Laricina considers internal permanent and contract candidates as well as external candidates. Promoting from within enables us to strengthen and expand the Company through those employees who best embody our values. This complements our approach to succession planning. We also hire locally for our field operations at Saleski and Germain, working closely with several Aboriginal communities. Laricina believes that communication helps develop and maintain a positive, productive internal culture. The Company conducts weekly learning events, open to all employees, designed to encourage Company-wide communication. The Company also pays attention to what is important to its staff beyond the workplace. Educational bursaries for employees children, charitable programs to support employee objectives, and fitness facilities and programs are a few examples. With an eye to the Company s long-term needs, Laricina has prolific co-op and summer student programs especially for a company of its size. We continue to build technical full-time staff from our student ranks and it works well for us having full time technical staff right out of school who already know our team and our assets. Each individual is vital to our overall success. Our strength is in the depth and breadth of our team. Ann Gosselin, Manager, Human Resources From left to right: Brendan Skingle, Co-op Student; Julia Vis, Human Resources Analyst; Ann Gosselin, Manager, Human Resources Annual Report

43 Reserves and Resources (1) Laricina s assets contain very large resource potential, including best estimate exploitable bitumen initially in-place of 12.1 net billion barrels, with 4.2 billion barrels classified as contingent resources (best estimate), 0.3 billion barrels classified as prospective resources (best estimate) and 466 million barrels of probable reserves effective December 31, 2012 based on the GLJ Report (1). Of these amounts, Saleski has 1.6 billion barrels of contingent resources (best estimate) in the Grosmont carbonates, and Germain with 1.4 billion barrels of contingent resources (best estimate) in the Grand Rapids sands and the Winterburn carbonates. Including all properties, Laricina s resources are balanced approximately equally between sand and carbonate reservoirs. Reserves and Resources by Formation Probable Reserves (1) 84% Clastics Grand Rapids 16% Carbonates Grosmont 14% Clastics McMurray/ Wabiskaw 24% Clastics Grand Rapids Contingent Resources (1) (best estimate) 62% Carbonates Grosmont & Winterburn 76% Clastics McMurray/ Wabiskaw Prospective Resources (1) (best estimate) 24% Carbonates Grosmont (1) GLJ Report effective December 31, See notes on page 45. Laricina Energy LtD. 41

44 The following tables summarize certain information contained in the GLJ Report. It should be noted that the estimates of recovery, production, and net revenue presented in the tables below do not represent the fair market value of the Company s reserves and resources. Readers are directed to the footnotes and definitions in this section and the Oil Sands Reserves and Resources section of the MD&A on page 50. Project Summary Average Lease Area Anticipated Gross Peak Working in Acres Start-up (2) Production (2) Project Area Formation Interest (%) (gross) (year) (bbls/d) Saleski Grosmont 60 42, ,500 Germain Grand Rapids , ,000 Germain Winterburn* , ,000 Burnt Lakes Grosmont , ,000 Conn Creek McMurray , ,000 Poplar Creek McMurray 100 5, ,000 Other Properties McMurray/Grand Rapids ,721 undefined undefined *Note: In addition to the Germain lands of 39,041 acres where Laricina holds Grand Rapids and Winterburn rights, Laricina holds an additional 5,120 acres of Winterburn rights only. (2) See notes page 45. Summary of Reserves and Resource Classification (mmbbls) Reserves Contingent Resources (3) Prospective Resources (4) Probable Probable + Possible Property Reserves (5) Reserves (6) Low (7) Best (8) High (9) Low (7) Best (8) High (9) Saleski (10) ,619 2, Germain Grand Rapids , Germain Winterburn (10) , Burnt Lakes (10) , Conn Creek Poplar Creek Other Properties Total (11) ,373 4,205 7, Note: Columns may not add due to rounding. (3) - (11) See notes page Annual Report

45 Bitumen Reserves and Resources 10 Percent Present Value of Future Net Revenue Before Tax Based on Forecast Prices and Costs ($ millions) At December 31, Change Probable Reserves (253) Probable + Possible Reserves 1,247 1, Low Estimate Contingent Resources 1,632 1, Best Estimate Contingent Resources 8,477 9,948 (1,471) High Estimate Contingent Resources 20,923 19,401 1,522 Low Estimate Prospective Resources (25) Best Estimate Prospective Resources (53) High Estimate Prospective Resources (91) The economic forecasts have only been prepared for the Burnt Lakes, Conn Creek, Germain Grand Rapids, Germain Winterburn, Poplar Creek and Saleski properties that represent approximately 70 percent of Laricina s net land base. The economic forecasts have been prepared on 100 percent of probable reserves, 93 percent of contingent resources (best estimate) and 46 percent of prospective resources (best estimate). Laricina s bitumen reserves are associated with the Company s Germain Grand Rapids and Saleski assets, where Laricina has applied for regulatory approval to construct commercial bitumen recovery schemes. The Company s probable reserves increased by 20 percent over December 31, 2011 primarily as a result of reserves assigned at Saleski. Laricina s PV10 of its probable reserves was $543 million as at December 31, 2012, compared to $796 million as at December 31, 2011, a decrease of 32 percent and is a result primarily of a downward revision to forecast prices and change in assumptions used in the valuation. Laricina s contingent resources (best estimate) increased by one percent from 4,171 million barrels at December 31, 2011 to 4,205 million barrels at December 31, 2012, and the PV10 decreased by 15 percent to $8.5 billion from $9.9 billion at December 31, The net change in resource volumes is a result primarily of an increase due to additional drilling and the acquisition of the remaining working interest in certain jointly-controlled oil sands properties, offset by the reclassification of contingent resources to probable reserves at Saleski. The reduction in PV10 is primarily due to a downward revision to forecast prices and change in assumptions used in the valuation, offset by increased resource volumes. The best and the high estimate contingent resource and economic assessment at Germain Grand Rapids reflects GLJ s risked analysis of Laricina s planned SC-SAGD process, which has been tested by other operators in the Athabasca and Cold Lake oil sands, whereas the low estimate is based on SAGD. For Saleski, GLJ s evaluation reflects the C-SAGD process in the low and best estimate contingent resource and economic assessment, whereas the high estimate is based on SAGD. Laricina Energy LtD. 43

46 Technology Sensitivity Economic sensitivities were also prepared for the Germain Grand Rapids and Saleski properties using Laricina s risked assessment of the SC-SAGD process. The risked resource volumes as determined by Laricina using SC-SAGD technology for the Germain Grand Rapids and Saleski projects were 1,569 million barrels and 2,060 million barrels, respectively. The total of these volumes, 3,628 million barrels, is an incremental volume of 609 million barrels greater than the proved plus probable plus best estimate contingent resources assigned in the GLJ Report for these two properties and results in an incremental $3.3 billion PV10. This assessment is included for information purposes and should not be construed as GLJ s independent view of the technology. Technology Sensitivity 10 Percent Present Value of Future Net Revenue Before Tax (12) Based on Forecast Prices and Costs ($ millions) At December 31, Change Best Estimate Technology Sensitivity 10,995 11,965 (970) (12) See Notes page 45. Growth in Value and Resources Recoverable Resources (mmbbls) 5,000 4,000 3,000 2,000 1, Probable Reserves Best Estimate Contingent Resources Best Estimate Prospective Resources Growth in Value and Resources Net Present Value, Before Tax, 10 Percent Discount ($ millions) 12,000 10,000 8,000 6,000 4,000 2, Probable Reserves Best Estimate Contingent Resources Best Estimate Prospective Resources Annual Report

47 Notes: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) Based on the report of GLJ Petroleum Consultants Ltd. (GLJ) regarding Laricina s properties effective December 31, 2012 (GLJ Report) using GLJ s commodity price forecast as at January 1, All values shown are net to Laricina s working interest unless otherwise indicated. Recoverable resources and production estimates for Conn Creek and Poplar Creek are based on SAGD and SC-SAGD technology; Germain Winterburn is based on CSS technology; Saleski is based on C-SAGD and SAGD technology; and Burnt Lakes is based on a combination of SAGD and CSS technology; Germain Grand Rapids 2P reserves based on SAGD technology and additional volumes are based on SC-SAGD. Anticipated start-up year and peak production rates are subject to certain development milestones, regulatory approvals, available funding and project priority, in addition to other unknown uncertainties. No assurance can be made the actual start-up year or peak production rates will materialize as represented. Peak production rates are for individual projects and commence at staggered intervals and therefore have not been aggregated. Contingent resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingencies may include factors such as economic, legal, environmental, political, and regulatory matters, or a lack of markets. These resource estimates are not currently classified as reserves, pending further reservoir delineation, project application, facility and reservoir design work, preparation of firm development plans and company approvals. Contingent resources entail additional commercial risk than reserves and adjustments for commercial risks have not been incorporated in the summaries set forth herein. There is no certainty that it will be commercially viable to produce any portion of the contingent resources. Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development. The prospective resources estimates reflected herein have been risked for the chance of discovery but not for the chance of development and hence are considered partially risked estimates. Prospective resources entail additional commercial risk than reserves and contingent resources and adjustments for commercial risks have not been incorporated in the summaries set forth herein. If a discovery is made, there is no certainty that it will be developed. If it is developed, there is no certainty as to the timing of such development. 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. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. It is unlikely that the actual remaining quantities recovered will exceed the sum of the estimated proved plus probable plus possible reserves. If probabilistic methods are used, there should be at least a 10 percent probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves. Low estimate is considered to be a conservative estimate of the quantity that will actually be recovered. It is likely that the actual remaining quantity will exceed the low estimate. If probabilistic methods are used, there should be a 90 percent probability that the quantities actually recovered will equal or exceed the low estimate. Best estimate is considered to be the best estimate of the quantity that will actually be recovered. It is equally likely that the actual remaining quantities recovered will be greater or less than the best estimate. If probabilistic methods are used, there should be at least a 50 percent probability that the quantities actually recovered will equal or exceed the best estimate. High estimate is considered to be an optimistic estimate of the quantity that will actually be recovered. It is unlikely that the actual remaining quantities recovered will exceed the high estimate. If probabilistic methods are used, there should be at least a 10 percent probability that the quantities actually recovered will equal or exceed the high estimate. Laricina s resources at Saleski and Burnt Lakes are contained in the Grosmont Formation, and a portion of Laricina s resources at Germain are contained in the Winterburn Formation, each a carbonate reservoir. SAGD, C-SAGD and CSS, the recovery processes being considered to develop these assets, are considered by GLJ to be technology under development in carbonate reservoirs. Although the technology has been developed for application to noncarbonate reservoirs, and the Company is currently operating a pilot in the Grosmont Formation at Saleski, there are no known successful commercial projects that use SAGD, C-SAGD or CSS to recover bitumen from a carbonate formation. These volumes are arithmetic sums of the Company s working interest share before royalties, which statistical principles indicate may be misleading as to volumes that may actually be recovered. Readers should give attention to the estimates of individual classes of resources and appreciate the differing probabilities of recovery associated with each class as explained. SC-SAGD best estimate technology sensitivity was based on Laricina s risked view of resources for Saleski-Grosmont and Germain-Grand Rapids based on SC-SAGD technology. Laricina Energy LtD. 45

48 Management s Discussion and Analysis This Management s Discussion and Analysis (MD&A) of the financial results of Laricina Energy Ltd. (Laricina or the Company) for the years ended December 31, 2012 and 2011 was prepared as of April 4, 2013 and should be read in conjunction with the audited consolidated financial statements and accompanying notes for the years ended December 31, 2012 and December 31, The financial information presented in this MD&A was prepared in accordance with International Financial Reporting Standards (IFRS). The information in this MD&A provides management s analysis of the financial and operating results of Laricina and contains forward-looking statements based on estimates and assumptions that are subject to risks and uncertainties. Readers are directed to the following Advisory on Forward-Looking Statements which applies throughout this annual report. Actual results or events may vary materially from those anticipated. Advisory on Forward-Looking Statements This MD&A and annual report contain certain forward-looking statements relating to, without limitation, the Company s business and its intentions, plans, expectations, anticipated financial performance or condition. Forward-looking statements may include, but are not limited to, statements concerning estimates of contingent, prospective and recoverable resources, reserves and total potential production volumes; statements relating to the continued advancement of the Company s projects; and other statements which are not historical facts. Forward-looking statements typically contain words such as plan, expect, estimate, intend, believe, anticipate, project, forecast, potential or other similar words suggesting future outcomes and statements that actions, events or conditions may, would, could, should or will be taken or occur in the future. The reader is cautioned not to place undue reliance on any forward-looking statements as there can be no assurance that the plans, intentions or expectation upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Although the Company s management believes that the expectations represented by such forward-looking statements are reasonable as of April 4, 2013, there can be no assurance that such expectations will prove to be correct and, accordingly, that actual results will be consistent with the forwardlooking statements. The risks and other factors that could cause results to differ materially from those expressed in the forward-looking statements contained in this annual report include, but are not limited to: geological conditions relating to the Company s properties; the impact of regulatory changes especially as they relate to royalties, taxation and environmental changes; the impact of technology on operations and processes and the performance of new technology expected to be applied or utilized by the Company; labour shortages; supply and demand metrics for oil and natural gas; the impact of pipeline capacity, upgrading capacity and refinery demand; general economic, business and market conditions; and such other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities, contained in other disclosure documents or otherwise provided by the Company. The actual results, performance or achievements of the Company could differ materially from those expressed in or implied by forward-looking statements in this MD&A and annual report and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefit Laricina will derive. Unless required by law the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements in this MD&A and annual report are expressly qualified by this advisory and disclaimer Annual Report

49 Business Overview Laricina is a privately-held in situ oil sands company targeting opportunities in the west Athabasca region of Alberta. The Company is considered to be a development-stage company as it does not expect to achieve significant production volumes until late Focused on two major development areas, Saleski and Germain, Laricina holds a portfolio, independently estimated as at December 31, 2012 of 466 million barrels of probable reserves, and over 4.2 billion barrels of contingent resources (best estimate) and 0.3 billion barrels of prospective resources (best estimate) contained in bitumen-bearing sand and carbonate reservoirs. Highlights for the Year Ended December 31, 2012 Throughout 2012, Laricina reached significant milestones in demonstrating commercial thermal bitumen production from the Grosmont carbonate formation at the Saleski pilot and in advancing construction at the nearby Germain commercial demonstration project (CDP) to develop the Grand Rapids sand formation. Production volumes at the Saleski pilot increased during 2012 due to an additional well in the Grosmont C zone, which used improved drilling and stimulation techniques; the transition from conventional steam-assisted gravity drainage (SAGD) to cyclic-sagd (C-SAGD); and the commencement of solvent injection in the first C-zone well. Achievements at the Saleski pilot included peak bitumen production volumes of more than 1,600 gross barrels per day including more than 1,200 gross barrels from the new C-zone well; gross annual production in excess of 141,600 gross barrels of bitumen; increased duration of production cycles; and a reduction in the amount of diluent required for blending with the produced bitumen. Advancement of the Germain CDP included the completion of engineering, completion of 98 percent of module fabrication, delivery and installation of 72 of the 81 planned modules to site, and overall construction progress at 44 percent. Commissioning of the facility and initial steaming of the first well-pair are expected late in the second quarter of In addition to the development property activities during 2012, the Company completed a $30.0 million acquisition of the remaining working interest in certain jointly-controlled oil sands properties; acquired an equity interest in the Chip Lake road, which is linked to the Company-owned access road to the Saleski and Germain projects; advanced the installation and provision of infrastructure; filed a regulatory application for the Stony Mountain Pipeline; and filed a project update covering C-SAGD for the Saleski Phase 1 expansion regulatory application. Annual Financial Information (thousands of dollars, except per share amounts) Total assets 1,391,561 1,372, ,728 Working capital 345, , ,751 Capital expenditures (cash) 260, , ,873 Net operating revenue (1) 5,613 2,359 Finance income 7,525 6,803 2,387 Net loss (30,860) (21,659) (3,884) Net loss per common share basic and diluted (0.47) (0.38) (0.09) (1) Net operating revenue is defined as bitumen blend sales less royalties. Laricina Energy LtD. 47

50 Laricina made significant achievements throughout 2012 in its progression to being an operating company. The Company surpassed 186,000 gross barrels of cumulative bitumen production from the Saleski pilot; demonstrated commercial production rates from the Grosmont carbonate formation; completed detailed engineering, and advanced construction and fabrication of the Germain 5,000-barrel-per-day CDP; and completed infrastructure projects to support commercial development at Saleski and Germain. Capital expenditures during 2012 were primarily for the advancement of Germain CDP construction, drilling of four additional well-pairs to be used in the Germain CDP and infrastructure to support the Saleski and Germain projects. Laricina is a development-stage company with revenue primarily from investment of cash in low-risk investments, bitumen blend sales from the Saleski pilot, and rental income from third parties for the use of the Company s camps. The net losses in 2012 and 2011 resulted primarily from the excess of operating costs over net operating revenue associated with pilot production, and general and administrative activities required to support the Company s continued progress. The increase in total assets during 2011 is due to $499.6 million of net proceeds raised through equity private placements. Finance income increased in 2012 as a result of increased funds on deposit beginning in the second half of 2011 and a minor increase in the average interest rate for funds on deposit during Finance income increased during 2011 as a result of increased funds on deposit from private placements completed in the second half of Operational Results (thousands of dollars) Net operating revenue 5,613 2,359 Transportation and blending expenses 3,169 1,230 Operating expenses 21,933 11,421 Net operating revenue Laricina recorded first production volumes and bitumen blend sales from the Saleski pilot during the second quarter of Throughout 2012, the Company completed production tests, commenced solvent injection, initiated injection and production cycles through C-SAGD, and improved its understanding of the communication between the C and D zones in the Grosmont Formation. (barrels) Net production volumes 84,970 26,900 Net sales volumes 101,920 33,300 The increases in bitumen production and bitumen blend sales volumes during 2012 are due to the completion of a second C-zone well, which recorded first production in June of 2012, an increase in the number of days in each production cycle and an increase in the average production per day over Cumulative production volumes since start-up exceeded 186,000 gross barrels of bitumen by December 31, 2012, including production exceeding 28,000 gross barrels of bitumen in December Peak production of approximately 1,600 gross barrels of bitumen per day was achieved during 2012 which included production of more than 1,200 gross barrels of bitumen per day from the second C zone well Annual Report

51 A solvent injection program was initiated in the C zone during the third quarter of Initial results indicated an increase in bitumen production rates and production occurring at a lower temperature than with steam alone. A production test on a Grosmont Formation D zone well was completed during the second quarter of 2012 and provided evidence of localized heat transfer between the C and D zone wells in addition to pressure and fluid communication. During the remainder of 2013, Laricina plans to continue to study the connectivity between the C and D zones and the potential to extract bitumen more efficiently from the C and D zones of the Grosmont Formation through combined well operations. Bitumen blend sales volumes have fluctuated since initial bitumen production commenced in the second quarter of 2011, which is consistent with the Company s planned C-SAGD recovery process. Laricina expects sales and production volumes to continue fluctuating through alternating cycles of steam injection and bitumen production Average sales price per barrel $ $ West Texas Intermediate (US $/barrel) $ $ Western Canadian Select (Cdn $/barrel) $ $ The increase in net operating revenue during 2012 is primarily due to higher bitumen blend sales volumes, partially offset by a lower average realized price per barrel of bitumen blend. The average sales price in 2012 decreased by $16.44 per barrel from 2011, due to widening price differentials resulting from pipeline capacity constraints in Canada and the United States. Laricina s average sales price per barrel is net of terminal fees and other charges. Laricina pays Crown royalties on oil sands production. The increase in royalties during 2012 is primarily the result of increased sales volumes. Transportation and blending expenses Transportation and blending expenses include the cost of diluent purchased for blending with produced bitumen and the cost of transporting bitumen blend to the sales terminals. Increases in transportation and blending costs during 2012 are the result of increased sales volumes, partially offset by decrease in the quantity of diluent required for blending and a decrease of $7.70 per barrel of diluent purchased. During 2012 Laricina shipped bitumen blend volumes by rail to the Atlantic and Gulf of Mexico coasts of the United States. The addition of rail transportation to the Company s marketing program diversifies Laricina s delivery options while reducing exposure to a constrained pipeline environment. Operating expenses Operating expenses incurred throughout 2012 and 2011 were primarily related to production from the Saleski pilot. The increase in 2012 over 2011 is the result of a full year of production from the Saleski pilot facility, well servicing and initial solvent injection. Due to the experimental nature of the Saleski pilot, operating costs are expected to exceed net revenue throughout the pilot s life. Other operating costs increases are related to additional use of the camps by third parties and road maintenance. Laricina Energy LtD. 49

52 Oil Sands Reserves and Resources Laricina has focused on four bitumen-bearing geological formations for development: the McMurray and Grand Rapids sands, and the Grosmont and Winterburn carbonates. GLJ Petroleum Consultants Ltd. (GLJ) completed an independent reserves and resource assessment and economic evaluation of the Company s oil sands properties effective December 31, 2012 (GLJ Report). The Company has probable reserves of 466 million barrels and probable plus possible reserves (1)(4) of 579 million barrels, an increase from 387 million barrels and 488 million barrels, respectively, estimated at the previous year-end. These reserves represent a portion of the bitumen resource volumes at Germain in the Grand Rapids sands and at Saleski in the Grosmont carbonates, where Laricina has applied for regulatory approval to construct commercial bitumen recovery schemes. The increase in reserves is the result of the first-time classification of reserves in the Grosmont carbonates at Saleski and is supported by the pilot results. The GLJ Report identified best estimate contingent resources (2) of 4.2 billion barrels and prospective resources (4) of 0.3 billion barrels, unchanged from the resources reported at December 31, The current high estimate contingent resources are 7.3 billion barrels and prospective resources are 0.8 billion barrels compared to 6.9 billion barrels and 0.8 billion barrels, respectively, reported at December 31, Recovery methods including SAGD, C-SAGD, solvent-cyclic (SC) SAGD and cyclical steam stimulation (CSS) were used when evaluating the resource potential of each reservoir. Reserves (1) Contingent Resources (2)(3) Prospective Resources (4) Probable plus (mmbbls) Probable Possible Low Best High Low Best High Saleski ,619 2,730 Germain Grand Rapids ,105 Germain Winterburn 433 1,157 Burnt Lakes 567 1, Conn Creek Poplar Creek Other properties Note: Columns may not add due to rounding ,373 4,205 7, (1) (2) (3) (4) The Canadian Oil and Gas Evaluation Handbook (COGE Handbook) defines possible reserves as those additional reserves that are less certain to be recovered than probable reserves. If probabilistic methods are used, there should be at least a 10 percent probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves. The COGE Handbook defines contingent resources as quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingencies may include factors such as economic, legal, environmental, political, and regulatory matters, or a lack of markets. It is also appropriate to classify as contingent resources the estimated recoverable quantities associated with a project in early evaluation status. There is no certainty that it will be commercially viable to produce any portion of the contingent resources. Contingent resources for Conn Creek and Poplar Creek are based on SAGD and SC-SAGD technology; Saleski is based on C-SAGD and SAGD technology; Germain Winterburn is based on CSS technology; Burnt Lakes is based on a combination of SAGD and CSS technology; Germain Grand Rapids Phase 1 is based on SC-SAGD. The COGE Handbook defines prospective resources as quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development. There is no certainty that any portion of the prospective resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources Annual Report

53 The GLJ Report included economic evaluations for Saleski, Germain Grand Rapids, Germain Winterburn, Burnt Lakes, Conn Creek and Popular Creek which collectively represent approximately 70 percent of Laricina s net land base. The economic forecasts have been prepared on 100 percent of Laricina s probable reserves, 93 percent of the best estimate contingent resources, and 46 percent of best estimate prospective resources using GLJ s January 1, 2013 price forecasts. The net present value of future net revenue before income tax at a 10 percent discount rate is as follows: (millions of dollars) Low Best High Contingent resources 1,632 8,477 20,923 Prospective resources An economic evaluation was also provided for probable reserves and probable plus possible reserves, which resulted in net present value of future net revenue before income tax at a 10 percent discount rate of $0.5 billion and $1.2 billion, respectively. The December 31, 2012 economic evaluation represents a decrease in net present value of future net revenue from December 31, This decrease is primarily due to a decrease in forecast prices used in the valuations and changes in assumptions relating to the timing of certain projects. Laricina requested that GLJ provide an economic sensitivity of the best estimate contingent resources for the Germain Grand Rapids and Saleski Grosmont reservoirs using Laricina s risked assessment of the SC-SAGD process. The risked assessment of SC-SAGD adds 0.6 billion barrels of best estimate contingent resources and increases the net present value of future net revenue before income tax at a 10 percent discount rate by $3.3 billion. The incremental value has decreased from the 2011 economic sensitivity due to a decrease in forecast prices used in the valuations and changes in assumptions related to the timing of certain projects. These assessments are included for information purposes and should not be construed as GLJ s independent view of the technology. The possible incremental value from applying SC-SAGD recovery techniques will depend on the successful operation of Laricina s Germain CDP and the second stage of the Saleski pilot, both of which will incorporate solvents. Laricina has explored and delineated the geological formations throughout its portfolio of properties, including Saleski, Germain, Burnt Lakes, Conn Creek and Poplar Creek. At December 31, 2012, Laricina had a total of 376 delineation wells on its operated lands, of which approximately 70 percent were at Saleski and Germain. Delineation wells support the recoverable resource estimates provided by GLJ, the Company s overall confidence in its development plans, and the regulatory applications, as well as fulfilling lease retention requirements. Laricina Energy LtD. 51

54 Capital Investment Capital investment includes costs related to exploration and evaluation (E&E) assets, property, plant and equipment (PP&E), and intangible assets. (thousands of dollars) E&E assets: Land 30,302 20,079 Exploration 11,421 16,152 Development 181, ,917 Other 16,439 31,880 Capitalized general and administrative expenses 16,834 15, , ,451 PP&E: Facilities and other equipment 30,785 15,264 Corporate 2,213 1,643 32,998 16,907 Intangible assets 13,196 9,491 Capital asset additions 302, ,849 Capital expenditures (not including non-cash items) 260, ,389 Capital asset additions during 2012 were primarily to support the advancement of the Germain CDP. Expenditures included the final major equipment purchases, completion of engineering, 98 percent of module fabrication, delivery and installation of approximately 90 percent of the modules to site, drilling of four additional well-pairs and completion of the six well-pairs previously drilled at the Germain CDP. Land On February 15, 2012, Laricina closed a transaction to acquire the remaining working interest in certain jointly-controlled oil sands properties for total consideration of $30.0 million consisting of 705,882 common shares at $42.50 per common share. Land additions during 2011 included $19.8 million for 12,800 net acres of oil sands leases in the Burnt Lakes area. At December 31, 2012, Laricina s total land holdings were 215,708 net acres compared to 209,205 net acres at December 31, At December 31, 2012 and December 31, 2011, oil sands rights comprised 95 percent of the total land holdings. Exploration Laricina s 2012 exploration expenditures included the acquisition of 22.0 km of 2-D seismic at Conn Creek, 17.0 km of 2-D seismic at Portage, and the completion of the winter drilling program of five exploration wells, of which three were at Germain and two were at Saleski. The decrease in exploration costs from 2011 was due to a reduced drilling program. The Company s 2011 winter exploration program included a 15.6-square-km 3-D seismic program and the completion of the winter drilling program of 13 exploration wells Annual Report

55 Preparations for the winter exploration drilling program consisting of three wells at Saleski commenced late in At the date of this report, the exploration wells were completed along with 23.5 square-km of 3-D seismic at Burnt Lakes, 14.0 km of 2-D seismic at Portage, 5.1 square-km of 3-D seismic at Conn Creek and 1.1 square-km of 4-D seismic at Saleski. Development activities Consistent with 2011 the majority of development expenditures during 2012 were to support the advancement of the Germain CDP. (thousands of dollars) Saleski 26,011 11,549 Germain 152, ,397 Other 33,521 1, , ,181 During 2012, development activities primarily related to the Germain CDP included the completion of engineering, equipment purchases, 98 percent of module fabrication, and the delivery and construction of approximately 90 percent of facility modules. Development activities at the Saleski pilot included the construction and commissioning of a second steam generator. Development drilling activities included the completion of six well-pairs and the drilling of four additional well-pairs at Germain; the drilling and completion of two additional C zone wells at Saleski; and the winter development drilling program which included four observation wells to be used in future development programs at Saleski and Germain. Other development activities during 2012 included the acquisition of an interest in the first 76 km of the Chip Lake road which runs north from Wabasca and connects to Laricina s road system at Germain. Additional expenditures include upgrades to the Chip Lake road and bridges. Development activities during 2011 included the acquisition of equipment, advancement of engineering, site preparation and commencement of module fabrication for the Germain CDP; a finance lease for the Germain permanent camp; progress on construction of a fuel gas pipeline and power substation; and the commissioning of a second steam generator at the Saleski pilot. The development drilling activities during 2011 were primarily focused on the Germain CDP and included initial drilling of six well-pairs, 17 observation wells, eight water source and monitoring wells, and two water disposal wells. In July 2011, the Government of Alberta announced that Laricina had been selected to receive funding of up to $10.0 million gross under the Innovative Energy Technologies Program for the Saleski pilot. At December 31, 2012, $8.2 million gross ($4.9 million net) of this funding had been recorded as a reduction of costs associated with the Saleski pilot compared to $5.5 million gross ($3.3 million net) at December 31, Laricina Energy LtD. 53

56 Other Other capital activities in 2012 focused primarily on the expansion of infrastructure required for commercial development at Saleski and Germain. During the fourth quarter of 2012, Laricina filed a project update to the regulatory application for the Saleski Phase 1 expansion which included additional steam capacity, single horizontal wells and the use of C-SAGD. Regulatory and consultation work for the Stony Mountain Pipeline continued throughout 2012 including filing the regulatory application during the third quarter and commencing initial engineering. The Stony Mountain Pipeline is a bitumen transportation system which will connect the Company s commercial projects to the Cheecham terminal south of Fort McMurray and includes a 200,000 barrel-per-day 24-inch diameter bitumen blend line and a 70,000 barrel-per-day, 12-inch diameter diluent return line. During 2011 other capital activities included pre-operating activities associated with initial steaming and first production at the Saleski pilot, advancing the regulatory application for Saleski Phase 1, initial engineering and regulatory work for the Stony Mountain Pipeline, and completion of the environmental impact assessment and regulatory application for the three-phase, 150,000-barrel-per-day Germain expansion. Throughout 2012 and 2011 other capital investment costs were incurred to advance innovation and technology projects, such as the Enhanced Solvent Extraction Incorporating Electromagnetic Heating project, OASIS software design and reservoir studies. The Company also made provisions for future site restoration costs and capitalized costs associated with pre-operating activities. Intangible assets As at December 31, 2012 intangible assets of $12.5 million had been recorded relating to the expansion of available power for the Company s future development projects at Germain. The depreciation of certain components of the pilot, such as the development wells, that contribute directly to the Company s understanding of the reservoir and assist in the future assignment of proved reserves are recapitalized until the related reserves are recognized. As at December 31, 2012, $10.2 million was recorded as an intangible asset for the recapitalization of the depreciation of certain components of the Saleski pilot. Capital expenditures outlook Capital expenditures before capitalized general and administration costs are expected to be $243.3 million for Of this amount, $157.1 million relates to the construction and commissioning of the Germain CDP and advancing the Germain Phase 2 regulatory application; $15.8 million to the Saleski pilot; $13.7 million to long-lead equipment and engineering, and development drilling for the Saleski Phase 1 expansion; $15.6 million to developing infrastructure for Germain and Saleski; $16.5 million to conclude the winter exploration drilling and geophysical program; and the remainder to studies and corporate development. Of the total planned expenditures, $76.2 million has been carried over from 2012 due to a timing delay of incurred costs. Laricina plans to finance future activities with current cash resources, debt and additional private or, potentially, public equity financings Annual Report

57 Corporate Results (thousands of dollars) General and administrative expenses, net 26,000 17,157 Finance income 7,525 6,803 Other income 8,516 2,892 Net loss (30,860) (21,659) General and administrative expenses General and administrative expenses increased in 2012 over 2011 primarily due to the continued growth in the Company s employee and consulting base and the additional overhead costs associated with increased personnel. (thousands of dollars) General and administrative expenses, gross 35,263 23,810 Share-based compensation costs 7,571 8,770 Capitalized costs (16,834) (15,423) General and administrative expenses, net 26,000 17,157 At December 31, 2012, the Company had 154 employees of which 116 were based in the Calgary head office, compared to 121 and 95, respectively, at December 31, The growth in personnel is a result of the additional expertise and skills required to operate the Saleski pilot, construction of the Germain CDP, advancement of Saleski Phase 1 and other infrastructure projects to support future development. Laricina expects that general and administrative costs will increase in 2013 as the employee and consultant base increases to support operations at the Germain CDP. Capitalized general and administrative costs consist of costs directly related to project exploration and development activities. As the projects continue to progress towards commercialization, a smaller percentage of general and administrative expenses will be capitalized. During 2012, David Theriault, Senior Vice President In Situ and Exploration, announced his retirement. Dean Setoguchi joined the Company as Senior Vice President and Chief Financial Officer and David Safari joined the Company as Vice President Facilities. Subsequent to December 31, 2012, James Hand joined Laricina as Senior Vice President Operations and Chief Operating Officer. Finance and other income The increase in finance income during 2012 is primarily due to the increase in average funds on deposit, resulting from the net proceeds from the equity private placements completed during the second half of Other income includes the sale of Saleski pilot data to a third party and fees charged to third parties for the usage of Laricina s camp facilities and roads. Net proceeds from data sales were $1.2 million in 2012 and $2.7 million in Camp and road usage fees increased to $7.3 million during 2012 from $0.3 million during Finance costs Finance costs include the accretion of site restoration provisions and interest recorded on the finance lease associated with the Germain permanent camp. Finance costs decreased by $0.3 million during 2012 from $1.4 million in 2011 due to a reduction in finance lease obligations. Laricina Energy LtD. 55

58 Pre-exploration costs Pre-exploration activities of $1.0 million during 2012 included a variety of studies for purposes of improved drilling, construction and fabrication techniques and a possible central camp site proposal. During 2011, pre-exploration activities of $0.4 million included studies related primarily to the initial surveying work to support pipeline infrastructure. Depreciation and amortization Depreciation and amortization expense of $8.0 million during 2012 increased from $5.8 million during The increase is related to a full year of depreciation for the Saleski pilot facility; in 2011 depreciation commenced in the second quarter. During the fourth quarter of 2012, the Company began amortizing intangible assets related to the expansion of available power at Germain. Net loss Laricina recorded a net loss of $30.9 million for 2012 compared to a net loss of $21.7 million for The increase is primarily due to a full year of Saleski pilot operations and increased general and administrative expenses. Typical of a company in early stages of operations, Laricina expects to continue to show net losses at least until commercial production levels are achieved. Due to the experimental nature of a pilot project, the Saleski pilot is expected to have operating costs in excess of net revenue throughout its life. Selected quarterly information (thousands of dollars, except per share amounts) Q Q Q Q Q Q Q Q Working capital 345, , , , , , , ,200 Capital asset additions 89,983 58,505 53, ,423 77,431 61,333 25,382 81,703 Net operating revenue 2,092 1, , Finance and other income 2,154 4,086 4,599 5,202 4,919 2,622 1, Net loss (8,600) (7,341) (8,588) (6,331) (5,476) (6,089) (5,755) (4,339) Net loss per common share, basic and diluted $ (0.13) $ (0.11) $ (0.13) $ (0.10) $ (0.09) $ (0.10) $ (0.11) $ (0.08) Working capital increased during the second and third quarters of 2011 due to the closing of private placements of common shares in June and August contributing net proceeds of $365.8 million and $133.8 million, respectively. Capital asset additions in the fourth quarter of 2012 included an acquisition of an interest in the Chip Lake road and additions in the first quarter of 2012 included a $30.0 million acquisition of the remaining working interests in jointly-controlled oil sands assets. Fluctuations in capital additions are the result of the Saleski pilot completion and related pre-operational activities in the first quarter of 2011; the winter drilling programs, which typically occur in the first quarter of each year; and the progress of the Germain CDP detailed engineering, fabrication and construction during Net operating revenue increased throughout 2012 as a result of increases in sales volumes, partially offset by declines in the average realized bitumen blend price. Sales volumes have fluctuated since initial production commenced in the second quarter of 2011, consistent with the Company s planned production cycles. Laricina expects that sales volumes will continue fluctuating due to planned cycles of alternating steam injection and bitumen production Annual Report

59 Other income during 2012 is related to third-party usage of Laricina s camps and roads. Other income in the third quarter of 2012 and fourth quarter of 2011 resulted from the sale of certain Saleski pilot data to a third party resulting in net proceeds of $1.2 million and $2.7 million, respectively. Finance income has decreased since the third quarter of 2011 due to decreased funds on deposit. Liquidity and Financial Resources Working capital Working capital decreased by $282.3 million from December 31, 2011 to $345.8 million at December 31, 2012 primarily due to capital expenditures incurred, including engineering, construction and fabrication costs for the Germain CDP and the winter drilling program. (thousands of dollars) Working capital, December 31, ,121 Capital expenditures (cash) (260,520) Operating activities (26,464) Proceeds from the issuance of common shares 12,224 Other (7,553) Working capital, December 31, ,808 Laricina has sufficient working capital to fund the completion and commissioning of the Germain CDP. The 2013 capital and operating spending program of approximately $298.7 million is focused primarily on the completion and commissioning of the Germain CDP, infrastructure development and the advancement of the Saleski Phase 1 project. Approximately 50 percent of the program is directly associated with the Germain CDP and five percent is tied to the advancement of the Saleski Phase 1 project. The balance of the spending will include operations at the Saleski pilot and Germain CDP, the advancement of future phases at Saleski and Germain, infrastructure, studies, other corporate capital, and general and administrative expenses. The future capital expenditures Laricina will require to continue advancing to commercial operations depend on continued financing. The Company anticipates funding capital and operating activities through an appropriate combination of debt and equity. Asset sales or joint venture arrangements may also be considered. Investments The Company s cash is held in a business operating account with a major Canadian bank bearing interest up to the bank s prime rate minus 1.9 percent. In addition, the Company holds excess cash in high-interest savings accounts and guaranteed investment certificates with interest rates ranging from 1.3 percent to 1.7 percent. The Company may invest in Canadian government securities or fixed-term and bankers acceptance investments with a minimum A rating. Laricina Energy LtD. 57

60 Debt financing Laricina has a demand credit facility of $15.0 million with a major Canadian bank which has been extended to October 31, 2013 and is secured by an equivalent cash deposit. The credit facility is intended for general corporate purposes, including the exploration, development and acquisition of oil sands properties. At December 31, 2012 and the date of this report, the Company had letters of credit totalling $3.0 million under this credit facility, and no amount has been drawn. The letters of credit are related to the development of the Saleski and Germain projects. As projects are advanced to the commercial development phase, Laricina will evaluate the markets for prudent interim or long-term debt funding alternatives. Commitments and contractual obligations At this date, the Company has contractual obligations for office space, communication equipment and agreements, drilling rig rentals, natural gas purchases, camp facilities and other obligations as follows: (thousands of dollars) Office Field 2013 remainder 2,397 8, ,928 6, ,423 2, , and thereafter 230 1,058 The Company s letters of credit at December 31, 2012 are to suppliers of utilities to support development at Saleski and Germain. If project development is interrupted, the Company will be required to reimburse up to $3.0 million of the suppliers costs. The letters of credit of $2.8 million and $0.2 million are renewable on July 31, 2013 and August 31, 2013, respectively. As at April 4, 2013, the Company has $28.6 million of purchase commitments which relate to the Germain CDP and acquisition of long-lead equipment for Saleski Phase 1. Outstanding share data At March 31, 2013 share capital consisted of the following: (thousands) Common shares 67,115 Stock options 1,946 Replacement options 2,438 Performance share units 785 Total 72,284 Each stock option, replacement option and performance share unit requires the Company upon exercise and payment of the consideration to issue one common share Annual Report

61 Critical Accounting Estimates IFRS requires certain estimates and assumptions in the preparation of financial statements that are based on management s best estimates. By their nature, estimates and assumptions are uncertain and the effect of changes in these estimates and assumptions on the financial statements could be significant. The following items involved estimations or assumptions by Laricina s management in the preparation of the Company s consolidated financial statements. Oil sands reserves and resources Laricina s oil sands reserves and resources are independently evaluated by petroleum engineering consultants. The estimation of reserves and resources is a subjective process and is based on forecasts which are subject to uncertainties such as geological and engineering data, projected future rates of production, commodity pricing and the timing of future capital expenditures. Revisions to reserve and resource estimates could occur from the results of future drilling, testing, production levels and economics of recovery. Impairment Impairment is indicated if the net carrying value of capital assets is deemed unrecoverable from the estimated future undiscounted cash flows associated with those capital assets. The estimation of future cash flows is based on a number of estimates, including resources, production rates, commodity prices, future development costs and other relevant assumptions. Site restoration provision The fair value of the provision is recognized as both an asset and a liability for existing site restoration obligations. The fair value of the obligation is the present value of the estimated cash flows required for an asset s future abandonment. These future payments are discounted using a credit-adjusted risk-free discount rate appropriate for the Company. Estimating the timing, amount and value of these retirement costs is subject to judgment. Share-based payments The Company applies the fair value method for performance warrants, stock options and performance share units granted. Compensation cost is recognized over the vesting period of the award based on the estimated fair value of the performance warrant, stock option or performance share unit on the grant date using the Black-Scholes pricing model. Deferred income tax The determination of deferred income tax assets and liabilities requires interpretation of complex laws and regulations, and deferred income tax assets and liabilities are recognized at tax rates expected to be in effect at the estimated timing of reversal of temporary differences between the accounting and tax values of certain assets and liabilities. Laricina Energy LtD. 59

62 Changes in Accounting Policies A number of new accounting standards, and amendments to standards and interpretations, were not effective for the period ended December 31, 2012 and therefore were not applied in preparing the audited consolidated financial statements for the year ended December 31, The Company has reviewed the new standards and interpretations required for annual periods beginning January 1, 2013 and determined that IFRS 7 Financial Instruments: Disclosures, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IFRS 13 Fair Value Measurement are relevant but not yet applicable to these financial statements. The impact of these standards has not yet been determined. The Company has also reviewed the new standards and interpretations required for annual periods beginning January 1, 2014 and determined that International Accounting Standard 32 Financial Instruments: Presentation is relevant but not yet applicable to these financial statements. The impact of this standard is not yet determined. Further, the Company has reviewed the new standards and interpretations required for annual periods beginning January 1, 2015 and determined that IFRS 9 Financial Instruments is relevant but not yet applicable to these financial statements. The impact of this standard is not yet determined. Risk Management Laricina s operational and financial success could be affected by a variety of risks related to the oil and natural gas industry, many of which are not in the Company s control. Laricina does not have commercial oil sands operations and its primary assets consist of oil sands properties that are undeveloped, planned for development or under construction. Accordingly, the Company s success depends on the successful execution of its construction activities, current development plans, future development and additional acquisitions of oil sands properties. Current risk factors influencing the Company include, but are not limited to, the following: Uncertainty of reserves and resources Estimating oil sands reserves and resources is inherently uncertain and no assurance can be given that the currently estimated level of reserves and resources or recovery of bitumen will be realized. Reservoir engineering is a partially subjective process of estimating and is highly dependent on the accuracy of the assumptions on which it is based. Assumptions such as historical production from similar properties, the effects of regulation by government agencies, estimated future capital and operating costs and potential enhanced recovery techniques are used in estimates of economically recoverable bitumen and actual results may vary considerably. Estimates of the economically recoverable bitumen and the classification of such reserves and resources are based on probability of recovery, and the estimates of future net revenue expected from those reserves, prepared by different engineers or by the same engineers at different times, may vary substantially. Some of the formations from which Laricina intends to produce bitumen and to which GLJ has assigned probable or possible reserves and resources have not yet produced commercial quantities of bitumen Annual Report

63 Capital requirements and financial resources Similar to many other growth-oriented oil sands companies, Laricina expects to make substantial capital expenditures for the acquisition, exploration, development and production of oil sands resources in the future. Such expenditures require financing from equity or debt sources, asset sales or joint venture arrangements. There can be no assurance that any of these sources of financing will be available at terms that would be acceptable to the Company, if at all. Regulatory Future development of Laricina s oil sands properties depends on the approval of required regulatory applications and permits. Failure to obtain regulatory approvals or failure to obtain them on a timely basis could result in delays, increased costs or in projects not proceeding. Government regulations may be changed from time to time in response to economic or political conditions. The implementation of new regulations or the modification of existing regulations could affect the timing of Laricina s project development plans or increase costs, which might make future projects uneconomic. Regulatory approvals require the Company to consult with local communities and stakeholders. While Laricina has an established stakeholder consultation and communication plan, there can be no assurance that the actions or omissions of respective parties will not affect the timing or potential receipt of the necessary approvals to advance the Company s development plans. Local communities are active in reviewing and participating in the regulatory process. Interventions, should they occur, could impact the timing and risks of regulatory approvals. In November 2012, the Alberta government passed the Responsible Energy Development Act (REDA) in response to recommendations made to the Minister of Energy by the Regulatory Enhancement Project (REP) team. The REP team s goal was to create a modern, efficient, outcome-based and competitive regulatory system that will contribute to Alberta s overall competitiveness while protecting the environment, public safety and resource conservation. The REP team s recommendation was to adopt a coordinated policy framework and an integrated regulatory system for the upstream oil and natural gas sector. The REDA establishes the new Alberta Energy Regulator, which will assume the regulatory functions of the Energy Resources Conservation Board, Alberta Environment and Sustainable Resource Development with oil, natural gas, oil sands and coal development and is expected to be operational by June There are no assurances regulatory approval will be improved by this process. Alberta s Land-use Framework, which is to be implemented under the Alberta Land Stewardship Act (ALSA), outlines the Government of Alberta s approach to managing land and natural resources to meet long-term economic, environmental and social goals. The ALSA considers the amendment or removal of previously issued items including regulatory permits, licenses, approvals or authorizations in order to achieve an objective or policy resulting from the implementation of a regional plan. The Government of Alberta s first of seven regional plans is the Lower Athabasca Regional Plan (LARP) which came into effect September 1, The LARP s intent is to identify and set resource and environmental management outcomes for air, land, water and biodiversity and guide future decisions while considering the social and economic impacts. The LARP and the proposed conservation areas do not directly affect any of Laricina s current oil sands leases. The proposed legislation s full impact on the Company cannot be determined until the various regional environmental management outcomes are established. Laricina Energy LtD. 61

64 Due to the proximity of Laricina s Conn Creek and Poplar Creek properties to the city of Fort McMurray, the Company is working with the Regional Municipality of Wood Buffalo (RMWB) and the Government of Alberta to ensure compatibility between Laricina s development plans and city growth. On August 29, 2011, the Government of Alberta signed a memorandum of understanding with the RMWB to establish an Urban Development Sub Region (UDSR). The UDSR will be a designated area of Crown land surrounding the Fort McMurray urban service area where future urban development will be the primary intended land use. The UDSR will facilitate land use planning, timely release of land for urban development and efficient infrastructure planning and construction to accommodate population growth and urban expansion. A draft UDSR area has been identified which is the basis for stakeholder engagement. The draft boundary extends over portions of Laricina s Conn Creek and Poplar Creek leases. Consultation between the Company and the Government of Alberta is ongoing. The impact of the draft UDSR is undeterminable at this time. Environmental Like all natural resource development, oil sands development has an impact on the environment and is subject to environmental regulation. Environmental legislation and regulations provide for, among other things, restrictions or prohibitions on spills or emissions of various substances. They also require that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. No assurance can be given that the current or future environmental laws and regulations will not have an adverse effect on the Company s financial condition. Announcements from the federal and provincial governments on regulations and legislation for greenhouse gas and air emissions have caused uncertainty and changed the environmental regulation of oil sands operations. In 2007, the Alberta government s Climate Change Emissions Management Act and Specified Gas Emitters Regulation (SGER) came into effect requiring that facilities emitting more than 100,000 tonnes of greenhouse gases per year reduce their greenhouse gas emissions intensity by 12 percent from a regulated baseline starting July 1, If the emissions intensity target is not met through improvements in operations, compliance tools include a $15 per tonne payment into the Climate Change Emissions Management Fund, purchase of Alberta-based offsets, or purchase of emission performance credits from a different Alberta facility. Failure to comply with these regulations results in a penalty of $200 per tonne of greenhouse gases over the allowable greenhouse gas emission intensity limit. The Saleski pilot is not subject to the SGER as its emissions will be below the threshold. The Germain CDP will have reporting requirements based on the current threshold. Federal and provincial reporting is required for emissions above 50,000 tonnes. In addition, new in situ facilities are provided a baseline period for the first three years of operation during which time the facility is exempt from compliance obligations. Emissions intensity reduction obligations are then phased in over a six-year period at a rate of two percent per year beginning in the fourth year of commercial operation. The Government of Canada has also indicated its intention to develop greenhouse gas regulations for the oil and natural gas industry with a view to having draft regulations prepared by mid Environment Canada is currently working with industry and other stakeholders on the design of the regulations. It is unclear at this time what additional financial liability the federal regulations would create but there has been agreement in principle that there will be harmonization with provincial regulations and a suite of flexible compliance mechanisms designed to ensure that the sector s competitiveness is maintained Annual Report

65 There is no federal regulation of greenhouse gases. Until such time as this might occur, the impact on the Company s operations remains unknown. On February 3, 2012 the Government of Alberta and the Government of Canada announced their intention to significantly increase the level of environmental monitoring occurring on the oil sands region through the creation of a new, scientifically rigorous, comprehensive, integrated and transparent environmental monitoring program. It will include increased air, water, land and biodiversity monitoring and commenced immediately. The estimated cost of the program is $50 million per year and will be borne by the oil sands producers. The funding requirement will be allocated among companies according to production levels and applications under review. Laricina was required to provide funding during 2012 and the Company expects funding requirements to increase over time in conjunction with increases in Laricina s future production. Laricina participates in several ongoing research studies and anticipates mitigating the impacts of the aforementioned legislative initiatives through innovations that increase operating efficiency by reducing energy consumption and emissions per unit of production. The Company is also a founding member of the In Situ Oil Sands Alliance, a group of independent emerging oil sands companies organized to support industry dialogue with the federal and provincial governments and the respective regulators. Competition The oil sands industry is highly competitive for the acquisition of reserves, exploration leases and skilled industry personnel. Many competitors in the oil sands industry have significantly greater financial resources than Laricina. Other unconventional oil developments and other energy investments compete for available capital. There can be no assurance concerning the impact of competition on the timing, availability or price of capital. Laricina s success will depend on its ability to enter into joint venture arrangements with other oil sands development companies, enter into beneficial partnerships with other industry participants, attract individuals with oil sands expertise and attract additional capital. Royalty regime On January 1, 2009, the New Royalty Framework and Transitional Royalty Program announced by the Government of Alberta in 2007 became effective. Upon one of Laricina s bitumen recovery projects being developed and becoming commercially operational, Laricina s revenue and expenses will be directly affected by the applicable royalty regime. The economic benefit of future capital expenditures for any project, in many cases, depends on a satisfactory royalty regime. There can be no assurance that the royalty structure currently in place will remain unchanged. On March 11, 2010, the Government of Alberta announced the outcome of its Alberta Competiveness Review. The review did not affect bitumen production as its focus was on conventional oil and natural gas production. Exploration, development and production risks Laricina s success depends on its ability to find, acquire, develop and produce oil at an economically recoverable cost. Oil sands exploration, by definition, involves risk. Laricina is designing and testing innovative, improved recovery and cost-reduction strategies for projects. There is no assurance that the Company s development strategy will achieve positive financial results. Laricina Energy LtD. 63

66 Infrastructure The future development of the Company s commercial projects will depend on certain infrastructure, including roads and camps, pipelines for transportation of diluent and bitumen blend, natural gas fuel pipelines and electricity transmission systems. Delays or restrictions in necessary infrastructure may influence the timing and scale of operations and negatively impact financial results. Insurance The exploration for and development of oil sands properties may expose the Company to liability for pollution, well blowouts, property damage, personal injury or other hazards. Although Laricina obtains insurance to protect against such risks, there are limitations on insurance coverage that may not be sufficient to cover the full extent of such costs, or a particular risk may not be insurable in all circumstances, or the Company may elect not to obtain insurance in certain circumstances. A significant event that is not fully insured against could have a material adverse effect on the Company s financial position. Assessment of value of acquisitions Acquisitions of oil and natural gas issuers and oil and natural gas assets are typically based on engineering and economic assessments. These include assumptions regarding recoverability and marketability of oil and natural gas, future commodity prices, future operating costs, future capital expenditures, royalties and other government levies. Many of these factors are subject to change and are outside the Company s control. Initial assessments may be based on reports by a firm of independent engineers that may have evaluation methods and approaches that are different from those of the firm engaged by Laricina to complete its annual resource evaluations. As a result, the initial assessments may differ significantly from the assessments by the Company s engineering firm and affect the return on and value of the acquisition. Foreign exchange Crude oil prices and certain major equipment costs are generally based on a United States dollar market price. Fluctuations in exchange rates between the United States dollar and Canadian dollar therefore give rise to foreign currency exchange exposure and could result in adverse effects on Laricina s financial position or future cash flows. Commodity price risk Oil prices, natural gas prices, diluent prices and heavy oil differentials fluctuate significantly in response to regional, national and global supply and demand factors that are beyond Laricina s control. The Company s future financial results depend on future demand and on the price movement of the aforementioned commodities, including any negative price effects arising from increased bitumen supplies from competitors. Operating costs The cost of natural gas is a significant component of the cost of bitumen production. Laricina s future earnings could be reduced should natural gas prices increase. Higher costs of diluent and hydrocarbon solvents could also reduce future earnings. Any carbon-related charges imposed by government could reduce Laricina s future earnings Annual Report

67 Lack of liquidity Laricina is privately held. A future public offering might not lead to an active trading market or, if developed, one that would be sustainable. There can be no assurance that a future offering for the common shares will be made. Accordingly, an investment in the common shares should only be considered by investors who do not require liquidity. Reliance on key employees Laricina s continued success depends on the performance of key employees. Failure to retain current key employees or to attract and retain additional key employees with the necessary skills could have an adverse effect on the Company s development, growth and profitability. Seasonality Certain of Laricina s properties are in areas that are inaccessible during non-winter months or where activities are restricted due to environmental concerns. Seasonal factors and unexpected weather may delay exploration or development. Third-party credit risk The Company is or may be exposed to third-party credit risk through financial instruments, accounts receivable and contractual arrangements with current or future joint venture partners and other parties. Should any counterparties fail to meet their contractual obligations it could affect operations or have a material adverse effect on the Company s financial position or cash flow. Income Taxes Although Laricina files all required income tax returns and expects to be in compliance with the provisions of the Income Tax Act (Canada) and applicable provincial tax legislation, there is no assurance that these returns will not be reassessed by taxation authorities in a way that would have an impact on current and future income taxes payable Outlook Laricina s current working capital provides sufficient resources to complete the Germain CDP. Laricina will continue to monitor the capital markets and consider a full range of financing strategies to provide the funds necessary to advance its projects, such as private or public equity, asset sales, debt and participation agreements with other oil sands developers or joint arrangements. During 2013, the majority of capital expenditures will be to complete the Germain CDP. During the first quarter of 2013 the Company completed the remaining four well-pairs, module fabrication and delivery of modules to site. Laricina anticipates that initial steaming at the Germain CDP will commence late in the second quarter of 2013, with initial production expected three to four months later. Laricina will continue to enhance production performance at the Saleski pilot by evaluating solvent injection performance, demonstrating repetition of the C-SAGD process and optimizing well performance. Laricina Energy LtD. 65

68 In 2013, Laricina plans to advance the Saleski Phase 1 expansion of 10,700 barrels per day, focusing on regulatory matters, front-end engineering and design, site preparation and drilling. The regulatory application for the Saleski Phase 1 expansion was filed in December A project update to the regulatory application was filed in October 2012 and included additional steam capacity and a modification from well-pairs to single horizontal wells for C-SAGD operations. The Company expects regulatory approval in mid-2013, followed by advancement of engineering design, ordering of initial long-lead equipment and drilling expected to commence in the fourth quarter of 2013, subject to additional financing. Additional activities in 2013 will include regulatory work to support the Germain Phase 2 expansions and the Stony Mountain Pipeline application. As the Company continues to advance its projects, additional expertise will be required to commission and operate the Germain CDP, advance the Saleski Phase 1 expansion and develop required infrastructure. This expertise will be required for all aspects of the business and will include a combination of head office and field employees and consultants. General and administrative expenses are expected to increase as a result of additional salaries and overhead associated with personnel increases. The winter exploration and development drilling programs were completed in the first quarter of 2013 and consisted of 23.5 square-km of 3-D seismic at Burnt Lakes, 5.1 square-km of 3-D seismic at Conn Creek and 1.1 square-km of 4-D seismic at Saleski; three exploration wells at Saleski; and two water source wells, two monitoring wells and two observation wells at Saleski. The 2013 capital and net operating spending program (including cash general and administrative expenses) are expected to be approximately $298.7 million, mostly to complete construction and commission the Germain CDP Annual Report

69 Independent Auditors Report To the Shareholders of Laricina Energy Ltd. We have audited the accompanying consolidated financial statements of Laricina Energy Ltd., which comprise the consolidated statements of financial position as at December 31, 2012 and December 31, 2011, the consolidated statements of comprehensive loss, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Laricina Energy Ltd. as at December 31, 2012 and December 31, 2011, and its consolidated financial performance and consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. (signed) Chartered Accountants Calgary, Canada April 4, 2013 Laricina Energy LtD. 67

70 Consolidated Statements of Financial Position As at December 31 (thousands of dollars) Note Assets Current assets Cash and cash equivalents , ,891 Trade and other receivables 7,923 17,892 Prepaid expenses and deposits Inventories 5 3,355 1, , ,331 Non-current assets Abandonment deposits Other long-term assets 6 1,194 1,194 Exploration and evaluation assets 7 874, ,405 Property, plant and equipment 8 84,587 45,313 Intangible assets 9 22,531 9, , ,309 Total assets 1,391,561 1,372,640 Liabilities and shareholders equity Current liabilities Trade and other payables 54,531 44,210 Finance lease obligation 8 7,641 5,000 62,172 49,210 Non-current liabilities Site restoration provision 10 18,982 16,178 Finance lease obligation 8 7,851 Deferred income tax 11 1,710 10,403 20,692 34,432 Total liabilities 82,864 83,642 Shareholders equity Share capital 13 1,333,979 1,286,352 Contributed surplus 31,410 28,478 Deficit (56,692) (25,832) Total shareholders equity 1,308,697 1,288,998 Total liabilities and shareholders equity 1,391,561 1,372,640 The accompanying notes are an integral part of these consolidated financial statements. On behalf of the Board: (signed) Brian K. Lemke Director (signed) Glen C. Schmidt Director Annual Report

71 Consolidated Statements of Comprehensive Loss For the years ended December 31 (thousands of dollars) Note Revenue Bitumen blend sales 5,771 2,433 Royalties (158) (74) Net operating revenue 5,613 2,359 Other income 15 8,516 2,892 14,129 5,251 Expenses Transportation and blending 3,169 1,230 Operating 21,933 11,421 Pre-exploration 1, General and administrative 16 26,000 17,157 Depreciation and amortization 8,030 5,769 60,166 35,941 Results from operating activities (46,037) (30,690) Finance income 7,525 6,803 Finance expenses 8,10 (1,041) (1,361) Net finance income 6,484 5,442 Loss before tax (39,553) (25,248) Deferred income tax recovery 11 (8,693) (3,589) Total loss and comprehensive loss for the year (30,860) (21,659) Loss and comprehensive loss per common share 14 Basic $ (0.47) $ (0.38) Diluted $ (0.47) $ (0.38) The accompanying notes are an integral part of these consolidated financial statements. Laricina Energy LtD. 69

72 Consolidated Statements of Changes in Equity Share Contributed (thousands of dollars) capital surplus Deficit Total equity Balance at December 31, ,198 21,771 (4,173) 797,796 Comprehensive loss (21,659) (21,659) Issuance of common shares 519, ,683 Share issuance costs, net of tax of $5,022 (15,065) (15,065) Share-based payments 8,242 8,242 Performance share units exercised 1,536 (1,535) 1 Balance at December 31, ,286,352 28,478 (25,832) 1,288,998 Comprehensive loss (30,860) (30,860) Issuance of common shares in exchange for assets 30,000 30,000 Share-based payments 8,335 8,335 Performance warrants exercised 10,578 (572) 10,006 Performance share units exercised 2,377 (2,376) 1 Replacement options exercised 1,720 (1,664) 56 Stock options exercised 2,952 (791) 2,161 Balance at December 31, ,333,979 31,410 (56,692) 1,308,697 The accompanying notes are an integral part of these consolidated financial statements Annual Report

73 Consolidated Statements of Cash Flows For the years ended December 31 (thousands of dollars) Cash flows from operating activities Comprehensive loss (30,860) (21,659) Adjustments for: Depreciation and amortization 8,030 5,769 Equity-settled share-based payments 4,657 4,227 Unwinding of site restoration discount Deferred income tax recovery (8,693) (3,589) Deferred income (32) (26,464) (14,933) Change in trade and other receivables 777 (733) Change in prepaid expenses and deposits (58) (153) Change in inventories (1,889) (896) Change in trade and other payables 3,064 4,948 Net cash used in operating activities (24,570) (11,767) Cash flows from investing activities Property, plant and equipment, and exploration and evaluation expenditures (236,600) (198,108) Intangible expenditures (6,842) (5,667) Abandonment deposits (9) (399) Net cash used in investing activities (243,451) (204,174) Cash flows from financing activities Proceeds from the issuance of common shares 12, ,684 Finance lease obligation (5,210) (2,149) Share issuance costs (20,129) Net cash from financing activities 7, ,406 Net increase (decrease) in cash and cash equivalents (261,007) 281,465 Cash and cash equivalents, beginning of year 656, ,426 Cash and cash equivalents, end of year 395, ,891 The accompanying notes are an integral part of these consolidated financial statements. Laricina Energy LtD. 71

74 Notes to the Consolidated Financial Statements December 31, 2012 (tabular amounts in thousands of dollars except as otherwise noted) 1. Reporting Entity Laricina Energy Ltd. (Laricina or the Company) was incorporated on November 11, 2005 under the Business Corporations Act (Alberta). The consolidated financial statements of the Company as at and for the year ended December 31, 2012 encompass the Company and its subsidiaries. Since inception, Laricina has focused on acquiring prospective oil sands properties, developing properties into projects, financing, attracting suitable personnel and developing innovative technologies. Two areas have been identified as near-term commercial projects, Saleski and Germain. The Company will require equity and debt financing to fund projects beyond the Saleski pilot plant and Germain commercial demonstration project. 2. Basis of Preparation Statement of compliance These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRS). On April 4, 2013, the December 31, 2012 consolidated financial statements were approved for release to shareholders by the Board of Directors. Basis of measurement The consolidated financial statements were prepared on the historical cost basis except for liabilities for cash-settled share-based payment arrangements measured at fair value which are included in trade and other payables. The methods used to measure fair value are discussed in note 4. Functional and presentation currency The consolidated financial statements are presented in Canadian dollars, the Company s functional currency. Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These estimates and judgments are based on management s best understanding of current events and actions that the Company may undertake in the future. Actual results may differ from these estimates and judgments. Significant estimates and judgments used in the preparation of the consolidated financial statements include, but are not limited to, the valuation of investment tax credits (note 6), the recovery of exploration and evaluation (E&E) assets (note 7), the valuation of property, plant and equipment (PP&E) (note 8), the valuation of intangible assets (note 9), site restoration provisions (note 10), valuation and utilization of tax losses (note 11) and measurement of share-based payments (note 13) Annual Report

75 The amounts recorded for depreciation of E&E assets are based on estimates of useful life. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised. IFRS requires that the Company s oil sands assets be aggregated into cash generating units (CGUs), which are classified based on their ability to generate independent cash flows which are used to assess assets for impairment. The determination of the Company s CGUs is subject to management s judgment. Estimates of reserves and future costs are used to assess impairment and are subject to measurement uncertainty. The decision to transfer assets from E&E to PP&E is based on management s assessment of technical feasibility and commercial viability, which is subject to management s judgment. The site restoration provision is based on current legal and constructive requirements, technology, estimated costs and expected timing for remediation. Actual costs can differ from estimated costs because of changes in laws and regulations, discovery and analysis of site conditions and changes in technology. Share-based payments are subject to estimation as they are calculated using the Black-Scholes option pricing model, which is based on significant assumptions such as volatility and forfeiture rate. 3. Summary of Significant Accounting Policies The accounting policies set out below were applied consistently by the Company and its subsidiaries to all years presented in the consolidated financial statements. Basis of consolidation Subsidiaries are entities controlled by the Company. Control exists when a Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date it ceases. Many of the Company s oil sands activities involve jointly-controlled assets. The consolidated financial statements include the Company s share of these jointly-controlled assets and a proportionate share of the respective revenue and related costs. Exploration and evaluation assets Costs of exploring for and evaluating oil sands properties are initially capitalized and may include costs of lease acquisition, technical services and studies, seismic acquisition, exploration drilling and testing, directly attributable overhead and administration expenses, and the projected costs of retiring the assets but do not include general prospecting or evaluation costs incurred prior to having obtained the legal rights to explore the area, which are expensed as they are incurred. Laricina Energy LtD. 73

76 3. Summary of Significant Accounting Policies (continued) E&E assets are not depleted or amortized until the earlier of: the asset coming into use as management intended and the determination of technical feasibility and commercial viability of extracting a mineral resource. The technical feasibility and commercial viability of extracting a mineral resource is considered to be determined when proved reserves have been estimated. E&E assets are allocated to CGUs for purposes of determining whether or not the assets must be transferred to the development and producing (D&P) category within PP&E and for performing impairment testing when there are indicators of impairment. The Company uses the following CGUs for E&E assets: Saleski, Germain, Burnt Lakes and Other. A review of each exploration project is performed, at least annually, to determine whether proved reserves have been assigned by independent reservoir engineers. Upon determination of proved reserves, E&E assets attributable to these reserves are tested for impairment within the associated CGU and then transferred to D&P assets. E&E assets that are in use as management intended are depreciated and recapitalized as intangible assets until technical feasibility and commercial viability of extracting a mineral resource can be determined. Once this has occurred the underlying intangible asset is transferred to D&P assets and subsequently depleted. Other E&E assets, including facilities and infrastructure, are depreciated when they are used to support the gathering of reservoir information. The depreciation of these assets is recognized in comprehensive loss. Property, plant and equipment PP&E consists of assets which have been transferred from E&E assets to D&P assets, facilities and other equipment, and corporate assets. Costs incurred subsequent to the determination of technical feasibility and commercial viability and costs of replacing parts of D&P assets are recognized as PP&E only when they increase the future economic benefits embodied in the specific asset to which they are related. Such costs generally represent costs incurred in developing proved or probable reserves and bringing on or enhancing production from such reserves and are accumulated on a project-area basis. The carrying amount of any replaced or sold components is derecognized. The costs of the day-to-day maintenance of PP&E are recognized in comprehensive loss as incurred. Gains and losses on disposal of an E&E asset or PP&E are determined by comparing the proceeds from disposal with the carrying amount of the E&E asset or PP&E and are recognized on a net basis in other income or other expense in comprehensive loss. Intangible assets Intangible assets consist of payments made to third parties to expand the availability of infrastructure for the Company s future development projects and the recapitalization of the depreciation of specific E&E assets. Depreciation, depletion and amortization The net carrying value of E&E assets is depreciated on a straight-line basis over estimated useful lives between 10 and 25 years. E&E assets which are producing bitumen and gathering information about the reservoir to assist in the determination of technical feasibility and commercial viability of extracting mineral resources are recapitalized as intangible assets and will be subsequently transferred to D&P assets when proved reserves are assigned. Other E&E assets are transferred to D&P assets when production commences and proved reserves have been assigned Annual Report

77 The net carrying value of D&P assets is depleted using the unit-of-production method which uses the ratio of production to the related total proved plus probable reserves, taking into account the future development costs necessary to bring the related reserves into production. The estimate of future development costs is reviewed annually by independent reservoir engineers. Proved plus probable reserves are estimated using independent reservoir engineering reports and represent the estimated quantity of bitumen which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs which are considered commercially producible. Such reserves may be considered commercially producible if management has the intention of developing and producing them and such intention is based upon: a reasonable assessment of the future economics of such production; a reasonable expectation that there is a market for all or substantially all of the expected production; and evidence that the necessary production, transmission and transportation facilities are available or can reasonably be made available. Reserves which can be produced economically through application of enhanced recovery techniques are only included in the proved plus probable classification when successful testing by a pilot project, or other reasonable evidence, such as experience of the same techniques on similar reservoirs or reservoir simulation studies, provides support for the engineering analysis on which the project was based. For facilities and other equipment, depreciation is recognized in comprehensive loss on a straight-line basis over their estimated useful life of 25 years. For corporate assets, depreciation is recognized in comprehensive loss on a straight-line basis over their estimated useful lives at annual rates of 20 to 30 percent. The expected residual value of facilities and other equipment, and corporate assets is evaluated when depreciation commences. Depreciation methods, useful lives and residual values are reviewed at each reporting date. When significant components of an E&E asset or PP&E have different useful lives, they are accounted for and depreciated as separate items. Amortization of intangible assets infrastructure expansion is recognized in comprehensive loss on a straight-line basis over the term of the related contract. Inventories Inventories consist of materials, condensate, bitumen blend and other inventory. Materials inventory consists of materials, parts and supplies and is valued at the lower of cost or net realizable value with cost determined using a first-in, first-out basis. Condensate inventory is condensate purchased for bitumen blending and is valued at the lower of cost or net realizable value with cost determined using a weighted-average cost. Bitumen blend inventory is produced bitumen that has been blended with condensate for purposes of transporting the product to market and is valued at the lower of cost or net realizable value with cost determined using a weighted-average cost. Other inventory consists primarily of gravel for use in road maintenance and site preparation, and is valued at the lower of cost or net realizable value, with cost determined using a weighted-average cost. Laricina Energy LtD. 75

78 3. Summary of Significant Accounting Policies (continued) Leased assets Leases where the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the leased asset is accounted for in accordance with the accounting policy applicable to the associated asset. Minimum lease payments made under finance leases are allocated between finance expense and the reduction of the outstanding liability. Operating leases are not recognized in the Company s statements of financial position. Payments made under operating leases are recognized as expenses on a straight-line basis over the lease term. Impairment A financial asset is assessed at each reporting date for objective evidence indicating that impairment has occurred, such as one or more events that might have a negative effect on the asset s estimated future cash flows. Significant financial assets are tested for impairment on an individual basis with the remaining financial assets assessed in groups that have similar credit risk. An impairment loss of a financial asset is recognized in comprehensive loss and is calculated as the difference between the carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate. The carrying amounts of the Company s non-financial assets, other than E&E assets and deferred income tax assets, are reviewed at each reporting period for indications of impairment. If there is an indication of impairment, the asset s recoverable amount is estimated. E&E assets are assessed for impairment when they are reclassified to D&P assets and if facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For the purposes of impairment testing, assets are grouped into the smallest group of assets that generates independent cash inflows from continuing use, or the CGU. The recoverable amount of the asset or CGU is the greater of its value-in-use (VIU) and its fair value less costs to sell. The Company s corporate assets do not generate separate cash inflows. If a corporate asset may be impaired, the asset is assessed for impairment by reviewing the recoverable amount for the CGU to which the asset has been allocated. In assessing VIU, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessment of the time-value-of-money and the asset s specific risks. VIU is generally calculated using the present value of the future cash flows expected to be derived from the production of proved and probable reserves. An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its estimated recoverable amount. Impairment losses are recognized in comprehensive loss and are reversed in subsequent periods if indicators exist such that the impairment has decreased. The reversal of an impairment loss is the lower of the recoverable amount and the carrying value of the asset, net of depreciation, amortization or depletion, as if no previous impairment existed. The Company assesses the impairment of E&E assets, before and at the moment of reclassification to PP&E, using E&E CGUs. After the reclassification to PP&E on the basis of technical feasibility and commercial viability, D&P CGUs are used for impairment testing Annual Report

79 Site restoration provision A provision is recognized if, as a result of a past event, the Company has a legal or constructive obligation that can be reliably estimated and it is probable that payment will be required to settle the obligation. A provision is determined by discounting the expected future cash flows at a rate that reflects the current assessment of the time-value-of-money and the risks specific to the underlying liability. The Company recognizes a provision for site restoration obligations as its activities give rise to dismantling, decommissioning and site disturbance remediation requirements. A provision is made for the estimated cost of site restoration with a corresponding increase to the related E&E asset or PP&E. Site restoration costs are amortized on a basis consistent with the related asset s depreciation or depletion policy. The site restoration provision is measured at the present value of management s best estimate of expenditures required to settle the obligation at the reporting date. Subsequent to the initial measurement, the provision is adjusted at the end of each reporting period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The unwinding of the discount related to the passage of time is recognized as a finance expense and the changes in the estimated future cash flows are capitalized. Actual site restoration costs are charged against the site restoration obligation when incurred to the extent the estimated expenditures were provided for. Share-based payment arrangements The Company applies the fair value method for stock options and performance share units (PSUs) granted. Compensation costs are recognized over the vesting period of the award based on the estimated fair value of the stock options or PSUs on the grant date using the Black-Scholes pricing model, with a corresponding increase to contributed surplus. A forfeiture rate is estimated on the grant date and is adjusted over time to reflect the actual number of stock options or PSUs that vest. Upon exercise, consideration received together with the amount previously recognized in contributed surplus is recorded as an increase to share capital. The fair value of the amount payable to employees in respect of share appreciation rights (SARs), which are settled in cash, is recognized as compensation cost over the vesting period with a corresponding increase in accrued liabilities. Revenue Revenue from the sale of bitumen is recorded when the significant risks and rewards of product ownership are transferred to the buyer, typically when legal title passes to an external party. This is generally at the time the product is delivered to a sales terminal. Finance income and finance costs Finance income is recognized as it accrues using the effective interest rate method. Finance expense includes the unwinding of the site restoration provision discount and interest associated with finance leases. Income tax Income tax is comprised of current and deferred income taxes, which are recognized in comprehensive loss except when they relate to items recognized directly in equity, or in other comprehensive income. Laricina Energy LtD. 77

80 3. Summary of Significant Accounting Policies (continued) The asset and liability method of accounting for income taxes is followed whereby deferred income tax assets and liabilities are recognized based on the estimated tax effects of temporary differences between the carrying value of assets and liabilities, and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted or substantially enacted tax rates that will apply in the years the temporary differences are expected to be recovered or settled. Deferred income tax assets and liabilities are offset if there is a legally enforceable right to offset current income tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity. A deferred income tax asset is recognized to the extent that it is probable that future taxable income will be available against which the temporary difference can be utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to the extent the related tax benefit will no longer be realized. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issuance of common shares are recognized as a deduction from equity, net of any tax effects. Flow-through common shares A portion of the Company s exploration activities has been financed through the issuance of flow-through common shares. Under the terms of the common share issuance, the related resource expenditure deductions are renounced to the shareholders in accordance with income tax legislation. Flow-through common shares issued are recorded in share capital at the fair value of common shares on the date of issuance. The premium received on issuing flow-through common shares is initially recorded as a deferred credit. As qualifying expenditures are incurred, the premium is reversed and a deferred income tax liability is recorded. The net amount is then recognized as deferred income tax expense. Government assistance The Company receives funding from the Government of Alberta related to energy technology. The assistance is recorded as a reduction to the corresponding asset or expense when there is reasonable assurance of the collection of funding. Earnings per share Basic loss and comprehensive loss per common share is calculated using the weighted-average number of common shares issued and outstanding during the reporting period. The Company uses the treasury stock method to determine the dilutive effect of replacement options, stock options and PSUs. Financial instruments Financial instruments are initially recognized in the statement of financial position at fair value. Subsequent measurement of financial assets and liabilities, except those at fair value through comprehensive loss and available-for-sale, are measured at amortized cost determined using the effective interest rate method. Cash and cash equivalents are comprised of cash balances and guaranteed investment certificates that may be redeemed at the Company s option. Trade and other receivables, and prepaid expenses and deposits are classified as loans and receivables, while trade and other payables are classified as other financial liabilities and the fair values approximate their carrying value due to the short-term nature of these instruments. The Company has not designated any financial instruments as available-for-sale Annual Report

81 New accounting standards and interpretations not yet adopted The Company has reviewed the new standards and interpretations required for adoption for annual periods beginning January 1, 2013 and determined that IFRS 7 Financial Instruments: Disclosures, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IFRS 13 Fair Value Measurement are relevant but not yet applicable to these financial statements. These standards are summarized as follows: IFRS 7 has been amended to clarify requirements for offsetting of financial assets and financial liabilities, and to enhance the corresponding disclosure requirements; IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee; IFRS 11 requires an entity to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting and joint operations will be accounted for by recognition of the entity s share of the joint operation s assets, liabilities, revenue and expenses; IFRS 12 establishes disclosure requirements for interests in other entities such as joint arrangements, associates and special purpose vehicles; and IFRS 13 is a comprehensive standard defining fair value as the price that would be expected to be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, and establishes disclosure requirements for fair value measurement across all IFRS. The impact of the aforementioned standards has not yet been determined. The Company has reviewed the new standards and interpretations required for adoption for annual periods beginning January 1, 2014 and determined that International Accounting Standard (IAS) 32 Financial Instruments: Presentation is relevant but not yet applicable to these financial statements. IAS 32 has been amended to clarify the requirements for offsetting financial assets and financial liabilities and the corresponding disclosure requirements. This standard s impact is not yet determined. The Company has reviewed the new standards and interpretations required for adoption for annual periods beginning January 1, 2015 and determined that IFRS 9 Financial Instruments is relevant but not yet applicable to these financial statements. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, and requires a single impairment method to be used. IFRS 9 may require different accounting for changes to the fair value of a financial liability as a result of changes to an entity s credit risk. The impact of this standard is not yet determined. Laricina Energy LtD. 79

82 4. Determination of Fair Values Certain accounting policies and disclosures require the Company to determine fair value for purposes of measurement or disclosure. Fair values have been determined using the methods outlined below using the applicable hierarchy, where applicable. Level 1 fair value measurement Level 1 fair value measurements are based on unadjusted quoted market prices. Level 2 fair value measurement Level 2 fair value measurements are based on valuation models and techniques where the significant inputs are derived from quoted indices. For stock options, PSUs, and SARs fair value is estimated using the Black-Scholes option pricing model based on market prices for the underlying common shares, volatility based on historical prices of publicly-traded peer companies and published risk-free interest rates. Level 3 fair value measurement Level 3 fair value measurements are based on unobservable information derived from management s estimate of fair value. Additional disclosure about the assumptions used in determining fair value is in the notes specific to the asset or liability. Cash and cash equivalents, trade and other receivables, and trade and other payables The fair value of cash and cash equivalents, trade and other receivables, and trade and other payables is estimated at the present value of the future cash flows, discounted at the market interest rate at the reporting date. At December 31, 2012 and December 31, 2011 the fair value of these balances approximated their carrying value due to their short-term nature. Stock options, performance share units and share appreciation rights The fair value of stock options, PSUs and SARs is measured using the Black-Scholes option pricing model. Measurement inputs include the common share price on the measurement date, the exercise price, expected volatility, expected life, expected forfeitures, expected dividends and the risk-free interest rate. The carrying value of accrued liabilities for SARs has been assessed at a Level 2 fair value measurement as the significant inputs are derived from market prices for the underlying common shares, volatility based on historical prices of publicly-traded peer companies and published risk-free interest rates Annual Report

83 5. Inventories December 31 December Condensate Materials 2, Bitumen blend Other 1, Other Long-Term Assets 3,355 1,740 At December 31, 2012, the Company had investment tax credits of $1.2 million ($1.2 million at December 31, 2011). The investment tax credits resulted from the Canada Revenue Agency s Scientific Research and Experimental Development (SR&ED) program and the Company s applications for 2007, 2008, and 2009 SR&ED expenditures. The after-tax benefit associated with the investment tax credits is approximately $0.9 million ($0.9 million at December 31, 2011). The investment tax credits will be used to offset current income taxes payable and begin to expire in Exploration and Evaluation Assets Cost Balance, December 31, ,806 Additions during the year 219,451 Balance, December 31, ,257 Additions during the year 255,996 Transferred to PP&E (9,230) Balance, December 31, ,023 Depreciation Balance, December 31, 2010 Depreciation for the year (6,852) Balance, December 31, 2011 (6,852) Depreciation for the year (10,817) Balance, December 31, 2012 (17,669) Carrying amounts As at December 31, ,405 As at December 31, ,354 Laricina Energy LtD. 81

84 7. Exploration and Evaluation Assets (continued) E&E assets consist of the Company s exploration projects which are pending the determination of technical feasibility and commercial viability. Additions represent the Company s share of the costs incurred on E&E assets during the year. During the year ended December 31, 2012, $9.2 million was transferred to PP&E for costs associated with road upgrades. No amounts were transferred to PP&E during the year ended December 31, In May 2011 the Company began selling bitumen produced from the Saleski pilot. There are no proved reserves assigned to this project and, as a result, no assets were transferred to PP&E. Depreciation of the pilot s central processing facility and related infrastructure has been recorded in comprehensive loss. The depreciation of assets providing additional reservoir information has been recapitalized as intangible assets. On July 19, 2011 the Government of Alberta announced that the Company had been selected to receive funding of up to $10.0 million (gross) under the Innovative Energy Technologies Program for the Saleski pilot. The funds are being recorded as a reduction to the corresponding E&E asset when received. As at December 31, 2012, $8.2 million gross ($4.9 million net) has been recorded as a reduction of the costs associated with the Saleski pilot. As at December 31, 2011 $5.5 million gross ($3.3 million net) had been recorded as a reduction of the costs associated with the Saleski pilot. 8. Property, Plant and Equipment Facilities and other Corporate equipment assets Total Cost Balance, December 31, ,201 2,474 32,675 Additions during the year 15,264 1,643 16,907 Balance, December 31, ,465 4,117 49,582 Additions during the year 30,785 2,213 32,998 Transferred from E&E 9,230 9,230 Balance, December 31, ,480 6,330 91,810 Depreciation Balance, December 31, 2010 (598) (1,372) (1,970) Depreciation for the year (1,815) (484) (2,299) Balance, December 31, 2011 (2,413) (1,856) (4,269) Depreciation for the year (1,961) (993) (2,954) Balance, December 31, 2012 (4,374) (2,849) (7,223) Carrying amounts As at December 31, ,052 2,261 45,313 As at December 31, ,106 3,481 84, Annual Report

85 During the year ended December 31, 2011, the Company entered into a contract with a third party to establish a permanent camp at Germain. The Company assumes substantially all of the risks and rewards of ownership and, as a result, the contract is classified as a finance lease. As at December 31, 2012 assets held under finance lease have a gross carrying value of $15.0 million ($15.0 million at December 31, 2011) and accumulated depreciation of $1.2 million ($0.6 million at December 31, 2011) and are included in facilities and other equipment. 9. Intangible Assets Depreciation Infrastructure of E&E expansion assets Total Cost Balance, December 31, 2010 Additions during the year 5,667 3,824 9,491 Balance, December 31, ,667 3,824 9,491 Additions during the year 6,842 6,354 13,196 Balance, December 31, ,509 10,178 22,687 Amortization Balance, December 31, 2010 Amortization for the year Balance, December 31, 2011 Amortization for the year (156) (156) Balance, December 31, 2012 (156) (156) Carrying amounts As at December 31, ,667 3,284 9,491 As at December 31, ,353 10,178 22,531 At December 31, 2012, the Company had intangible assets of $12.5 million ($5.7 million at December 31, 2011) relating to payments made to a third party to expand the availability of power for the Company s future development projects at Saleski and Germain. The amortization of this asset commenced during 2012 when the expansion was completed and will be recognized over the term of the contract with the third-party provider. At December 31, 2012, the Company had intangible assets of $10.2 million ($3.8 million at December 31, 2011) relating to the recapitalization of the depreciation of E&E assets. During the second quarter of 2011, the Company commenced production from the Saleski pilot. Although no proved reserves have been assigned to this project, the pilot is operating as management intended and, as a result, depreciation of the related assets is recognized. The depreciation of assets which directly contribute to the continued understanding of the reservoir and assist in the future assignment of proved reserves has been reclassified as an intangible asset. Laricina Energy LtD. 83

86 10. Site Restoration Provision Balance, December 31, ,747 Provisions made during the year 8,916 Revisions (change in estimates) (457) Revisions (change in discount rate) 2,621 Unwinding of discount 351 Balance, December 31, ,178 Provisions made during the year 1,508 Revisions (change in estimates) 543 Revisions (change in discount rate) 351 Unwinding of discount 402 Balance, December 31, ,982 The Company s provisions include site restoration obligations arising from its ownership interest in oil sands assets including well sites and gathering systems. The total future site restoration obligation is estimated based on the Company s net ownership interest in all wells, facilities, roads, infrastructure and camps, estimated costs to reclaim and abandon these assets and the estimated timing of the costs to be incurred in future years. The Company has estimated the net present value of the site restoration obligations to be $19.0 million as at December 31, 2012 ($16.2 million at December 31, 2011) based on an undiscounted total future liability of $35.8 million ($32.5 million at December 31, 2011). These obligations are expected to be settled over the next 28 years with the majority of the costs to be incurred between 2025 and The discount factor, being the risk-free rate related to the liability, was 2.4 percent at December 31, 2012 (2.5 percent at December 31, 2011). 11. Income Taxes The provision for income taxes differs from the amount which would be expected by applying the combined federal and provincial statutory income tax rates to profit or loss before income taxes. A reconciliation of the difference for the years ended December 31 is as follows: Reconciliation of effective tax rate Loss before income taxes (39,553) (25,248) Canadian statutory income tax rate (percent) Expected income tax recovery at statutory rate (9,888) (6,691) Increase (decrease) in income taxes resulting from: Reduction in effective tax rate 314 Non-deductible costs 1,195 1,110 Flow-through share renunciation 3,915 (8,693) (1,352) Flow-through share premium (2,237) Income tax recovery (8,693) (3,589) Annual Report

87 Laricina has unrecognized deferred tax assets of $4.3 million that relate to capital losses recognized in previous years. This amount has not been recognized as it is not probable that Laricina will have capital gains to offset these capital losses. The combined federal-provincial statutory corporate income tax rate decreased to percent in 2012 from percent in 2011 as a result of tax legislation enacted in The temporary differences that give rise to the deferred tax assets and liabilities in the years ended December 31 are as follows: Deferred tax liabilities PP&E and E&E assets 65,107 52,855 Deferred tax assets Non-capital losses (58,976) (36,225) Share issuance costs (4,421) (6,227) (63,397) (42,452) 1,710 10,403 Movement in deferred tax balances during the year ended December 31, 2012: Recognized Beginning Recognized directly in End of year in loss equity of year PP&E and E&E assets 52,855 12,252 65,107 Non-capital losses (36,225) (22,751) (58,976) Share issuance costs (6,227) 1,806 (4,421) 10,403 (8,693) 1,710 Movement in deferred tax balances during the year ended December 31, 2011: Recognized Beginning Recognized directly in End of year in loss equity of year PP&E and E&E assets 28,175 24,680 52,855 Non-capital losses (7,883) (28,342) (36,225) Share issue costs (3,515) 2,310 (5,022) (6,227) 16,777 (1,352) (5,022) 10,403 As at December 31, 2012, the Company has non-capital losses of $235.6 million which begin to expire in Laricina Energy LtD. 85

88 12. Credit Facility The Company s credit agreement with a Canadian chartered bank has been extended to October 31, Amounts drawn can take the form of prime rate-based loans, bankers acceptances, LIBOR loans or letters of credit and will bear interest at the prime rate, bankers acceptance rates or at LIBOR plus a spread above the reference rate between 1.0 percent and 2.0 percent per annum. The credit agreement provides a demand credit facility of $15.0 million and is secured by an equivalent cash deposit. As at December 31, 2012 and April 4, 2013 the Company had issued letters of credit totalling $3.0 million under the credit facility and no amount had been drawn. 13. Share Capital Authorized Unlimited number of common shares without par value Unlimited number of preferred shares without par value, issuable in series Number of shares (thousands) Amount Common Shares Balance, December 31, , ,198 Issued for cash 12, ,683 Share issuance costs, net of tax benefit (15,065) Performance share units exercised 67 1,536 Balance, December 31, ,211 1,286,352 Issued in exchange for assets ,000 Performance warrants exercised ,578 Performance share units exercised 89 2,377 Replacement options exercised 1,121 1,720 Stock options exercised 123 2,952 Balance, December 31, ,103 1,333,979 On June 29, 2011, Laricina closed a private placement of 8,928,709 common shares at a price of $42.50 per common share for gross proceeds of $379.5 million ($365.8 million net of share issuance costs). In August 2011, Laricina closed additional private placements of 3,299,119 common shares at a price of $42.50 per common share for gross proceeds of $140.2 million ($133.8 million net of share issuance costs). On February 15, 2012, the Company acquired the remaining working interests in jointly-controlled oil sands properties effective January 1, 2012 for total consideration of $30.0 million consisting of 705,882 common shares valued at $42.50 per common share Annual Report

89 Performance warrants In conjunction with its initial private placement, the Company granted performance warrants on a one-time basis to certain founding directors, officers, employees of, and providers of services to the Company. The performance warrants were issued in five series with the targeted exercise prices ranging from $6.00 to $16.00, vesting over three years, and entitling the holder to receive one common share for each warrant exercised Weighted Weighted average average Number exercise Number exercise (thousands) price (thousands) price Outstanding, beginning of year 4,071 $ ,071 $ Exercised (853) Exchanged for replacement options (3,218) Outstanding, end of year $ 4,071 $ Exercisable, end of year $ 4,071 $ The fair value calculation for performance warrants was not required during the years ended December 31, 2012 and December 30, 2011 as no performance warrants were issued or required a change in measurement. Replacement options On June 18, 2012, the Company entered into a replacement option agreement with certain directors, officers and employees whereby the holders of specific options and performance warrants exchanged their rights to these options and performance warrants for replacement options. The economic value of the rights exchanged equalled the economic value of the replacement options granted on the date of the exchange. The replacement options expire on June 18, 2014 and for each replacement option exercised the holder will receive one common share. Weighted average Number exercise (thousands) price Outstanding, December 31, 2011 $ Exchange of certain performance warrants and options 3, Exercised (1,121) 0.05 Outstanding, December 31, ,438 $ 0.05 Exercisable, December 31, $ 0.05 Laricina Energy LtD. 87

90 13. Share Capital (continued) Stock option plan The Company has a stock option plan under which directors, officers, employees of, and providers of services to the Company are eligible to receive grants of options. The exercise price and vesting period of options granted is determined by the Board of Directors at the time of grant Weighted Weighted average average Number exercise Number exercise (thousands) price (thousands) price Outstanding, beginning of year 3,485 $ ,083 $ Granted Exercised (123) Forfeited (412) (26) Exchanged for replacement options (1,690) 5.00 Outstanding, end of year 1,977 $ ,485 $ Exercisable, end of year 910 $ ,498 $ Outstanding and exercisable options as at December 31, 2012: Outstanding Exercisable Weighted Weighted Weighted average average average remaining exercise exercise Number contractual price Number price Exercise price ($/option) (thousands) life (years) ($/option) (thousands) ($/option) , For the year ended December 31, 2012, compensation cost of $4.4 million ($3.8 million in 2011) was recognized for options granted of which $1.7 million ($2.0 million in 2011) was capitalized Annual Report

91 The estimated fair value of options was calculated at the date of grant using the Black-Scholes model and the following weighted-average assumptions: Fair value per option $ $ Expected volatility (percent) Risk-free interest rate (percent) Expected life (years) 7 7 Expected dividend yield A forfeiture rate of 5.0 percent in 2012 (2.0 percent in 2011) was used when recording share-based payments related to the stock option plan. This estimate is adjusted to the actual forfeiture rate at time of forfeiture. Expected volatility is based on historical volatility of publicly traded peer companies. Expected life is based on general option-holder behaviour and the risk-free interest rate is based on Government of Canada bonds of a similar duration. Performance share unit plan The Company has a performance share unit plan under which directors, officers, employees of, and providers of services to the Company are eligible to receive grants of PSUs. PSUs have an exercise price of $0.01 per PSU and vest on dates determined by the Board of Directors at the time of grant, and for each PSU exercised the holder will receive one common share. The PSUs outstanding at December 31, 2012 have a weighted-average remaining contractual life of 5.0 years Weighted Weighted average average Number exercise Number exercise (thousands) price (thousands) price Outstanding, beginning of year 675 $ $ 0.01 Granted Exercised (89) 0.01 (67) 0.01 Forfeited (117) 0.01 (17) 0.01 Outstanding, end of year 796 $ $ 0.01 Exercisable, end of year 250 $ $ 0.01 For the year ended December 31, 2012, compensation cost of $4.0 million ($4.5 million in 2011) was recognized for PSUs granted of which $1.6 million ($2.4 million in 2011) was capitalized. Laricina Energy LtD. 89

92 13. Share Capital (continued) The estimated fair value of PSUs was calculated at the date of grant using the Black-Scholes model and the following weighted-average assumptions: Fair value per option $ $ Expected volatility (percent) Risk-free interest rate (percent) Expected life (years) 7 7 Expected dividend yield A forfeiture rate of 5.0 percent in 2012 (2.0 percent in 2011) was used when recording share-based payments related to the PSUs. Expected volatility is based on historical volatility of publicly-traded peer companies. Expected life is based on general option-holder behaviour and the risk-free interest rate is based on Government of Canada bonds of a similar duration. Share appreciation rights The Company has a SARs plan under which directors, officers, employees of, and providers of services to the Company are eligible to receive grants of SARs providing for cash payments equal to the excess of the market price of the common shares over the exercise price of the right. The vesting period of the SARs is two years Weighted Weighted average average Number exercise Number exercise (thousands) price (thousands) price Outstanding, beginning of year 77 $ $ Granted Exercised (14) (11) Expired (6) Forfeited (58) (8) Outstanding, end of year 145 $ $ Exercisable, end of year 17 $ $ All SARs were granted to employees directly involved in field activities. For the year ended December 31, 2012, compensation cost of $0.3 million ($0.3 million in 2011) was recognized for SARs granted. At December 31, 2012, the Company had recorded an accrued liability of $0.6 million ($0.3 million at December 31, 2011) for outstanding SARs. At December 31, 2012, the Company had an obligation of nil (nominal at December 31, 2011) for SARs that had vested Annual Report

93 The estimated fair value of SARs for the year ended December 31, 2012 was calculated at the date of grant using the Black-Scholes model and the following weighted-average assumptions: Fair value per SAR $ $ 6.95 Share price $ $ Exercise price $ $ Expected volatility (percent) Risk-free interest rate (percent) Expected life (years) Expected dividend yield A forfeiture rate of 20.0 percent was applied for grants issued during the year ended December 31, 2012 (10.0 percent in 2011), when recording share-based payments related to the SARs. Expected volatility is based on historical volatility adjusted for changes expected due to publicly available information. Expected life is based on general option-holder behaviour and the risk-free interest rate is based on Government of Canada bonds of a similar duration. 14. Loss and Comprehensive Loss per Share Basic loss and comprehensive loss per share The calculation of basic loss and comprehensive loss per share for the year ended December 31, 2012 was based on the loss and comprehensive loss attributable to common shareholders of $ 30.9 million ($21.7 million in 2011) and the weighted-average number of common shares outstanding during the year, calculated as follows: (thousands) Issued common shares at beginning of year 64,211 51,916 Effect of common shares issued 617 5,763 Effect of performance warrants exercised 425 Effect of PSUs exercised 46 Effect of replacement options exercised 379 Effect of stock options exercised Weighted-average common shares outstanding (basic) 65,724 57,726 Diluted loss and comprehensive loss per share The calculation of diluted net loss and comprehensive loss per share does not include performance warrants, options or PSUs as the effect would be anti-dilutive. The basic and diluted loss and comprehensive loss per share was $0.47 for the year ended December 31, 2012, compared to $0.38 for the year ended December 31, Laricina Energy LtD. 91

94 15. Other Income Other income is composed of the following: Data sale to third party 1,200 2,700 Third-party camp and road usage 7, ,516 2, Personnel Expenses The aggregate payroll expenses of employees and executive management are as follows: Wages and salaries 16,207 11,885 Benefits and other personnel costs 4,644 2,875 Share-based payments 7,571 8,770 Total remuneration 28,422 23,530 Capitalized portion of total remuneration (11,376) (11,496) 17,046 12,034 Personnel expenses directly related to E&E activities were capitalized and included in E&E assets. 17. Operating Leases Non-cancellable operating lease rentals as at December 31 are payable as follows: Less than one year 8,472 9,414 Between one and five years 17,403 19,921 25,875 29, Annual Report

95 18. Executive Compensation In addition to salaries, the Company provides non-cash benefits to executive officers through participation in the Company s stock option and PSU plans. Executive officer compensation costs for the years ended December 31 are comprised of the following: Salaries 1,808 1,835 Other short-term employment benefits Share-based payments 1,930 2,031 4,703 4,835 Share-based payments represent the amortization of compensation costs associated with grants of stock options and PSUs to executive officers as recorded in the financial statements. 19. Financial Risk Management The Company is exposed to certain financial risks as a result of exploration, development and financing activities. These risks include credit risk, liquidity risk and market risk. This note discusses the Company s exposure to these risks as well as the objectives, policies and processes for measuring and managing risk as well as capital management. The Board of Directors oversees management s establishment and execution of the risk management policies. The policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls and to monitor risks and market conditions. Credit risk Credit risk is the risk that the counterparty to a financial asset will default, resulting in the Company incurring a financial loss. It is mitigated through credit practices that limit transactions according to counterparties credit quality. A substantial portion of the Company s trade and other receivables is with a small number of joint venture partners in the oil and natural gas industry and is subject to normal industry credit risk and resolution processes under the joint venture agreements. Laricina has historically not experienced any collection issues and joint venture receivables are typically collected within one month of the joint venture bill being issued. The Company does not anticipate any default as it transacts with creditworthy customers and management does not expect any losses from non-performance; as a result, no provision for doubtful accounts has been recorded at December 31, 2012 or The carrying amount of financial assets represents the maximum credit exposure, as follows: December 31 December Cash and cash equivalents 395, ,891 Trade and other receivables 7,923 17, , ,783 Laricina Energy LtD. 93

96 19. Financial Risk Management (continued) The maximum exposure to credit risk for trade and other receivables by type of customer was: December 31 December Joint venture partners 1,240 3,466 Other 6,683 14,426 7,923 17,892 The Company s most significant receivable at December 31, 2012 was $2.1 million for third-party camp revenue. The Company s most significant receivable at December 31, 2011 was $5.5 million, for the sale of data to a third party. As at December 31, 2012, the Company s trade and other receivables were aged based on due date with $5.8 million classified as current (less than 30 days). The $2.1 million overdue account was collected subsequent to December 31, As at December 31, 2011, all the Company s trade and other receivables of $17.9 million were classified as current. Liquidity risk Liquidity risk is the risk that the Company will encounter difficulties in meeting its financial liabilities. The Company manages liquidity risk through the management of its capital structure and timing of discretionary expenditures to ensure it will meet its liabilities when due without incurring unacceptable losses or risking harm to its reputation. Laricina prepares annual capital and operating expenditure budgets that are monitored on a regular basis and updated as necessary. As at December 31, 2012, cash was held in a fully-liquid, interest-bearing operating account and Laricina had $12.0 million available in the bank credit facility to manage its expenditures, if necessary. Trade payables are expected to be paid within one month. The Company s liabilities at December 31 are payable as follows: Less than one year Trade and other payables 54,531 44,210 Finance lease obligation 7,641 5,000 62,172 49,210 Between one and three years Finance lease obligation 7,851 62,172 57, Annual Report

97 Market risk Market risk is the risk that the value of financial instruments or future cash flows will fluctuate due to movements in market prices, such as commodity prices. Oil prices, natural gas prices and heavy oil differentials fluctuate significantly in response to regional, national and global supply and demand factors beyond Laricina s control. The Company closely monitors commodity prices to determine the appropriate course of action. Prices for oil are determined in global markets and generally denominated in US dollars. The exchange rate effect cannot be quantified but generally an increase in the Canadian dollar versus the US dollar reduces the price received for oil. Capital management The Company s objectives when managing capital are to safeguard its ability to pursue the acquisition, exploration, development and production of oil sands resources and to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk. Laricina s capital structure includes shareholders equity, bank debt and working capital. The Company does not have material operations and the primary assets consist of oil sands properties for development. Accordingly, the Company may adjust capital spending, issue new shares, acquire or dispose of assets, enter into joint venture arrangements or issue new debt to manage the capital structure. The Company s capital management objectives remained unchanged during the year ended December 31, Laricina is not subject to externally imposed capital restrictions; the credit facility referred to in note 12, however, is secured by an equivalent cash deposit. 20. Capital Commitments At December 31, 2012, the Company had purchase orders outstanding of $54.2 million for the purchase of E&E assets, all of which are due within one year. At December 31, 2011, the Company had purchase orders outstanding of $61.4 million for the purchase of E&E assets. Laricina Energy LtD. 95

98 Laricina Management Team Glen C. Schmidt President and Chief Executive Officer Calgary, Alberta James R. Hand Senior Vice President and Chief Operating Officer Calgary, Alberta C. Dean Setoguchi Senior Vice President and Chief Financial Officer Calgary, Alberta Derek A. Keller Vice President Production Calgary, Alberta Mr. Schmidt has more than 30 years of oil and gas experience with more than 20 years at the executive level. He has been President and Chief Executive Officer of Laricina since inception in He holds a Master of Business Administration and Bachelor of Science in Chemical Engineering (with Distinction) from the University of Calgary and is a member of the Association of Professional Engineers and Geoscientists of Alberta. Mr. Hand has more than 30 years of oil and gas experience in a variety of technical, managerial and leadership positions, domestically and internationally. He has been Senior Vice President Operations and Chief Operating Officer at Laricina since Mr. Hand holds a Bachelor of Science in Petroleum Engineering from Texas A&M University and is a registered Professional Engineer in the State of Alaska. Mr. Setoguchi has more than 20 years of experience in capital markets, investor relations, financing, treasury and strategic planning. He has been Senior Vice President and Chief Financial Officer at Laricina since Mr. Setoguchi holds a Bachelor of Management from the University of Lethbridge and is a Chartered Accountant. Mr. Keller has 20 years of oil and gas experience, primarily in heavy oil and oil sands. He has been with Laricina since Mr. Keller holds a Bachelor of Science in Chemical Engineering from the University of Alberta and is a member of the Association of Professional Engineers and Geoscientists of Alberta. Karen E. Lillejord Vice President Finance and Controller Calgary, Alberta David Safari Vice President Facilities Calgary, Alberta Marla A. Van Gelder Vice President Corporate Development Calgary, Alberta Ms. Lillejord has 28 years of experience in a variety of functions, primarily in the area of corporate reporting. She has been with Laricina since inception in Ms. Lillejord holds a degree in Business Administration from the University of Regina and has obtained the designations of Chartered Accountant, Certified Management Accountant and Certified Public Accountant. Mr. Safari has more than 26 years of experience in the energy industry, domestically and internationally. He has been with Laricina since Mr. Safari holds a Bachelor of Science in Chemical Engineering from the Sharif University of Technology in Tehran, Iran and is a member of the Association of Professional Engineers and Geoscientists of Alberta and the Association of Professional Engineers and Geophysicists of Saskatchewan. Ms. Van Gelder has 23 years of combined experience in banking, finance and oil and gas. She has been with Laricina since Ms. Van Gelder holds a Bachelor of Commerce from the University of Calgary and has obtained her designation as a Certified General Accountant and is a Chartered Financial Analyst charterholder Annual Report

99 Laricina Board of Directors Ian D. Bruce Calgary, Alberta Jeffrey M. Donahue, Jr. Toronto, Ontario Jonathan C. Farber Westport, Connecticut, USA S. Barry Jackson Calgary, Alberta Gordon J. Kerr Calgary, Alberta Independent investor. Mr. Bruce is also a director of Cameco Corporation, Logan International Inc., TriAxon Oil Corp., Northern Blizzard Resources Inc. and PumpWell Solutions Ltd. Formerly Chief Executive Officer and Co-Chairman of Peters & Co. Limited. Vice President Principal Investing, CPPIB Equity Investments Inc. since October 5, Vice President, Strategy and Business Development with BHP Billiton PLC in London from September 2003 to Managing Director, Lime Rock Management LP, an investment management firm, since June Chairman, TransCanada Corporation since April 29, Mr. Jackson is also a director of Nexen Inc. and WestJet Airlines Ltd. President and Chief Executive Officer, Enerplus Corporation since May 10, Robert A. Lehodey, Q.C. Calgary, Alberta Brian K. Lemke Calgary, Alberta W. Glen Russell Calgary, Alberta Glen C. Schmidt Calgary, Alberta Partner, Osler, Harkin & Harcout LLP since March 9, Mr. Lehodey is also a director of Delphi Energy Corp and a number of other private companies. Independent businessman and investor. Formerly Chairman, Cordero Energy Inc. from April 2005 to November Principal, Glen Russell Consulting since October Mr. Russell is also Chairman of Accolade Capital Inc. President and Chief Executive Officer of Laricina Energy Ltd. since November Mr. Schmidt is also a director of Elkhorn Resources Inc. and Argent Energy Trust. Laricina Energy LtD. 97