EXHIBIT 99.3





MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING



The management of Provident is responsible
for establishing and maintaining adequate internal control over financial reporting for the Company. Under the supervision of our
Chief Executive Officer and our Chief Financial Officer we have conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on our assessment, we have concluded that as of December 31, 2011, our internal control
over financial reporting was effective.



Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.



The effectiveness of the Company’s internal
control over financial reporting as of December 31, 2011, has been audited by PricewaterhouseCoopers LLP, independent auditors,
as stated in their report which appears herein.



|“Signed”                | “Signed”               
|----------------------- | -----------------------
|                        |                        
|Douglas J. Haughey      | Brent C. Heagy         
|Chief Executive Officer | Chief Financial Officer
|                        |                        
|Calgary, Alberta        |                        
|March 6, 2012           |                        











MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS



The management of Provident is responsible
for the information included in the consolidated financial statements and Management’s Discussion and Analysis. The financial
statements have been prepared in accordance with accounting principles generally accepted in Canada and in accordance with accounting
policies detailed in the notes to the financial statements. Where necessary, the statements include amounts based on management’s
informed judgments and estimates. Financial information in Management’s Discussion and Analysis is consistent with that presented
in the financial statements.



PricewaterhouseCoopers LLP, Chartered Accountants,
appointed by the shareholders, have audited the financial statements and conducted a review of internal accounting policies and
procedures to the extent required by generally accepted auditing standards, and performed such tests as they deemed necessary to
enable them to express an opinion on the financial statements.



The Board of Directors, through its Audit Committee,
is responsible for ensuring that management fulfills its responsibility for financial reporting and internal control. The Audit
Committee is composed of three independent directors. The Audit Committee reviews the financial statements and Management’s
Discussion and Analysis and reports its findings to the Board of Directors for its consideration in approving the financial statements.



|“Signed”                | “Signed”               
|----------------------- | -----------------------
|                        |                        
|Douglas J. Haughey      | Brent C. Heagy         
|Chief Executive Officer | Chief Financial Officer
|                        |                        
|Calgary, Alberta        |                        
|March 6, 2012           |                        

























March 6, 2012



Independent Auditor’s Report



To the Shareholders of Provident Energy Ltd.



We have completed an integrated audit of Provident Energy Ltd.’s
2011 consolidated financial statements and its internal control over financial reporting as at December 31, 2011 and an audit of
its 2010 consolidated financial statements. Our opinions, based on our audits, are presented below.



Report on the consolidated financial statements

We have audited the accompanying consolidated financial statements
of Provident Energy Ltd., which comprise the consolidated statements of financial position as at December 31, 2011, December 31,
2010 and January 1, 2010 and the consolidated statements of operations and comprehensive income (loss), changes in equity and cash
flows for the years ended December 31, 2011 and 2010, and the related notes, which comprise 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 as
issued by the International Accounting Standards Boardand 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.



Auditor’s 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
and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
Canadian generally accepted auditing standards require that we comply with ethical requirements.



An audit involves performing procedures to obtain audit evidence,
on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on
the auditor’s 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, the auditor considers internal control relevant to the company’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate
in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and 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 on the consolidated financial
statements.





|PricewaterhouseCoopersLLP, Chartered Accountants                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1115 Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3                                                                                                                                                      
|T:+1 403 509 7500, F: +1 403 781 1825, www.pwc.com/ca                                                                                                                                                             
|“PwC”refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.



1

















Opinion

In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of Provident Energy Ltd. as at December 31, 2011, December 31,
2010 and January 1, 2010 and its financial performance and its cash flows for the years ended December 31, 2011 and 2010 in accordance
with International Financial Reporting Standards as issued by the International Accounting Standards Board.



Report on internal control over financial reporting

We have also audited Provident Energy Ltd.’s internal
control over financial reporting as at December 31, 2011, based on criteria established in Internal Control - Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



Management’s responsibility for internal control over
financial reporting

Management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included
in the accompanying Management’s Report on Internal Control Over Financial Reporting.



Auditor’s responsibility

Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects.



An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such
other procedures as we consider necessary in the circumstances.



We believe that our audit provides a reasonable basis
for our audit opinion on the company’s internal control over financial reporting.



Definition of internal control over financial reporting

A company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.





2













Inherent limitations

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with
the policies or procedures may deteriorate.



Opinion

In our opinion, Provident Energy Ltd. maintained, in all material
respects, effective internal control over financial reporting as at December 31, 2011, based on criteria established in Internal
Control - Integrated Framework issued by COSO.











Chartered Accountants

Calgary, Alberta



3











PROVIDENT ENERGY LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Canadian dollars (000s)



|                                                             |  | As at        |            |   | As at        |   |            | As at      | 
|------------------------------------------------------------ |  | ------------ | ---------- | - | ------------ | - | ---------- | ---------- | 
|                                                             |  | December 31, |            |   | December 31, |   |            | January 1, | 
|                                                             |  | 2011         |            |   | 2010         |   |            | 2010       | 
|Assets                                                       |  |              |            |   |              |   |            |            | 
|Current assets                                               |  |              |            |   |              |   |            |            | 
|Cash and cash equivalents                                    |  | $            | -          |   |              | $ | 4,400      |            | 
|Accounts receivable                                          |  |              | 230,457    |   |              |   | 206,631    |            | 
|Petroleum product inventory (note 7)                         |  |              | 147,378    |   |              |   | 106,653    |            | 
|Prepaid expenses and other current assets                    |  |              | 4,559      |   |              |   | 2,539      |            | 
|Financial derivative instruments (note 16)                   |  |              | 4,571      |   |              |   | 487        |            | 
|Assets held for sale (note 23)                               |  |              | -          |   |              |   | -          |            | 
|                                                             |  |              | 386,965    |   |              |   | 320,710    |            | 
|Non-current assets                                           |  |              |            |   |              |   |            |            | 
|Investments                                                  |  |              | -          |   |              |   | -          |            | 
|Exploration and evaluation assets (note 23)                  |  |              | -          |   |              |   | -          |            | 
|Property, plant and equipment (note 8)                       |  |              | 984,217    |   |              |   | 833,790    |            | 
|Intangible assets (note 9)                                   |  |              | 107,118    |   |              |   | 118,845    |            | 
|Goodwill (note 10)                                           |  |              | 107,430    |   |              |   | 100,409    |            | 
|Deferred income taxes (note 15)                              |  |              | 2,962      |   |              |   | 72,699     |            | 
|                                                             |  | $            | 1,588,692  |   |              | $ | 1,446,453  |            | 
|Liabilities                                                  |  |              |            |   |              |   |            |            | 
|Current liabilities                                          |  |              |            |   |              |   |            |            | 
|Accounts payable and accrued liabilities                     |  | $            | 276,480    |   |              | $ | 227,944    |            | 
|Cash dividends payable                                       |  |              | 8,353      |   |              |   | 12,646     |            | 
|Current portion of long-term debt (note 11)                  |  |              | 9,199      |   |              |   | 148,981    |            | 
|Financial derivative instruments (note 16)                   |  |              | 56,901     |   |              |   | 37,849     |            | 
|Liabilities held for sale (note 23)                          |  |              | -          |   |              |   | -          |            | 
|                                                             |  |              | 350,933    |   |              |   | 427,420    |            | 
|Non-current liabilities                                      |  |              |            |   |              |   |            |            | 
|Long-term debt - bank facilities and other (note 11)         |  |              | 184,936    |   |              |   | 72,882     |            | 
|Long-term debt - convertible debentures (note 11)            |  |              | 315,786    |   |              |   | 251,891    |            | 
|Decommissioning liabilities (note 12)                        |  |              | 85,055     |   |              |   | 57,232     |            | 
|Long-term financial derivative instruments (notes 11 and 16) |  |              | 52,373     |   |              |   | 29,187     |            | 
|Other long-term liabilities (notes 12 and 14)                |  |              | 20,551     |   |              |   | 19,634     |            | 
|Deferred income taxes (note 15)                              |  |              | -          |   |              |   | -          |            | 
|Commitments (note 21)                                        |  |              |            |   |              |   |            |            | 
|                                                             |  |              | 1,009,634  |   |              |   | 858,246    |            | 
|                                                             |  |              |            |   |              |   |            |            | 
|Shareholders’ equity                                         |  |              |            |   |              |   |            |            | 
|Equity attributable to owners of the parent                  |  |              |            |   |              |   |            |            | 
|Share capital (note 13)                                      |  |              | 2,911,024  |   |              |   | -          |            | 
|Unitholders' contributions (note 13)                         |  |              | -          |   |              |   | 2,866,268  |            | 
|Other equity                                                 |  |              | (8,370     | ) |              |   | 684        |            | 
|Accumulated deficit                                          |  |              | (2,328,241 | ) |              |   | (2,278,745 | )          | 
|                                                             |  |              | 574,413    |   |              |   | 588,207    |            | 
|Non-controlling interest (note 6)                            |  |              | 4,645      |   |              |   | -          |            | 
|                                                             |  |              | 579,058    |   |              |   | 588,207    |            | 
|                                                             |  | $            | 1,588,692  |   |              | $ | 1,446,453  |            | 



The accompanying notes are an integral part of these consolidated
financial statements.



On behalf of the Board of Directors:



|“Signed”               | “Signed”            
|---------------------- | --------------------
|                       |                     
|John B. Zaozirny, Q.C. | Grant D. Billing, CA
|Director               | Director            











PROVIDENT ENERGY LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)

Canadian dollars (000s except per share amounts)



|                                                                                                       |  | Year ended   |          
|------------------------------------------------------------------------------------------------------ |  | ------------ | ---------
|                                                                                                       |  | December 31, |          
|                                                                                                       |  | 2011         |          
|                                                                                                       |  |              |          
|Product sales and service revenue (note 18)                                                            |  | $            | 1,955,878
|Realized loss on buyout of financial derivative instruments (note 16)                                  |  |              | -        
|Unrealized gain offsetting buyout of financial derivative instruments (note 16)                        |  |              | -        
|Loss on financial derivative instruments (note 16)                                                     |  |              | (69,756  
|                                                                                                       |  |              | 1,886,122
|                                                                                                       |  |              |          
|Expenses                                                                                               |  |              |          
|Cost of goods sold (note 7)                                                                            |  |              | 1,517,070
|Production, operating and maintenance                                                                  |  |              | 37,432   
|Transportation                                                                                         |  |              | 20,001   
|Depreciation and amortization                                                                          |  |              | 43,630   
|General and administrative (note 14)                                                                   |  |              | 51,059   
|Strategic review and restructuring (note 22)                                                           |  |              | -        
|Financing charges                                                                                      |  |              | 41,282   
|Loss on revaluation of conversion feature of convertible debentures and redemption liability (note 16) |  |              | 17,469   
|Other income and foreign exchange (note 20)                                                            |  |              | (7,524   
|                                                                                                       |  |              | 1,720,419
|                                                                                                       |  |              |          
|Income from continuing operations before taxes                                                         |  |              | 165,703  
|                                                                                                       |  |              |          
|Current tax expense (recovery) (note 15)                                                               |  |              | 654      
|Deferred tax expense (recovery) (note 15)                                                              |  |              | 67,832   
|                                                                                                       |  |              | 68,486   
|Net income and comprehensive income from continuing operations                                         |  |              | 97,217   
|Net income (loss) and comprehensive income (loss) from discontinued operations (note 23)               |  |              | -        
|Net income (loss) and comprehensive income (loss)                                                      |  | $            | 97,217   
|                                                                                                       |  |              |          
|Net income (loss) and comprehensive income (loss) attributable to:                                     |  |              |          
|Owners of the parent                                                                                   |  | $            | 96,791   
|Non-controlling interest                                                                               |  |              | 426      
|                                                                                                       |  | $            | 97,217   
|                                                                                                       |  |              |          
|Per share amounts attributable to the equity holders of the Company:                                   |  |              |          
|Net income per share from continuing operations                                                        |  |              |          
|– basic and diluted                                                                                    |  | $            | 0.36     
|Net income (loss) per share                                                                            |  |              |          
|– basic and diluted                                                                                    |  | $            | 0.36     



The accompanying notes are an integral part of these consolidated
financial statements.











PROVIDENT ENERGY LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Canadian dollars (000s)



|                                                                                                       |  | Year ended   |         
|------------------------------------------------------------------------------------------------------ |  | ------------ | --------
|                                                                                                       |  | December 31, |         
|                                                                                                       |  | 2011         |         
|Cash provided by (used in) operating activities                                                        |  |              |         
|Net income for the year from continuing operations                                                     |  | $            | 97,217  
|Add (deduct) non-cash items:                                                                           |  |              |         
|Depreciation and amortization                                                                          |  |              | 43,630  
|Non-cash financing charges and other                                                                   |  |              | 8,603   
|Loss on purchase of convertible debentures (note 11)                                                   |  |              | 3,342   
|Non-cash share based compensation expense                                                              |  |              | 12,469  
|Unrealized gain offsetting buyout of financial derivative instruments (note 16)                        |  |              | -       
|Unrealized loss on financial derivative instruments (note 16)                                          |  |              | 3,235   
|Loss on revaluation of conversion feature of convertible debentures and redemption liability (note 16) |  |              | 17,469  
|Unrealized foreign exchange gain and other (note 20)                                                   |  |              | (414    
|Loss (gain) on sale of assets (note 20)                                                                |  |              | 1       
|Deferred tax expense (recovery)                                                                        |  |              | 67,832  
|Continuing operations                                                                                  |  |              | 253,384 
|Discontinued operations                                                                                |  |              | -       
|                                                                                                       |  |              | 253,384 
|Site restoration expenditures related to discontinued operations                                       |  |              | -       
|Change in non-cash operating working capital                                                           |  |              | (33,145 
|                                                                                                       |  |              | 220,239 
|                                                                                                       |  |              |         
|Cash used for financing activities                                                                     |  |              |         
|Issuance of convertible debentures, net of issue costs (note 11)                                       |  |              | 164,950 
|Repayment of debentures (note 11)                                                                      |  |              | (249,784
|Increase (decrease) in long-term debt                                                                  |  |              | 109,893 
|Declared dividends to shareholders                                                                     |  |              | (146,287
|Issue of shares, net of issue costs (note 13)                                                          |  |              | 37,101  
|Change in non-cash financing working capital                                                           |  |              | (4,293  
|                                                                                                       |  |              | (88,420 
|                                                                                                       |  |              |         
|Cash (used for) provided by investing activities                                                       |  |              |         
|Capital expenditures                                                                                   |  |              | (134,115
|Acquisition (note 6)                                                                                   |  |              | (7,852  
|Proceeds on sale of assets                                                                             |  |              | 3       
|Proceeds on sale of discontinued operations (note 23)                                                  |  |              | -       
|Change in non-cash investing working capital                                                           |  |              | 5,745   
|Investing activities from discontinued operations                                                      |  |              | -       
|                                                                                                       |  |              | (136,219
|                                                                                                       |  |              |         
|Decrease in cash and cash equivalents                                                                  |  |              | (4,400  
|Cash and cash equivalents, beginning of year                                                           |  |              | 4,400   
|Cash and cash equivalents, end of year                                                                 |  | $            | -       
|                                                                                                       |  |              |         
|Supplemental disclosure of cash flow information                                                       |  |              |         
|Cash interest paid including debenture interest                                                        |  | $            | 35,307  
|Cash taxes received                                                                                    |  | $            | (1,465  



The accompanying notes are an integral
part of these consolidated financial statements.











PROVIDENT ENERGY LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Canadian Dollars (000s)



|                                                                                        |  | Share capital |           |   | Unitholders'
    contributions |   |            | Other
    equity |  |   | Accumulated
    deficit |   |  | Subtotal |            |   | Non-
    controlling interest |   |            | Total equity | 
|--------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ------------------------------ | - | ---------- | ---------------- |  | - | ----------------------- | - |  | -------- | ---------- | - | ----------------------------- | - | ---------- | ------------ | 
|                                                                                        |  |               |           |   |                                |   |            |                  |  |   |                         |   |  |          |            |   |                               |   |            |              | 
|Balance - December 31, 2010                                                             |  | $             | -         |   |                                | $ | 2,866,268  |                  |  | $ | 684                     |   |  | $        | (2,278,745 | ) |                               | $ | 588,207    |              | 
|Cancelled on conversion
    to a corporation effective January 1, 2011 (note 13)        |  |               |           |   |                                |   | (2,866,268 | )                |  |   |                         |   |  |          |            |   |                               |   | (2,866,268 | )            | 
|Issued on conversion
    to a corporation effective January 1, 2011 (note 13)           |  |               | 2,866,268 |   |                                |   |            |                  |  |   |                         |   |  |          |            |   |                               |   | 2,866,268  |              | 
|Equity associated with
    redemption liability of non wholly-owned subsidiary (note 6) |  |               |           |   |                                |   |            |                  |  |   | (9,054                  | ) |  |          |            |   |                               |   | (9,054     | )            | 
|Non-controlling interest
    on acqusition (note 6)                                     |  |               |           |   |                                |   |            |                  |  |   |                         |   |  |          |            |   |                               |   |            |              | 
|Net income and comprehensive
    income for the year                                    |  |               |           |   |                                |   |            |                  |  |   |                         |   |  |          | 96,791     |   |                               |   | 96,791     |              | 
|Proceeds on issuance
    of shares (note 13)                                            |  |               | 37,124    |   |                                |   |            |                  |  |   |                         |   |  |          |            |   |                               |   | 37,124     |              | 
|Shares issued on acqusition
    of subsidiary (notes 6 and 13)                          |  |               | 7,606     |   |                                |   |            |                  |  |   |                         |   |  |          |            |   |                               |   | 7,606      |              | 
|Debenture conversions
    (notes 11 and 13)                                             |  |               | 49        |   |                                |   |            |                  |  |   |                         |   |  |          |            |   |                               |   | 49         |              | 
|Dividends                                                                               |  |               |           |   |                                |   |            |                  |  |   |                         |   |  |          | (146,287   | ) |                               |   | (146,287   | )            | 
|Share issue costs                                                                       |  |               | (23       | ) |                                |   |            |                  |  |   |                         |   |  |          |            |   |                               |   | (23        | )            | 
|Balance
    - December 31, 2011                                                         |  | $             | 2,911,024 |   |                                | $ | -          |                  |  | $ | (8,370                  | ) |  | $        | (2,328,241 | ) |                               | $ | 574,413    |              | 
|                                                                                        |  |               |           |   |                                |   |            |                  |  |   |                         |   |  |          |            |   |                               |   |            |              | 
|Balance - January 1, 2010                                                               |  | $             | -         |   |                                | $ | 2,834,177  |                  |  | $ | 684                     |   |  | $        | (1,767,910 | ) |                               | $ | 1,066,951  |              | 
|Net loss and comprehensive
    loss for the period                                      |  |               |           |   |                                |   |            |                  |  |   |                         |   |  |          | (10,506    | ) |                               |   | (10,506    | )            | 
|Proceeds on issuance
    of trust units                                                 |  |               |           |   |                                |   | 32,091     |                  |  |   |                         |   |  |          |            |   |                               |   | 32,091     |              | 
|Cash distributions                                                                      |  |               |           |   |                                |   |            |                  |  |   |                         |   |  |          | (191,639   | ) |                               |   | (191,639   | )            | 
|Capital
    distribution in connection with the sale of the Upstream business (note 23) |  |               |           |   |                                |   |            |                  |  |   |                         |   |  |          | (308,690   | ) |                               |   | (308,690   | )            | 
|Balance - December
    31, 2010                                                         |  | $             | -         |   |                                | $ | 2,866,268  |                  |  | $ | 684                     |   |  | $        | (2,278,745 | ) |                               | $ | 588,207    |              | 



The accompanying notes are an integral part of these consolidated
financial statements.















Notes
to the Consolidated
Financial Statements



(Tabular amounts in Cdn $ 000s, except
share and per share amounts)



December 31, 2011



| | 1. | Structure of the Company
| | -- | ------------------------



Provident Energy Ltd. (the “Company”
or “Provident”) is incorporated under the Business Corporations Act (Alberta) and domiciled in Canada. The address
of its registered office is 2100, 250 – 2nd Street S.W. Calgary, Alberta. Provident owns and manages a natural gas liquids
(“NGL”) midstream business and was established as a result of the conversion from an income trust structure, Provident
Energy Trust (the “Trust”), to a corporate structure pursuant to a plan of arrangement. The conversion resulted in
the reorganization of the Trust into a publicly traded, dividend-paying corporation under the name “Provident Energy Ltd.”
effective January 1, 2011. Under the plan of arrangement, former holders of trust units of the Trust received one common share
in Provident Energy Ltd. in exchange for each trust unit held in the Trust.



Pursuant to the conversion,
the Company acquired, directly and indirectly, the same assets and business that the Trust owned immediately prior to the effective
time of the conversion and assumed all of the obligations of the Trust. In accordance with the conversion, the Trust was dissolved
effective January 1, 2011 and thereafter ceased to exist. The principal undertakings of Provident Energy Ltd. and its predecessor
Provident Energy Trust are collectively referred to as “the Company” or “Provident” and include the accounts
of Provident and its subsidiaries and partnerships.



The conversion was accounted
for on a continuity of interests basis. Accordingly, the consolidated financial statements reflect the financial position, results
of operations and cash flows as if Provident Energy Ltd. had always carried on the business formerly carried on by the Trust. As
a result of Provident’s conversion from an income trust to a corporation, effective January 1, 2011, references to “common
shares”, “shares”, “share based compensation”, “shareholders”, “performance share
units”, “PSUs”, “restricted share units”, “RSUs”, “premium dividend and dividend
reinvestment share purchase (DRIP) plan”, and “dividends” were formerly referred to as “trust units”,
“units”, “unit based compensation”, “unitholders”, “performance trust units”, “PTUs”,
“restricted trust units”, “RTUs”, “premium distribution, distribution reinvestment (DRIP) and optional
unit purchase plan”, and “distributions”, respectively, for periods prior to January 1, 2011.



| | 2. | Basis of preparation and adoption of IFRS
| | -- | -----------------------------------------



The Company prepares its financial
statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute
of Chartered Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate International Financial
Reporting Standards as issued by the International Accounting Standards Board (“IFRS”), and requires publicly accountable
enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, the Company commenced
reporting on this basis in the March 31, 2011 interim consolidated financial statements and for periods thereafter. In the financial
statements, the term “Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS.



These consolidated financial
statements have been prepared in accordance with IFRS. Subject to certain transition elections disclosed in note 5, the Company
has consistently applied the same accounting policies in its opening IFRS statement of financial position at January 1, 2010 and
throughout all of the periods presented, as if these policies had always been in effect. Note 5 discloses the impact of the transition
to IFRS on the Company’s reported financial position and financial performance, including the nature and effect of significant
changes in accounting policies from those used in the Company’s consolidated financial statements for the year ended December
31, 2010.











The policies applied in these
consolidated financial statements are based on IFRS issued and outstanding as of March 6, 2012, the date the Board of Directors
approved the statements.



| | 3. | Significant accounting policies
| | -- | -------------------------------



The following accounting policies apply to the continuing
operations of the Company. Policies applicable to the former Upstream oil and gas operations are disclosed in note 23 - Discontinued
operations.



| | i) | Principles of consolidation
| | -- | ---------------------------



The
consolidated financial statements include the accounts of Provident Energy Ltd. and all direct and indirect subsidiaries and partnerships
which Provident controls by having the power to govern the financial and operating policies. These entities are fully consolidated
from the date on which control is obtained by Provident. All intercompany transactions, balances, income and expenses, profits
and losses and unrealized gains and losses from intercompany transactions are eliminated on consolidation.



Non-controlling
interests represent equity interests in subsidiaries owned by outside parties. The share of net assets of subsidiaries attributable
to non-controlling interests is presented as a separate component of equity. Their share of net income and comprehensive income
is also recognized in this separate component of equity. Changes in the Company’s ownership interest in subsidiaries that
do not result in a loss of control are accounted for as equity transactions.



| | ii) | Financial instruments
| | --- | ---------------------



Financial
assets and liabilities are classified as financial assets or liabilities at fair value through profit or loss, loans and receivables,
held to maturity investments, available for sale financial assets, or other financial liabilities, as appropriate. When financial
assets and liabilities are initially recognized, they are measured at fair value.



Provident
determines the classification of its financial assets at initial recognition. The Company’s financial assets include cash
and cash equivalents, accounts receivable, financial derivative instruments and investments.



| |  | 
| |  | 

Financial
Assets



| | a) | Financial assets at fair value through profit or loss
| | -- | -----------------------------------------------------



Financial
assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial
recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for
the purpose of selling in the near term. The Company’s financial derivative instruments, including embedded derivatives,
are also classified as held for trading. Gains or losses on financial derivative instruments are recognized in profit or loss.



| | b) | Loans and receivables
| | -- | ---------------------



Loans
and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
After initial measurement, loans and receivables are subsequently carried at amortized cost using the effective interest method
less any allowance for impairment. Amortized cost is calculated taking into account any discount or premium on acquisition and
includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognized in
the income statements when the loans and receivables are derecognized or impaired, as well as through the amortization process.
The Company’s cash and cash equivalents and accounts receivables are included in this financial asset category.











Financial
Liabilities



| | a) | Financial liabilities at fair value through profit or loss
| | -- | ----------------------------------------------------------



Financial
liabilities at fair value include financial liabilities held for trading and financial liabilities designated upon initial recognition
at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose
of selling in the near term. Financial derivative instruments, including embedded derivatives, are also classified as held for
trading. Gains and losses on liabilities held for trading are recognized in profit and loss.



| | b) | Other financial liabilities
| | -- | ---------------------------



Other
liabilities are recorded initially at fair value of the consideration received less any related transaction costs. Subsequent to
initial recognition, the balances are measured at amortized cost using the effective interest method. Gains and losses are recognized
in the income statement when the liabilities are derecognized and through amortization expense recorded as financing charges. The
Company’s accounts payable, accrued liabilities other than share based compensation, cash dividends payable, long-term debt
and convertible debentures are included within this financial liability category (also see item xiv).



| | iii) | Property, plant & equipment
| | ---- | ---------------------------



The initial cost of an asset
comprises its purchase price or construction costs directly attributable to bringing the asset into operation, the initial estimate
of the decommissioning obligation, and for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate
amount paid and the fair value of any other consideration given to acquire the asset. Gains and losses on disposal of an item of
property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant
and equipment and are recognized net in profit or loss.



Midstream assets



Midstream
facilities, including natural gas liquids storage facilities and natural gas liquids processing and extraction facilities are carried
at cost less accumulated depreciation and accumulated impairment losses and are depreciated at a component level on a straight-line
basis over the estimated service lives of the assets, which range from 25 to 35 years. Capital
assets related to pipelines are carried at cost less accumulated depreciation and accumulated impairment losses and are depreciated
at a component level using the straight-line method over their economic lives of approximately 35years. Vehicles and equipment of the Company’s subsidiary, Three Star Trucking Ltd.
are carried at cost less accumulated depreciation and accumulated impairment losses, and are depreciated on a 20 percent declining
balance basis over their estimated useful lives.



Minimum NGL product and cavern bottoms



The minimum NGL product is the
minimum volume of NGL product needed as a permanent inventory to maintain adequate reservoir pressures and deliverability rates
throughout the withdrawal season within the Company’s owned assets. All tanks, caverns or other storage reservoirs require
a minimum level of product to maintain a minimum pressure. Below this minimum pressure, products cannot be readily extracted for
sale. Minimum NGL product and cavern bottoms within the Company’s owned assets are presented as part of Midstream assets
within property, plant and equipment and are not depreciated.



Pipeline fills



Pipeline fills represent the
petroleum based product purchased for the purpose of charging the pipeline system and partially filling the petroleum product storage
tanks with an appropriate volume of petroleum products to enable the commercial operation of the facilities and pipeline for all
Company owned pipelines and tanks. Pipeline fills within Provident’s pipelines are presented as part of Midstream assets
within property, plant and equipment and are not depreciated. Holdings of pipeline fills in third party carriers are recorded as
product inventory.











Office equipment and other



Office
equipment and other assets are carried at cost less accumulated depreciation and accumulated impairment losses and are generally
depreciated on a straight-line basis over their estimated useful lives. The estimated useful lives for office equipment and other
assets areas follows:



|Office equipment               | 5 - 6 years
|------------------------------ | -----------
|Computer hardware & software   | 3 - 4 years
|Leasehold improvements & other | 10 years   



Major maintenance and repairs,
inspection, turnarounds and derecognition



Major maintenance and turnarounds
are tracked on a project basis and reviewed by management for potential capitalization. These costs are depreciated on a straight-line
basis over a period which represents the estimated period before the next planned maintenance or turnaround. All other maintenance
costs are expensed as incurred. Expenditures on major maintenance or repairs comprise the cost of replacement parts of assets,
inspection costs and overhaul costs. Where an asset or part of an asset that was separately depreciated and is now written off
is replaced and it is probable that future economic benefits associated with the item will flow to the Company, the expenditure
is capitalized. In instances where an asset part is not separately considered a component, the replacement value is used to estimate
the carrying amount of the replaced assets, and the previous carrying amount is immediately expensed.



Impairment of property,
plant and equipment



For operating assets, the impairment
test is performed at the cash generating unit level and for office equipment and other assets, the impairment test is performed
at the individual asset level. A cash generating unit is determined to be the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows from other assets or groups of assets.



Values of assets are reviewed
for impairment when indicators of such impairment exist. If any indication of impairment exists, an estimate of the asset’s
recoverable amount is calculated. The recoverable amount is determined as the higher of the fair value less costs to sell for the
asset and the asset’s value in use. If the carrying amount of the asset exceeds its recoverable amount, the asset is deemed
impaired and an impairment loss is recognized in profit or loss so as to reduce the carrying amount of the asset to its recoverable
amount.



For assets excluding goodwill,
an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses
may no longer exist or may have decreased. If such indication exists, the Company makes an estimate of the recoverable amount.
A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s
recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased
to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation,
had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss.



| | iv) | Intangible assets
| | --- | -----------------



Intangible assets acquired separately
are recognized at cost upon initial recognition. The cost of intangible assets acquired in a business combination is fair value
as at the date of acquisition. Following initial recognition, the cost model is applied requiring the intangible asset to be carried
at cost less any accumulated amortization and accumulated impairment losses. Provident will assess whether the useful lives of
intangible assets are finite or indefinite. Intangible assets with finite useful lives are assessed for impairment whenever there
is an indication that the intangible asset may be impaired and amortized on a straight-line basis over the estimated useful lives
of the assets, which range from a period of 12 to 15 years. The amortization expense of intangible assets
with finite lives is recognized in depreciation and amortization expense in profit or loss.











Gains
or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds,
if any, and the carrying amount of the asset and are recognized in profit or loss when the asset is derecognized.



| | v) | Joint arrangements
| | -- | ------------------



A joint arrangement exists when
a contractual arrangement exists that establishes shared decision making over the joint activities. Joint control is defined as
thecontractually agreed sharing of the power to govern the financial and operating policies
of a venture so as to obtain benefits from its activities.



Joint operations



A joint operation involves the
use of assets and other resources of the Company and other venturers rather than the establishment of a corporation, partnership,
or other entity. The Company recognizes in its financial statements the assets it controls and the liabilities it incurs and its
share of the revenue and expenses from the sale of goods or services by the joint operation
arrangement.



Joint assets



A joint asset involves joint
control and offers joint ownership by the Company and other venturers of assets contributed to or acquired for the purpose of the
joint arrangement, without the formation of a corporation, partnership, or other entity. The Company accounts for its share of
the joint assets, its share of jointly incurred liabilities with other venturers, any revenue from the sale or use of its share
of the output of the joint asset, and any expenses incurred in relation to its interest in the joint asset from the sale of goods
or services by the joint asset.



| | vi) | Leases
| | --- | ------



Operating
lease payments are recognized as an expense in the statement of operations on a straight-line basis over the lease term.



| | vii) | Borrowing costs
| | ---- | ---------------



Borrowing
costs directly attributable to the construction of assets that take a substantial period of time to get ready for their intended
use are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur.
Borrowing costs consist of interest and other costs that the Company incurs in connection with the borrowing of funds. The capitalization
rate used to determine the amount of borrowing costs to be capitalized is the weighted average interest
rate applicable to the Company’s outstanding borrowings during the period.



| | viii) | Product inventory
| | ----- | -----------------



Inventories
of product are valued at the lower of cost and net realizable value based on market prices. Cost is determined using the weighted
average costing method and comprises direct purchase costs, costs of production, extraction and fractionation costs, and transportation
costs. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense
and included in cost of goods sold in the period the write-down or loss occurs. Any reversals of write-downs are also included
in cost of goods sold.



| | ix) | Goodwill
| | --- | --------



Goodwill
is initially measured at cost which represents the excess of the cost of an acquired enterprise over the net of the amounts assigned
to assets acquired and liabilities assumed. After initial recognition, goodwill is measured at cost less any accumulated impairment
losses.



Goodwill
does not generate cash flows independently of other assets or groups of assets, and often contributes to the cash flows of multiple
cash generating units. As a result, for the purpose of impairment testing, goodwill is monitored at the operating business level.













When
a cash generating unit is disposed of, goodwill associated with the operation is included in the carrying amount of the operation
when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on
the relative values of the disposed operation.



Goodwill
is not amortized. Rather, Provident assesses goodwill for impairment at least annually and when circumstances indicate that the
carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the group of cash
generating units that comprise the Midstream business to which the goodwill relates. The recoverable amount is determined based
on a fair value less cost to sell calculation using cash flow projections from financial forecasts. If the carrying amount exceeds
the recoverable amount of the group of cash generating units that comprise the Midstream business, an impairment loss is recognized.
Impairment losses relating to goodwill cannot be reversed in future periods. Provident performs its annual impairment test of goodwill
as at December 31.



| | x) | Decommissioning liabilities
| | -- | ---------------------------



A decommissioning liability is
recognized when the Company has a present legal or constructive obligation to dismantle and remove a facility or an item of property,
plant and equipment and restore the site on which it is located, and when a reliable estimate of that liability can be made. Normally
an obligation arises for a new facility upon construction or installation. An obligation for decommissioning may also crystallize
during the period of operation of a facility through a change in legislation or a decision to terminate operations.



When a liability for decommissioning
cost is recognized, a corresponding amount equivalent to the provision is also recognized as part of the cost of the related property,
plant and equipment. The amount recognized represents management’s estimate of the present value of the estimated future
expenditures of dismantling, demolition and disposal of the facilities, remediation and restoration of the surface land as well
as an estimate of the future timing of the costs to be incurred. These costs are subsequently depreciated as part of the costs
of the facility or item of property, plant and equipment. Any changes in the estimated timing of the decommissioning or decommissioning
cost estimates are accounted for prospectively by recording an adjustment to the provision, and a corresponding adjustment to property,
plant and equipment.



The Company uses a nominal risk
free discount rate. The accretion of the decommissioning liability is included as a financing charge.



| | xi) | Share based compensation
| | --- | ------------------------



Provident
uses the fair value method of valuing the compensation plans whereby notional shares are granted to employees. The fair value of
these notional shares is estimated and recorded as share based compensation (a component of general and administrative expenses).
A portion relating to operational employees at field and plant locations is allocated to operating expense. The offsetting amount
is recorded as accrued liabilities or other long-term liabilities. A realization of the expense and a resulting reduction in cash
provided by operating activities occurs when a cash payment is made. The fair value measurement is determined at each reporting
date using information available at that date.



| | xii) | Share dilution
| | ---- | --------------



The dilutive effect of convertible
debentures is determined using the "if-converted" method whereby the outstanding debentures at the end of the period
are assumed to have been converted at the beginning of the period or at the time of issue if issued during the year. Amounts charged
to income or loss relating to the outstanding debentures are added back to net income for the dilution calculation.





| | xiii) | Income taxes
| | ----- | ------------



Current income tax



Current income tax assets and
liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation
authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the end
of the reporting period, and include any adjustment to tax payable in respect of previous
years.











Deferred income tax



Provident follows the liability
method for calculating deferred income taxes. Differences between the amounts reported in the financial statements of the Company
and its corporate subsidiaries and their respective tax bases are applied to tax rates in effect to calculate the deferred tax
asset or liability. The effect of any change in income tax rates is recognized in the current period income or equity, as appropriate.



Deferred
tax assets are recognized for deductible temporary differences and the carry-forward of unused tax losses and unused tax credits
to the extent that it is probable that taxable profits will be available against which the unused tax losses/credits can be utilized.



Deferred
income tax liabilities are provided in full for all taxable temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the financial statements.



Deferred
income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized
or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the balance sheet
date. Discounting of deferred tax assets and liabilities is not permitted.



Deferred
income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement of operations.



| | xiv) | Convertible debentures
| | ---- | ----------------------



The Company’s convertible
debentures are compound financial instruments consisting of a financial liability and an embedded conversion feature. In accordance
with IAS 39, the embedded derivatives are required to be separated from the host contracts and accounted for as stand-alone instruments.



Debentures containing a cash
conversion option allow Provident to pay cash to the converting holder of the debentures, at the option of the Company. As such,
the conversion feature is presented as a financial derivative liability within long-term financial derivative instruments. Debentures
without a cash conversion option are settled in shares on conversion, and therefore the conversion feature is presented within
equity, in accordance with its contractual substance.



On initial recognition and at
each reporting date, the embedded conversion feature is measured using a method whereby the fair value is measured using an option
pricing model. Subsequent to initial recognition, any unrealized gains or losses arising from fair value changes are recognized
through profit or loss in the statement of operations at each reporting date. On initial recognition, the debt component, net of
issue costs, is recorded as a financial liability and accounted for at amortized cost. Subsequent to initial recognition, the debt
component is accreted to the face value of the debentures using the effective interest rate method.  Upon conversion, the
corresponding portions of the debt and equity are removed from those captions and transferred to share capital.



| | xv) | Revenue recognition
| | --- | -------------------



Revenue
associated with the sale of product owned by Provident is recognized when title passes from Provident to its customer.



Revenues
associated with the services provided where Provident acts as agent are recorded on a net basis when the services are provided.
Revenues associated with the sale of natural gas liquids storage services are recognized when the services are provided.















| | xvi) | Foreign currency translation
| | ---- | ----------------------------



The consolidated financial statements
are presented in Canadian dollars, which is Provident’s functional and presentation currency. Provident’s subsidiaries
with foreign operations have a functional currency of Canadian dollars. Transactions in foreign currencies are initially recorded
at the functional currency rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies
are retranslated at the functional currency rate of exchange at the balance sheet date, non-monetary items measured in terms of
historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions, and
revenues and expenses are translated using the exchange rates as at the dates of the initial transactions, with the exception of
depreciation and amortization which is translated on the same basis as the related assets. Translation gains and losses are included
in income in the period in which they arise.



| | xvii) | Accounting standards and amendments issued but not yet applied
| | ----- | --------------------------------------------------------------



International Financial
Reporting Standards



Unless otherwise noted, the following
revised standards and amendments are effective for annual periods beginning on or after January 1, 2013 with earlier application
permitted. The Company has not yet assessed the impact of these standards and amendments or determined whether it will early adopt
them.



| | a) | IFRS 9 – Financial Instruments,was issued in November 2009 and addresses classification
and measurement of financial assets. It replaces the multiple category and measurement models in IAS 39 for debt instruments with
a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces
the models for measuring equity instruments. Such instruments are either recognized at fair value through profit or loss or at
fair value through other comprehensive income. Where equity instruments are measured at fair value through other comprehensive
income, dividends are recognized in profit or loss to the extent that they do not clearly represent a return of investment; however,
other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Requirements for financial liabilities
were added to IFRS 9 in October 2010 and they largely carried forward existing requirements in IAS 39 – Financial Instruments
– Recognition and Measurement,except that fair value changes due to credit risk for liabilities designated at fair value
through profit and loss are generally recorded in other comprehensive income. IFRS 9 requires application for annual periods beginning
on or after January 1, 2015, with earlier adoption permitted.



| | b) | IFRS 10 – Consolidated Financial Statements, requires
an entity to consolidate an investee when it has power over the investee, 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. Under existing IFRS,
consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities. IFRS 10 replaces SIC-12, Consolidation – Special Purpose Entitiesand parts of IAS 27
– Consolidated and Separate Financial Statements.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | IFRS 11 – Joint Arrangements, requires a
venturer 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 whereas for a joint operation the venturer will recognize its share of the assets, liabilities,
revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity
account for jointly controlled entities. IFRS 11 supersedes IAS 31 –Interests
in Joint Ventures, and SIC-13, Jointly Controlled Entities—Non-monetary Contributions by Venturers.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | IFRS 12 – Disclosure of Interests in Other Entities,
establishes disclosure requirements for interests in other entities, such as subsidiaries, joint arrangements, associates, and
unconsolidated structured entities. The standard carries forward existing disclosures and also introduces significant additional
disclosure that address the nature of, and risks associated with, an entity’s interests in other entities.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------









| | e) | IFRS 13 – Fair Value Measurement, is a comprehensive
standard for fair value measurement and disclosure for use across all IFRS standards. The new standard clarifies that fair value
is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market
participants, at the measurement date. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among
the specific standards requiring fair value measurements and does not always reflect a clear measurement basis or consistent disclosures.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f) | There have been amendments to existing standards, including IAS 27 –
Separate Financial Statements(“IAS 27”), and IAS 28 – Investments
in Associates and Joint Ventures(“IAS 28”). IAS 27 addresses accounting for subsidiaries, jointly controlled entities
and associates in non-consolidated financial statements. IAS 28 has been amended to include joint ventures in its scope and to
address the changes in IFRS 10 – 13.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g) | IAS 1 –Presentation of Financial Statements,
has been amended to require entities to separate items presented in Other Comprehensive Income (“OCI”) into two groups,
based on whether or not items may be recycled in the future. Entities that choose to present OCI items before tax will be required
to show the amount of tax related to the two groups separately. The amendment is effective for annual periods beginning on or after
July 1, 2012, with earlier application permitted.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h) | IFRS 7 –Financial Instruments: Disclosures,has been amended to include additional disclosure requirements in the reporting of transfer transactions and risk exposures
relating to transfers of financial assets and the effect of those risks on an entity’s financial position, particularly those
involving securitization of financial assets. The amendment is applicable for annual periods beginning on or after July 1, 2011,
with earlier application permitted.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i) | IAS 32 – Financial Instruments: Presentation, has been amended to clarify requirements
for offsetting of financial assets and financial liabilities. The amendment is applicable for annual periods beginning on or after
January 1, 2014, and is required to be applied retrospectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Significant accounting judgments, estimates and assumptions
| | -- | -----------------------------------------------------------



The
preparation of financial statements requires management to make judgments, estimates and assumptions based on currently available
information that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and judgments are continuously
evaluated and are based on management’s experience and other factors, including expectations of future events that are believed
to be reasonable under the circumstances. However, actual results could differ from those estimated. By their very nature, these
estimates are subject to measurement uncertainty and the effect on the financial statements of future periods could be material.



In
the process of applying the Company’s accounting policies, management has made the following judgments, estimates, and assumptions
which have the most significant effect on the amounts recognized in the consolidated financial statements:



Inventory



Due
to the inherent limitations in metering and the physical properties of storage caverns and pipelines, the determination of precise
volumes of natural gas liquids held in inventory at such locations is subject to estimation. Actual inventories of natural gas
liquids within storage caverns can only be determined by draining of the caverns.











Impairment
indicators



The
recoverable amounts of cash generating units and individual assets have been determined based on the higher of value in use calculations
and fair values less costs to sell. These calculations require the use of estimates and assumptions.



Goodwill
is tested for impairment annually and at other times when impairment indicators exist. Impairment is determined for goodwill by
assessing the recoverable amount of the group of cash generating units that comprise the Midstream business to which the goodwill
relates. In assessing goodwill for impairment, it is reasonably possible that the commodity price assumptions, sales volumes, supply
costs, discount rates, and tax rates may change which may then impact the recoverable amount of the group of cash generating units
which comprise the Midstream business and may then require a material adjustment to the carrying value of goodwill.



For
the Midstream business, it is also reasonably possible that these assumptions may change which may then impact the recoverable
amounts of the cash generating units and may then require a material adjustment to the carrying value of its tangible and intangible
assets. The Company monitors internal and external indicators of impairment relating to its tangible and intangible assets.





Decommissioning and restoration costs



Decommissioning and restoration
costs will be incurred by the Company at the end of the operating life of certain of the Company’s facilities and properties.
The ultimate decommissioning and restoration costs are uncertain and cost estimates can vary in response to many factors including
changes to relevant legal and regulatory requirements, the emergence of new restoration techniques or experience at other production
sites. The expected timing and amount of expenditure can also change, for example, in response to changes in laws and regulations
or their interpretation. In determining the amount of the provision, assumptions and estimates are also required in relation to
discount rates.



The decommissioning provisions
have been created based on Provident’s internal estimates. Assumptions, based on the current economic environment, have been
made which management believe are a reasonable basis upon which to estimate the future liability. These estimates are reviewed
regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend
upon future market prices for the necessary decommissioning work required which will reflect market conditions at the relevant
time.



Income taxes



The Company follows the liability
method for calculating deferred income taxes. Differences between the amounts reported in the financial statements of the Company
and its subsidiaries and their respective tax bases are applied to tax rates in effect to calculate the deferred tax liability.
In addition, the Company recognizes the future tax benefit related to deferred income tax assets to the extent that it is probable
that the deductible temporary differences will reverse in the foreseeable future. Assessing the recoverability of deferred income
tax assets requires the Company to make significant estimates related to the expectations of future cash flows from operations
and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly
from estimates, the ability of the Company to realize the deferred tax assets and liabilities recorded at the balance sheet date
could be impacted. Additionally, future changes in tax laws in the jurisdictions in which the Company operates could limit the
ability of the Company to obtain tax deductions in future periods.



Contingencies



By their nature, contingencies
will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently involves
the exercise of significant judgment and estimates of the outcome of future events.











Share based compensation



The
Company uses the fair value method of valuing compensation expense associated with the Company’s share based compensation
plan whereby notional shares are granted to employees. Estimating fair value requires determining the most appropriate valuation
model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. The assumptions are discussed
innote 14.



Financial derivative instruments



The Company’s financial
derivative instruments are initially recognized on the statement of financial position at fair value based on management’s
estimate of commodity prices, share price and associated volatility, foreign exchange rates, interest rates, and the amounts that
would have been received or paid to settle these instruments prior to maturity given future market prices and other relevant factors.



Property, plant and equipment
and intangible assets



Midstream facilities, including
natural gas liquids storage and terminalling facilities and natural gas liquids processing and extraction facilities are carried
at cost and depreciated over the estimated service lives of the assets. Intangible assets are amortized over the estimated useful
lives of the assets. Capital assets related to pipelines and office equipment are carried at cost and depreciated over their economic
lives.



Management periodically reviews
the estimated useful lives of property, plant and equipment and intangible assets. These estimates are based on management’s
experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
However, actual results could differ from those estimated.



| | 5. | Transition to IFRS
| | -- | ------------------



Provident has prepared its financial
statements in accordance with Canadian GAAP for all periods up to and including the year ended December 31, 2010. These financial
statements for the year ended December 31, 2011 comply with IFRS applicable for periods beginning on or after January 1, 2011 and
the significant accounting policies meeting those requirements are described in note 3.



The effect of the Company’s
transition to IFRS are summarized in this note as follows:



| | i)  | Transition elections;                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ii) | Reconciliation of the consolidated statements of financial position, including shareholders’
equity, as previously reported under Canadian GAAP to IFRS; and

| | iii) | Reconciliation of the consolidated statements of operations as previously reported under Canadian
GAAP to IFRS.
| | ---- | ---------------------------------------------------------------------------------------------------------------



| | i) | Transition elections
| | -- | --------------------



Provident has prepared its IFRS
opening consolidated statement of financial position as at January 1, 2010, its date of transition to IFRS. In the preparation
of this opening statement of financial position, IFRS 1 allows first-time adopters certain exemptions from the general requirement
to apply IFRS retrospectively. Provident has applied the following transition exceptions and exemptions to full retrospective application
of IFRS:



| | a) | Business combinations - Provident has elected not to apply IFRS 3 retrospectively to business combinations
that occurred prior to transition to IFRS on January 1, 2010. Rather, the Company has elected to apply IFRS 3 relating to business
combinations prospectively from January 1, 2010. As such previous Canadian GAAP balances relating to business combinations entered
into before that date, including goodwill, have been carried forward without adjustment.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------











| | b) | Changes in decommissioning, restoration and similar liabilities – IFRIC 1 Changes in Existing
Decommissioning, Restoration and Similar Liabilities requires specified changes in a decommissioning, restoration or similar
liabilities to be added to or deducted from the cost of the asset to which it relates. The adjusted depreciable amount of the asset
is then depreciated prospectively over its remaining useful life. However, IFRS 1 allows Provident to measure decommissioning,
restoration and similar liabilities as at the date of transition to IFRS in accordance with IAS 37 rather than reflecting the impact
of changes in such liabilities that occurred before the date of transition to IFRS.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | Property, plant and equipment – The deemed cost of oil and natural gas properties at January
1, 2010, the date of transition to IFRS, was determined by reference to IFRS 1 - First-time Adoption of International Financial
Reporting Standards. Upon adoption, the Company has elected to apply the full cost exemption to measure oil and gas assets
in the development or production phases by allocating the carrying value determined under Canadian GAAP to cash generating units
pro rata using proved and probable reserve values on the date of transition. In addition, any differences arising from the adoption
of IFRS from previous Canadian GAAP for decommissioning liabilities related to the Upstream business have been recognized in accumulated
deficit on the transition date in accordance with IFRS 1.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | Arrangements containing leases – IFRS 1 allows a first-time adopter to apply the transitional
provisions in IFRIC 4 – Determining whether an Arrangement contains a Lease, which allows a first-time adopter to
determine whether an arrangement existing at the date of transition to IFRS contains a lease on the basis of facts and circumstances
existing at that date. As a first-time adopter, Provident made the same determination of whether an arrangement contained a lease
in accordance with previous Canadian GAAP as that required by IFRIC 4 but at a date other than that required by IFRIC 4.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------









| |     |                                                                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ii) | The following is a reconciliation of the consolidated statements of financial position, including Shareholders’ equity, as previously
reported under Canadian GAAP to IFRS:









|($ 000s)                                      |  |            |  | December 31, 2010 |   | January 1, 2010 |  
|--------------------------------------------- |  | ---------- |  | ----------------- | - | --------------- | -
|                                              |  |            |  |                   |   |                 |  
|                                              |  | Note       |  | CDN GAAP          |   | Adj             |  
|Assets                                        |  |            |  |                   |   |                 |  
|Current assets                                |  |            |  |                   |   |                 |  
|Cash and cash equivalents                     |  |            |  | 4,400             |   | -               |  
|Accounts receivable                           |  |            |  | 206,631           |   | -               |  
|Petroleum product inventory                   |  | A          |  | 83,868            |   | 22,785          |  
|Prepaid expenses
    and other current assets |  |            |  | 2,539             |   | -               |  
|Financial derivative instruments              |  |            |  | 487               |   | -               |  
|Assets held for sale                          |  | I          |  | -                 |   | -               |  
|                                              |  |            |  | 297,925           |   | 22,785          |  
|                                              |  |            |  |                   |   |                 |  
|Investments                                   |  |            |  | -                 |   | -               |  
|Exploration and evaluation assets             |  | I          |  | -                 |   | -               |  
|Property, plant and equipment                 |  | A, B, D, I |  | 832,250           |   | 1,540           |  
|Intangible assets                             |  |            |  | 118,845           |   | -               |  
|Goodwill                                      |  |            |  | 100,409           |   | -               |  
|Deferred income taxes                         |  | G          |  | 50,375            |   | 22,324          |  
|                                              |  |            |  | 1,399,804         |   | 46,649          |  
|Liabilities                                   |  |            |  |                   |   |                 |  
|Current liabilities                           |  |            |  |                   |   |                 |  
|Accounts
    payable and accrued liabilities  |  |            |  | 227,944           |   | -               |  
|Cash dividends payable                        |  |            |  | 12,646            |   | -               |  
|Current portion of long-term debt             |  |            |  | 148,981           |   | -               |  
|Financial derivative instruments              |  |            |  | 37,849            |   | -               |  
|Liabilities held for sale                     |  | I          |  | -                 |   | -               |  
|                                              |  |            |  | 427,420           |   | -               |  
|                                              |  |            |  |                   |   |                 |  
|Long-term debt - bank facilities and other    |  |            |  | 72,882            |   | -               |  
|Long-term debt - convertible debentures       |  |            |  | 251,891           |   | -               |  
|Decommissioning liabilities                   |  | B, I       |  | 22,057            |   | 35,175          |  
|Long-term financial derivative instruments    |  | C          |  | 19,601            |   | 9,586           |  
|Other long-term liabilities                   |  | F          |  | 18,735            |   | 899             |  
|Deferred income taxes                         |  | G, I       |  | -                 |   | -               |  
|                                              |  |            |  | 812,586           |   | 45,660          |  
|                                              |  |            |  |                   |   |                 |  
|Shareholders’ equity                          |  |            |  |                   |   |                 |  
|Unitholders' contributions                    |  |            |  | 2,866,268         |   | -               |  
|Convertible debentures equity component       |  | C          |  | 25,092            |   | (25,092         | )
|Other equity                                  |  | C          |  | 2,953             |   | (2,269          | )
|Accumulated deficit                           |  | H          |  | (2,307,095        | ) | 28,350          |  
|                                              |  |            |  | 587,218           |   | 989             |  
|                                              |  |            |  | 1,399,804         |   | 46,649          |  





















| | iii) | The following is a reconciliation of the consolidated statement of operations as previously reported under Canadian GAAP to IFRS:
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------







|                                                                      |  |       |      |  | Year ended        | 
|--------------------------------------------------------------------- |  | ----- | ---- |  | ----------------- | 
|($000s)                                                               |  |       |      |  | December 31, 2010 | 
|                                                                      |  | Notes |      |  | CDN GAAP          | 
|                                                                      |  |       |      |  |                   | 
|Product sales and service revenue                                     |  |       |      |  |                   | 
|Realized loss on buyout of financial derivative instruments           |  |       |      |  |                   | 
|Unrealized gain offsetting buyout of financial derivative instruments |  |       |      |  |                   | 
|Loss on financial derivative instruments                              |  |       |      |  |                   | 
|                                                                      |  |       |      |  |                   | 
|                                                                      |  |       |      |  |                   | 
|Expenses                                                              |  |       |      |  |                   | 
|Cost of goods sold                                                    |  |       | A    |  |                   | 
|Production, operating and maintenance                                 |  |       |      |  |                   | 
|Transportation                                                        |  |       |      |  |                   | 
|Depreciation and amortization                                         |  |       | D, E |  |                   | 
|General and administrative                                            |  |       |      |  |                   | 
|Strategic review and restructuring                                    |  |       |      |  |                   | 
|Financing charges                                                     |  |       | B, E |  |                   | 
|Loss on revaluation of conversion feature of convertible debentures   |  |       | C    |  |                   | 
|Other income and foreign exchange                                     |  |       |      |  |                   | 
|                                                                      |  |       |      |  |                   | 
|Income from continuing operations before taxes                        |  |       |      |  |                   | 
|Current tax recovery                                                  |  |       |      |  |                   | 
|Deferred income tax recovery                                          |  |       | G    |  |                   | 
|                                                                      |  |       |      |  |                   | 
|Net income for the year from continuing operations                    |  |       |      |  |                   | 
|Net loss from discontinued operations                                 |  |       | I    |  |                   | 
|Net loss and comprehensive loss for the year                          |  |       |      |  |                   | 



Explanatory notes to the IFRS 1 transition adjustments:



Note: The following items address the transition
adjustments applicable to continuing operations. For a description of the transition adjustments applicable to discontinued operations,
see item I.



| | A. | Petroleum product inventory – Product inventory
required to be stored in third party pipelines as pipeline fill was recorded in property, plant and equipment (“PP&E”)
under previous Canadian GAAP. Under IFRS, these amounts are recorded as part of petroleum product inventory. Upon transition to
IFRS, $21.5 million has been transferred from PP&E to petroleum product inventory. The additional inventory has been processed
through the inventory costing calculations with a corresponding reduction on cost of goods sold of $1.3 million for the year ended
December 31, 2010. Inventory required for linefill and cavern bottoms in assets owned by Provident remains capitalized in PP&E.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | B. | Decommissioning liabilities – The amounts recorded
under previous Canadian GAAP were the estimated future cash flows discounted at the Company’s average credit-adjusted risk
free rate of seven percent. Under IFRS, the amounts are discounted using a risk free rate of four percent at January 1, 2010 and
December 31, 2010. Provident recorded an adjustment to increase the decommissioning liabilities for continuing operations by $34.4
million with an offsetting increase in PP&E of $23.3 million and accumulated deficit of $11.1 million representing the pre-2010
earnings impact of this adjustment. The impact of this adjustment on 2010 annual earnings was additional accretion expense $0.7
million.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | C. | Convertible debentures equity component – Under previous
Canadian GAAP, the portion of initial value associated with the conversion feature of a convertible debenture is classified as
a separate component of equity. As a consequence of Provident’s status as an income Trust in 2010, IFRS requires the conversion
feature of convertible debentures to be classified as a financial instrument on transition and marked-to-market each reporting
period. Since the conversion feature of the debentures outstanding on January 1, 2010 was sufficiently out-of-the-money, the fair
value of this feature was determined to be nil. As a result, the Canadian GAAP balance of the equity component of convertible debentures
at January 1, 2010 of $15.9 million, as well as $2.3 million of related balances in other equity, have been reclassified to accumulated
deficit on the transition date.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------











In addition, in the fourth quarter
of 2010, a new convertible debenture was issued by Provident. Under previous Canadian GAAP, the portion of the initial value of
the debenture associated with the conversion feature of $9.2 million was recorded as a separate component of equity. Under IFRS,
the value of this conversion feature has been reclassified to long-term financial derivative instruments in the statement of financial
position. Under IFRS, Provident is also required to mark-to-market this conversion feature at each reporting period, which resulted
in the Company recording an unrealized loss of approximately $0.4 million in the fourth quarter of 2010 in loss on revaluation
of conversion feature of convertible debentures in the statement of operations with a corresponding offset to long-term financial
derivative instruments.



| | D. | Depreciation and amortization – IFRS requires that depreciation
be calculated at a component level, which resulted in additional depreciation expense from continuing operations of $0.7 million
for the year ended December 31, 2010.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | E. | Financing charges –Under IFRS, accretion expense associated
with decommissioning liabilities is recorded as a financing charge. Under previous Canadian GAAP, accretion expense from continuing
operations of $1.9 million for the year ended December 31, 2010 related to asset retirement obligations was recorded under depletion,
depreciation and accretion expense. Accordingly, these amounts have been reclassified from depletion, depreciation and accretion
expense to financing charges. As a result of this change, the caption depletion, depreciation and accretion expense has been changed
to be depreciation and amortization expense.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The balances recorded under
previous Canadian GAAP as interest on bank debt and interest and accretion on convertible debentures are now included under financing
charges under IFRS.



| | F. | Other long-term liabilities – Included in other long-term
liabilities are obligations associated with residual Upstream properties. Under previous Canadian GAAP, these obligations were
calculated using an average credit-adjusted risk free rate of seven percent. Under IFRS, the obligations are discounted using a
risk free rate which resulted in Provident recording an adjustment of $0.9 million as at December 31, 2010.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | G. | Deferred income taxes – The transition adjustment associated
with continuing operations was $13.1 million. This IFRS difference is primarily due to the tax rate applied to temporary differences
associated with SIFT entities. Under previous Canadian GAAP, Provident used the rate expected to be in effect when the timing differences
reverse. However, under IFRS, Provident is required to use the highest rate applicable for undistributed earnings in these entities.
In addition, IFRS requires the calculation of deferred taxes related to foreign exchange differences on balances denominated in
foreign currencies. The 2010 annual net income from continuing operations impact of IFRS differences on deferred taxes was an additional
recovery of $9.2 million, resulting in a total adjustment of $22.3 million at December 31, 2010.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Upon conversion to a corporation
on January 1, 2011, all timing differences are now measured under IFRS using a corporate tax rate and, as a result, the majority
of the IFRS differences at December 31, 2010 for deferred income taxes has reversed through first quarter 2011 net earnings as
a deferred tax expense.









| | H. | Accumulated deficit – The following is a summary of transition
adjustments to the Company’s accumulated deficit from Canadian GAAP to IFRS:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                               |  |      |      |  | 2010        |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---- |  | ----------- | -
|($ millions)                                                                                                                   |  | Note |      |  | December 31 |  
|                                                                                                                               |  |      |      |  |             |  
|Accumulated deficit as reported under Canadian GAAP                                                                            |  |      |      |  |             | $
|IFRS transition adjustments increase (decrease) on opening statement of financial position related to continuing operations:   |  |      |      |  |             |  
|Petroleum product inventory                                                                                                    |  |      | A    |  |             |  
|Decommissioning liabilities                                                                                                    |  |      | B    |  |             |  
|Convertible debentures                                                                                                         |  |      | C    |  |             |  
|Other long-term liabilities                                                                                                    |  |      | F    |  |             |  
|Deferred income taxes                                                                                                          |  |      | G    |  |             |  
|                                                                                                                               |  |      |      |  |             |  
|                                                                                                                               |  |      |      |  |             |  
|IFRS transition adjustments increase (decrease) on opening statement of financial position related to discontinued operations: |  |      |      |  |             |  
|Impairment on Upstream oil and gas properties                                                                                  |  |      | I    |  |             |  
|Decommissioning liabilities                                                                                                    |  |      | I    |  |             |  
|Deferred income taxes                                                                                                          |  |      | I    |  |             |  
|                                                                                                                               |  |      |      |  |             |  
|Total net impact on opening statement of financial position                                                                    |  |      |      |  |             | $
|                                                                                                                               |  |      |      |  |             |  
|IFRS transition adjustments increase (decrease) net income from continuing operations:                                         |  |      |      |  |             |  
|Cost of goods sold                                                                                                             |  |      | A    |  |             | $
|Loss on financial derivative instruments                                                                                       |  |      | C    |  |             |  
|Depreciation and amortization                                                                                                  |  |      | D, E |  |             |  
|Financing charges                                                                                                              |  |      | B, E |  |             |  
|Deferred income taxes                                                                                                          |  |      | G    |  |             |  
|                                                                                                                               |  |      |      |  |             |  
|IFRS transition adjustments increase (decrease) net income from discontinued operations:                                       |  |      |      |  |             |  
|Depletion expense                                                                                                              |  |      | I    |  |             |  
|Loss on sale of oil and gas properties                                                                                         |  |      | I    |  |             |  
|Loss on sale of discontinued operations                                                                                        |  |      | I    |  |             |  
|Deferred income taxes                                                                                                          |  |      | I    |  |             |  
|                                                                                                                               |  |      |      |  |             |  
|Total net impact on statement of operations                                                                                    |  |      |      |  |             | $
|Accumulated deficit as reported under IFRS                                                                                     |  |      |      |  |             | $





| | I. | Discontinued operations – There are a number of
IFRS adjustments associated with the Upstream business impacting both the statement of financial position on the date of transition,
January 1, 2010 and 2010 net earnings from discontinued operations. However, the total impact of the combined differences related
to the Upstream business on Provident’s equity balance at December 31, 2010 was nil. Explanatory notes to the IFRS 1 transition
reconciliations for discontinued operations are summarized in the following table:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------











|                                                                                            |  |      |   |  | 2010        |  
|------------------------------------------------------------------------------------------- |  | ---- | - |  | ----------- | -
|Discontinued operations ($ millions)                                                        |  | Note |   |  | December 31 |  
|IFRS transition adjustments increase (decrease) on opening statement of financial position: |  |      |   |  |             |  
|Impairment on Upstream oil and gas properties                                               |  |      | 1 |  |             | $
|Decommissioning liabilities                                                                 |  |      | 2 |  |             |  
|Deferred income taxes                                                                       |  |      | 5 |  |             |  
|                                                                                            |  |      |   |  |             |  
|IFRS adjustments increase (decrease) net income on statement of operations:                 |  |      |   |  |             |  
|Depletion expense                                                                           |  |      | 1 |  |             |  
|Loss on sale of oil and gas properties                                                      |  |      | 3 |  |             |  
|Loss on sale of discontinued operations                                                     |  |      | 6 |  |             |  
|Deferred income taxes                                                                       |  |      | 5 |  |             |  
|                                                                                            |  |      |   |  |             |  
|Net impact on accumulated deficit                                                           |  |      |   |  |             | $



| | 1) | Property, plant and equipment –On transition to
IFRS, Provident elected to use the IFRS 1 exemption for its Upstream oil & gas assets, allowing for the allocation of historical
book values as reported under previous Canadian GAAP to the individual cash generating units on a pro rata basis. If this election
is made, each of the cash generating units is required to be tested for impairment. Any impairment loss is recorded in accumulated
deficit on the transition date. Accordingly, Provident recorded a $391.5 million impairment loss on transition to IFRS. The lower
carrying value for the Upstream assets on transition resulted in a lower loss on sale of the business in the second quarter of
2010 compared to previous Canadian GAAP.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, upon transition to
IFRS, Provident had the option to continue to calculate depletion similar to previous Canadian GAAP using a reserve base of only
proved reserves or to use proved plus probable reserves. Provident has elected to use proved plus probable reserves under IFRS.
The combination of a lower carrying value due to the impairment loss on transition and the larger depletion base resulted in lower
depletion charges related to the Upstream business under IFRS of $40.2 million for the year ended December 31, 2010. This difference
is also offset in the loss on sale of the Upstream business in the second quarter of 2010.



| | 2) | Decommissioning liabilities – The amounts recorded
under previous Canadian GAAP were the estimated future cash flows discounted at the Company’s average credit-adjusted risk
free rate of seven percent. Under IFRS, the amounts are discounted using a risk free rate of four percent. The adjustment related
to the Upstream business, was an increase of the decommissioning liabilities by $36.1 million with the offset to accumulated deficit.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Assets held for sale – IFRS requires that assets held for
sale, be presented separately on the statement of financial position. Previous Canadian GAAP made an exception to this rule for
certain upstream oil and gas related transactions. The sale of West Central Alberta assets held in the Upstream business was announced
in December 2009. Therefore, assets and associated decommissioning liabilities of $186.4 million and $2.8 million, respectively,
related to this transaction have been presented separately on the statement of financial position, at their fair value, determined
with reference to the negotiated sales price adjusted for earnings between December 31, 2009 and the date of closing on March 1,
2010. This transaction resulted in a loss on sale of $8.1 million in the first quarter of 2010.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4) | Exploration and evaluation (“E&E”) expenditures –
IFRS requires that E&E expenditures be presented separately from PP&E on the statement of financial position. Provident
has segregated approximately $24.7 million of its PP&E in accordance with the IFRS 1 full cost exemption as at January 1, 2010.
In the first and second quarters of 2010, an additional $0.8 million and $0.2 million was incurred, respectively, which also was
classified as E&E. The costs consist primarily of land that relates to Upstream undeveloped properties which has not been depleted
but rather is assessed for impairment when indicators suggest the possibility of impairment.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------











| | 5) | Taxes – The transition adjustment for deferred income taxes
on transition to IFRS is primarily due to changes in the carrying amount of Upstream assets on the January 1, 2010 statement of
financial position and the corresponding impact on temporary differences used to determine the deferred income tax balance. As
a result, an adjustment of $111.7 million was recorded with an offset amount recorded in accumulated deficit. Additionally, a reduction
in deferred income tax recoveries of $12.2 million was incurred for the year ended December 31, 2010 primarily as a result of lower
depletion expense under IFRS.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| | 6) | Loss on sale of discontinued operations – The loss on sale of
discontinued operations was impacted by each of the IFRS adjustments 1 through 5 listed above, resulting in an IFRS adjustment
to the loss on sale of discontinued operations of $296.0 million, net of tax, for the year ended December 31, 2010.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | Acquisition
| | -- | -----------



Acquisition of Three Star
Trucking Ltd.



On October 3, 2011, Provident
acquired a two-thirds ownership interest in Three Star Trucking Ltd. (“Three Star”) for consideration of 944,828 Provident
common shares with an ascribed value of $7.6 million and cash consideration of $7.9 million. Three Star is a Saskatchewan based
oilfield hauling company serving Bakken-area crude oil producers. Provident retains the option to purchase the remaining one-third
interest in Three Star after three years from the closing date.



The following table summarizes
the consideration paid for Three Star, the fair value of assets acquired, liabilities assumed and the non-controlling interest
at the acquisition date.



|Consideration                                                              |  |   |         |  
|-------------------------------------------------------------------------- |  | - | ------- | -
|Cash                                                                       |  | $ | 7,852   |  
|Shares                                                                     |  |   | 7,606   |  
|Total consideration                                                        |  | $ | 15,458  |  
|                                                                           |  |   |         |  
|Recognized amounts of identifiable assets acquired and liabilities assumed |  |   |         |  
|Working capital                                                            |  | $ | 2,350   |  
|Property, plant and equipment                                              |  |   | 22,530  |  
|Deferred income taxes                                                      |  |   | (1,879  | )
|Long-term debt                                                             |  |   | (10,345 | )
|Redemption liability                                                       |  |   | (9,054  | )
|Other equity                                                               |  |   | 9,054   |  
|Total identifiable net assets                                              |  |   | 12,656  |  
|                                                                           |  |   |         |  
|Non-controlling interest                                                   |  |   | (4,219  | )
|Goodwill                                                                   |  |   | 7,021   |  
|Total                                                                      |  | $ | 15,458  |  



Acquisition-related costs of
$0.1 million have been charged to general and administrative expenses in the consolidated statement of operations.



The fair value of the 944,828
common shares issued as part of the consideration paid for Three Star was based on the closing share price on October 3, 2011.



On acquisition, the non-controlling
interest was measured at the proportionate interest in the identifiable net assets. No goodwill was attributed to non-controlling
interest on acquisition.











Provident has the option to
purchase (and the non-controlling interest has the right to sell) the remaining one-third interest in Three Star after the third
anniversary of the acquisition date (October 3, 2014). The put price to be paid by Provident for the residual interest upon exercise
is based on a multiple of Three Star’s earnings during the three-year period prior to exercise, adjusted for associated capital
expenditures and debt. On acquisition, Provident recorded a $9.1 million redemption liability associated with this put option with
an offset to other equity. The redemption liability will be accreted and subsequently fair valued at each reporting date with changes
in the value flowing through profit and loss. At December 31, 2011 the fair value of the redemption liability was determined to
be $7.5 million, resulting in an unrealized gain of $1.5 million for the year ended December 31, 2011 recorded in loss on revaluation
of conversion feature of convertible debentures and redemption liability on the consolidated statement of operations.



The revenue included in the
consolidated statement of operations since October 3, 2011 contributed by Three Star was $19.8 million, of which $13.2 million
and $6.6 million were attributable to the owners of the parent and non-controlling interest, respectively. In addition, net income
included in the consolidated statement of operations since October 3, 2011 contributed by Three Star was $1.3 million, of which
$0.9 million and $0.4 million were attributable to the owners of the parent and non-controlling interest, respectively.



| | 7. | Petroleum product inventory
| | -- | ---------------------------



When inventories are sold, the
carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. For
the year ended December 31, 2011, the Company recognized $1,517 million (2010 - $1,397 million) of product inventory as an expense
in cost of goods sold.





| | 8. | Property, plant and equipment
| | -- | -----------------------------



|($000s)                                   |  |   | Midstream
 assets |   |  |   | Office
 equipment
 & other |   |  |   | Subtotal  |   |  |   | Oil &
 natural gas properties |   |  |   | Total      |  
|----------------------------------------- |  | - | ----------------- | - |  | - | -------------------------- | - |  | - | --------- | - |  | - | ----------------------------- | - |  | - | ---------- | -
|Cost:                                     |  |   |                   |   |  |   |                            |   |  |   |           |   |  |   |                               |   |  |   |            |  
|Balance as at January 1, 2010             |  | $ | 886,442           |   |  | $ | 47,174                     |   |  | $ | 933,616   |   |  | $ | 2,682,180                     |   |  | $ | 3,615,796  |  
|Additions                                 |  |   | 74,445            |   |  |   | 673                        |   |  |   | 75,118    |   |  |   | 31,152                        |   |  |   | 106,270    |  
|Acquisitions                              |  |   | -                 |   |  |   | -                          |   |  |   | -         |   |  |   | 5,117                         |   |  |   | 5,117      |  
|Change in decommissioning provision       |  |   | 3,902             |   |  |   | -                          |   |  |   | 3,902     |   |  |   | 7,292                         |   |  |   | 11,194     |  
|Disposals & Other                         |  |   | (123              | ) |  |   | (2,356                     | ) |  |   | (2,479    | ) |  |   | (2,725,741                    | ) |  |   | (2,728,220 | )
|Balance as at December 31, 2010           |  |   | 964,666           |   |  |   | 45,491                     |   |  |   | 1,010,157 |   |  |   | -                             |   |  |   | 1,010,157  |  
|Additions                                 |  |   | 131,954           |   |  |   | 813                        |   |  |   | 132,767   |   |  |   | -                             |   |  |   | 132,767    |  
|Acquisitions                              |  |   | 22,530            |   |  |   | -                          |   |  |   | 22,530    |   |  |   | -                             |   |  |   | 22,530     |  
|Capitalized interest                      |  |   | 1,348             |   |  |   | -                          |   |  |   | 1,348     |   |  |   | -                             |   |  |   | 1,348      |  
|Change in decommissioning provision       |  |   | 25,494            |   |  |   | -                          |   |  |   | 25,494    |   |  |   | -                             |   |  |   | 25,494     |  
|Removal of fully depreciated assets       |  |   | (1,765            | ) |  |   | (23,601                    | ) |  |   | (25,366   | ) |  |   | -                             |   |  |   | (25,366    | )
|Disposals & Other                         |  |   | (13               | ) |  |   | 193                        |   |  |   | 180       |   |  |   | -                             |   |  |   | 180        |  
|Balance as at December 31, 2011           |  | $ | 1,144,214         |   |  | $ | 22,896                     |   |  | $ | 1,167,110 |   |  | $ | -                             |   |  | $ | 1,167,110  |  
|                                          |  |   |                   |   |  |   |                            |   |  |   |           |   |  |   |                               |   |  |   |            |  
|Accumulated depletion and depreciation:   |  |   |                   |   |  |   |                            |   |  |   |           |   |  |   |                               |   |  |   |            |  
|Balance as at January 1, 2010             |  | $ | 116,656           |   |  | $ | 27,786                     |   |  | $ | 144,442   |   |  | $ | 2,049,198                     |   |  | $ | 2,193,640  |  
|Depletion and depreciation for the period |  |   | 25,729            |   |  |   | 7,056                      |   |  |   | 32,785    |   |  |   | 123,940                       |   |  |   | 156,725    |  
|Disposals                                 |  |   | -                 |   |  |   | (860                       | ) |  |   | (860      | ) |  |   | (2,173,138                    | ) |  |   | (2,173,998 | )
|Balance as at December 31, 2010           |  |   | 142,385           |   |  |   | 33,982                     |   |  |   | 176,367   |   |  |   | -                             |   |  |   | 176,367    |  
|Depreciation for the period               |  |   | 26,522            |   |  |   | 5,381                      |   |  |   | 31,903    |   |  |   | -                             |   |  |   | 31,903     |  
|Removal of fully depreciated assets       |  |   | (1,765            | ) |  |   | (23,601                    | ) |  |   | (25,366   | ) |  |   | -                             |   |  |   | (25,366    | )
|Disposals & Other                         |  |   | (11               | ) |  |   | -                          |   |  |   | (11       | ) |  |   | -                             |   |  |   | (11        | )
|Balance as at December 31, 2011           |  | $ | 167,131           |   |  | $ | 15,762                     |   |  | $ | 182,893   |   |  | $ | -                             |   |  | $ | 182,893    |  
|                                          |  |   |                   |   |  |   |                            |   |  |   |           |   |  |   |                               |   |  |   |            |  
|Net book value:                           |  |   |                   |   |  |   |                            |   |  |   |           |   |  |   |                               |   |  |   |            |  
|Net book value as at January 1, 2010      |  | $ | 769,786           |   |  | $ | 19,388                     |   |  | $ | 789,174   |   |  | $ | 632,982                       |   |  | $ | 1,422,156  |  
|Net book value as at December 31, 2010    |  | $ | 822,281           |   |  | $ | 11,509                     |   |  | $ | 833,790   |   |  | $ | -                             |   |  | $ | 833,790    |  
|Net book value as at December 31, 2011    |  | $ | 977,083           |   |  | $ | 7,134                      |   |  | $ | 984,217   |   |  | $ | -                             |   |  | $ | 984,217    |  



As at December 31, 2011, Midstream assets
include land of $4.9 million (December 31, 2010 ̶ $4.9 million) and products required for line-fill and cavern bottoms of
$22.8 million (2010 ̶ $22.8 million) which are excluded from costs subject to depreciation.











Capitalized borrowing costs



The
amount of borrowing costs directly attributable to the construction of assets, such as storage caverns and related facilities,
which take a substantial period of time to get ready for their intended use capitalized during the period ended December 31, 2011
was $1.3 million (2010 – nil). The rate used to calculate the amount of borrowing costs capitalized was the weighted average
interest rate applicable to the Company’s outstanding borrowings during the period.



| | 9. | Intangible assets
| | -- | -----------------



|($000s)                                |  |   | Midstream contracts and customer relationships |   |  |   | Other intangible assets |  |  |   | Total   |  
|-------------------------------------- |  | - | ---------------------------------------------- | - |  | - | ----------------------- |  |  | - | ------- | -
|Cost:                                  |  |   |                                                |   |  |   |                         |  |  |   |         |  
|Balance as at January 1, 2010          |  | $ | 183,100                                        |   |  | $ | 16,308                  |  |  | $ | 199,408 |  
|Balance as at December 31, 2010        |  |   | 183,100                                        |   |  |   | 16,308                  |  |  |   | 199,408 |  
|Removal of fully amortized assets      |  |   | (21,100                                        | ) |  |   | -                       |  |  |   | (21,100 | )
|Balance as at December 31, 2011        |  | $ | 162,000                                        |   |  | $ | 16,308                  |  |  | $ | 178,308 |  
|                                       |  |   |                                                |   |  |   |                         |  |  |   |         |  
|Accumulated amortization:              |  |   |                                                |   |  |   |                         |  |  |   |         |  
|Balance as at January 1, 2010          |  | $ | 61,862                                         |   |  | $ | 5,068                   |  |  | $ | 66,930  |  
|2010 amortization                      |  |   | 13,200                                         |   |  |   | 433                     |  |  |   | 13,633  |  
|Balance as at December 31, 2010        |  |   | 75,062                                         |   |  |   | 5,501                   |  |  |   | 80,563  |  
|Amortization for the period            |  |   | 11,298                                         |   |  |   | 429                     |  |  |   | 11,727  |  
|Removal of fully amortized assets      |  |   | (21,100                                        | ) |  |   | -                       |  |  |   | (21,100 | )
|Balance as at December 31, 2011        |  | $ | 65,260                                         |   |  | $ | 5,930                   |  |  | $ | 71,190  |  
|                                       |  |   |                                                |   |  |   |                         |  |  |   |         |  
|Net book value:                        |  |   |                                                |   |  |   |                         |  |  |   |         |  
|Net book value as at January 1, 2010   |  | $ | 121,238                                        |   |  | $ | 11,240                  |  |  | $ | 132,478 |  
|Net book value as at December 31, 2010 |  | $ | 108,038                                        |   |  | $ | 10,807                  |  |  | $ | 118,845 |  
|Net book value as at December 31, 2011 |  | $ | 96,740                                         |   |  | $ | 10,378                  |  |  | $ | 107,118 |  
|                                       |  |   |                                                |   |  |   |                         |  |  |   |         |  
|Useful life (years)                    |  |   | 15                                             |   |  |   | 12 -15                  |  |  |   |         |  
|Remaining amortization period (years)  |  |   | 9                                              |   |  |   | 9                       |  |  |   |         |  



| | 10. | Goodwill
| | --- | --------



During the year ended December
31, 2011, goodwill increased by $7.0 million related to the acquisition of Three Star (see note 6).



Provident performed goodwill
impairment tests at December 31, 2011 and 2010, as well as at January 1, 2010, which determined that the recoverable amount of
the group of cash generating units that comprise the Midstream business was in excess of the respective carrying value. Accordingly,
no write-down of goodwill was required. The recoverable amount was determined based on a fair value
less costs to sell calculation using cash flow projections from financial forecasts approved by management covering a 15 year period
with a terminal growth rate of 2% thereafter. Key assumptions upon which management based its determinations of the recoverable
amount for the goodwill in 2011 include operating margins which are projected to increase by approximately 2% per annum, on average,
attributable to capital expenditures and expected growth in the fee-for-service business, combined with a weighted average
discount rate of 9%. The forecast included future commodity price assumptions based on independent third party estimates effective
at December 31, 2011 of US$100.05/bbl for WTI crude oil in 2012 with an average escalation rate of 2% per annum until 2026 and
$3.60/mcf for AECO natural gas in 2012 with an average escalation rate of 6% per annum until 2026.











| | 11. | Long-term debt
| | --- | --------------



|                                                |  | As at        |         |  | As at        |  
|----------------------------------------------- |  | ------------ | ------- |  | ------------ | -
|                                                |  | December 31, |         |  | December 31, |  
|($000s)                                         |  | 2011         |         |  | 2010         |  
|Current portion of convertible debentures       |  | $            | -       |  |              | $
|Current portion of long-term debt of subsidiary |  |              | 9,199   |  |              |  
|Current portion of long-term debt               |  |              | 9,199   |  |              |  
|                                                |  |              |         |  |              |  
|Revolving term credit facility                  |  |              | 184,019 |  |              |  
|Long-term debt of subsidiary                    |  |              | 917     |  |              |  
|Long-term debt - bank facilities and other      |  |              | 184,936 |  |              |  
|                                                |  |              |         |  |              |  
|Long-term debt - convertible debentures         |  |              | 315,786 |  |              |  
|Total                                           |  | $            | 509,921 |  |              | $





| | i) | Revolving term credit facility
| | -- | ------------------------------



Provident completed an extension
of its existing credit agreement (the "Credit Facility") on October 14, 2011, with National Bank of Canada as administrative
agent and a syndicate of Canadian chartered banks and other Canadian and foreign financial institutions (the "Lenders").
Pursuant to the amended Credit Facility, the Lenders have agreed to continue to provide Provident with a credit facility of $500
million which, under an accordion feature, can be increased to $750 million at the option of the Company, subject to obtaining
additional commitments.  The amended Credit Facility also provides for a separate Letter of Credit facility which has been
increased from $60 million to $75 million.



The amended terms of the Credit
Facility provide for a revolving three year period expiring on October 14, 2014 (subject to customary extension provisions), secured
by substantially all of the assets of Provident. Provident may draw on the facility by way of Canadian prime rate loans, U.S. base
rate loans, banker’s acceptances, LIBOR loans, or letters of credit. As at December 31, 2011, Provident had drawn $190.1
million (including $3.6 million presented as a bank overdraft in accounts payable and accrued liabilities) or 38 percent of its
Credit Facility (December 31, 2010 – $75.5 million or 15 percent). Included in the carrying value at December 31, 2011 were
financing costs of $2.2 million (December 31, 2010 – $2.4 million). At December 31, 2011, the effective interest rate of
the outstanding Credit Facility was 3.3 percent (December 31, 2010 – 4.1 percent). At December 31, 2011, Provident had $60.1
million in letters of credit outstanding (December 31, 2010 – $47.9 million) that guarantee Provident’s performance
under certain commercial and other contracts.



| | ii) | Long-term debt of subsidiary
| | --- | ----------------------------



On October 3, 2011, Provident
completed the acquisition of a two-thirds interest in Three Star. Three Star’s long-term debt is secured by the vehicles
and trailers owned by the subsidiary and matures over a period of between two to five years. In addition, Three Star has an operating
line of credit (presented in accounts payable and accrued liabilities) which is secured by substantially all of the assets of Three
Star other than the vehicles and trailers which are pledged as security for the subsidiary’s long-term debt. As at December
31, 2011, Three Star had drawn $18.0 million, including $9.2 million, $0.9 million, and $7.9 million presented as current portion
of long-term debt, long-term debt – bank facilities and other, and a bank overdraft in accounts payable and accrued liabilities,
respectively, on the consolidated statement of financial position. At December 31, 2011, the effective interest rate of
the subsidiary’s outstanding long-term debt was 4.9 percent.



| | iii) | Convertible debentures
| | ---- | ----------------------



In November 2010, Provident issued
$172.5 million aggregate principal amount of convertible unsecured subordinated debentures ($164.7 million, net of issue costs).
The debentures bear interest at 5.75% per annum, payable semi-annually in arrears on June 30 and December 31 each year commencing
June 30, 2011 and mature on December 31, 2017. The debentures may be converted into equity at the option of the holder at a conversion
price of $10.60 per share prior to the earlier of December 31, 2017 and the date of redemption, and may be redeemed by Provident
under certain circumstances. Upon conversion of the 5.75% debentures, Provident may elect to pay the holder cash at the option
of Provident. At issuance, $163.3 million was recorded related to the debt component of the debentures ($155.5 million, net of
issue of costs) and the conversion feature of the debentures was valued at $9.2 million and was recorded as a long-term financial
derivative instrument.











On January 13, 2011, in connection
with the corporate conversion, Provident Energy Ltd. announced an offer to purchase for cash its 6.5% convertible debentures maturing
on August 31, 2012 (the “C series”) and its 6.5% convertible debentures maturing on April 30, 2011 (the “D series”)
at a price equal to 101 percent of their principal amounts plus accrued interest. The offer was completed on February 21, 2011
and resulted in Provident taking up and cancelling $4.1 million principal amount of C series debentures and $81.3 million principal
amount of D series debentures. The transaction resulted in Provident recognizing a loss on repurchase of $1.2 million in financing
charges in the consolidated statement of operations. The total offer price, including accrued interest, was funded by Provident
Energy Ltd.’s existing revolving term credit facility.



On April 30, 2011 the remaining
D series debentures, with a principal amount of $68.6 million matured as scheduled. Provident funded the maturity through the revolving
term credit facility.



In May 2011, Provident issued
$172.5 million aggregate principal amount of convertible unsecured subordinated debentures ($165.0 million, net of issue costs).
The debentures bear interest at 5.75% per annum, payable semi-annually in arrears on June 30 and December 31 each year commencing
December 31, 2011 and mature on December 31, 2018. The debentures may be converted into equity at the option of the holder at a
conversion price of $12.55 per share prior to the earlier of December 31, 2018 and the date of redemption, and may be redeemed
by Provident under certain circumstances. Upon conversion of the 5.75% debentures, Provident may elect to pay the holder cash at
the option of Provident. At issuance, $164.1 million was recorded related to the debt component of the debentures ($156.6 million,
net of issue costs) and the conversion feature of the debentures was valued at $8.4 million and was recorded as a long-term financial
derivative instrument.



On May 25, 2011, Provident redeemed
all of the outstanding aggregate principal amount of the C series 6.5% convertible debentures at a redemption price equal to $1,000
in cash per $1,000 principal amount, plus accrued interest. The redemption resulted in Provident taking up and cancelling the remaining
outstanding $94.9 million principal amount of C series debentures. Provident recognized a loss on the redemption of $2.1 million
in financing charges in the consolidated statement of operations. The total redemption, including accrued interest, was funded
by Provident Energy Ltd.’s existing revolving term credit facility.



Provident may elect to satisfy
interest and principal obligations on the convertible debentures by the issuance of shares. For the year ended December 31, 2011,
$50 thousand of the face value of debentures were converted to shares at the election of debenture holders (2010 – nil).
Included in the carrying value at December 31, 2011 were financing costs of $13.4 million (December 31, 2010 – $9.0 million).
At December 31, 2011, the fair value of convertible debentures, including the conversion feature, was approximately $357 million
(December 31, 2010 – $424 million). The following table details each outstanding convertible debenture.



|                                   |  | As at              |         |  | As at             |   |         |                   |  |   |            | 
|---------------------------------- |  | ------------------ | ------- |  | ----------------- | - | ------- | ----------------- |  | - | ---------- | 
|Convertible Debentures             |  | December 31, 2011  |         |  | December 31, 2010 |   |         |                   |  |   |            | 
|($ 000s except conversion pricing) |  | Carrying value (1) |         |  | Face
    value    |   |         | Carrying value(1) |  |   | Face value | 
|6.5% Convertible Debentures        |  | $                  | -       |  |                   | $ | -       |                   |  |   | 148,981    | 
|6.5% Convertible Debentures        |  |                    | -       |  |                   |   | -       |                   |  |   | 96,084     | 
|5.75% Convertible Debentures       |  |                    | 157,914 |  |                   |   | 172,500 |                   |  |   | 155,807    | 
|5.75% Convertible Debentures       |  |                    | 157,872 |  |                   |   | 172,500 |                   |  |   | -          | 
|                                   |  | $                  | 315,786 |  |                   | $ | 345,000 |                   |  | $ | 400,872    | 

(1) Excluding the conversion feature of convertible
debentures.

(2) The debentures may be converted into shares at
the option of the holder of the debenture at the conversion price per share.











The conversion feature of convertible
debentures is presented at fair value as a long-term financial derivative instrument on the consolidated statement of financial
position (see note 16).



| | 12. | Decommissioning liabilities
| | --- | ---------------------------



Provident’s
decommissioning liabilities are based on its net ownership inproperty, plant and equipment and
represents management’s estimate of the costs to abandon and reclaim those assets as well as an estimate of the future timing
of the costs to be incurred. Estimated cash flows have been discounted at Provident’s nominal risk free rate and an inflation
rate of two percent has been estimated for future years. In the third quarter of 2011, Provident adjusted the nominal risk free
rate from four percent down to three percent, to reflect recent interest rate changes in long-term benchmark bond yields. The resulting
adjustment of $21.2 million is presented as a change in estimate. In 2011, decommissioning liabilities increased by $4.3 million
(2010 - $0.2 million) related to future obligations associated with capital expenditures incurred during the year.



The total undiscounted amount
of future cash flows required to settle the decommissioning liabilities is estimated to be $218.9 million (2010 - $207.3 million).
The estimated costs include such activities as dismantling, demolition and disposal of the facilities as well as remediation and
restoration of the surface land. Payments to settle the decommissioning liabilities are expected to occur subsequent to the closure
of the facilities and related assets. Settlement of these liabilities is expected to occur in 23to 35years.



|                                                                    |  | As at        |        |  | As at        |  
|------------------------------------------------------------------- |  | ------------ | ------ |  | ------------ | -
|                                                                    |  | December 31, |        |  | December 31, |  
|($000s)                                                             |  | 2011         |        |  | 2010         |  
|Carrying amount, beginning of year                                  |  | $            | 57,232 |  |              | $
|Acquisitions                                                        |  |              | -      |  |              |  
|Dispositions - discountinued operations                             |  |              | -      |  |              |  
|Increase in liabilities incurred during the year                    |  |              | 4,335  |  |              |  
|Settlement of liabilities during the year - discontinued operations |  |              | -      |  |              |  
|Transfer to other long-term liabilities (1)                         |  |              | -      |  |              |  
|Accretion of liability - continuing operations                      |  |              | 2,329  |  |              |  
|Accretion of liability - discontinued operations                    |  |              | -      |  |              |  
|Change in estimate                                                  |  |              | 21,159 |  |              |  
|Carrying amount, end of year                                        |  | $            | 85,055 |  |              | $

| | (1) | Commencing on June 30, 2010, obligations associated with residual Upstream properties have been classified as other long-term
liabilities on the statement of financial position.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 13. | Share capital
| | --- | -------------



On January 1, 2011, the Trust
completed a conversion from an income trust structure to a corporate structure pursuant to a plan of arrangement on the basis of
one common share in Provident Energy Ltd. in exchange for each trust unit held in the Trust. The conversion resulted in the reorganization
of the Trust into a publicly traded, dividend-paying corporation under the name “Provident Energy Ltd.”



Provident’s Premium Dividend
and Dividend Reinvestment purchase (“DRIP”) plan provides shareholders with a means to automatically reinvest sums
received on account of dividends on shares. Pursuant to the corporate conversion, the company assigned the DRIP to Provident Energy
Ltd. (“PEL DRIP”). As a result, all existing participants in the DRIP were deemed to be participants in the PEL DRIP
without any further action on their part and holders of common shares may participate in the PEL DRIP with respect to any cash
dividends declared and paid by Provident Energy Ltd. on the common shares.



On October 3, 2011, Provident
completed the acquisition of a two-thirds interest in Three Star. The acquisition was partially funded by issuing 944,828 common
shares at a price of $8.05.













| | i) | Share capital
| | -- | -------------



|Common Shares                                                   |  | Number of shares |             |  | Amount
(000s) |  
|--------------------------------------------------------------- |  | ---------------- | ----------- |  | ------------- | -
|Issued on conversion to a corporation effective January 1, 2011 |  |                  | 268,765,492 |  |               | $
|Issued to acquire Three Star                                    |  |                  | 944,828     |  |               |  
|Issued pursuant to the dividend reinvestment plan               |  |                  | 4,070,265   |  |               |  
|To be issued pursuant to the dividend reinvestment plan         |  |                  | 407,724     |  |               |  
|Debenture conversions                                           |  |                  | 4,325       |  |               |  
|Share issue costs                                               |  |                  | -           |  |               |  
|Balance at December 31, 2011                                    |  |                  | 274,192,634 |  |               | $



Provident has an unlimited number
of common shares authorized for issuance.



| | ii) | Unitholders’ contributions
| | --- | --------------------------



|Trust Units                                                        |  | Number of units |              |   | Amount (000s) |  
|------------------------------------------------------------------ |  | --------------- | ------------ | - | ------------- | -
|Balance at January 1, 2010                                         |  |                 | 264,336,636  |   |               | $
|Issued pursuant to the distribution reinvestment plan              |  |                 | 4,002,565    |   |               |  
|To be issued pursuant to the distribution reinvestment plan        |  |                 | 426,291      |   |               |  
|Balance at December 31, 2010                                       |  |                 | 268,765,492  |   |               | $
|Cancelled on conversion to a corporation effective January 1, 2011 |  |                 | (268,765,492 | ) |               |  
|Balance at December 31, 2011                                       |  |                 | -            |   |               | $



The basic and diluted per share
amounts for the year ended December 31, 2011 were calculated based on the weighted average number of shares outstanding of 270,741,572
(2010 – 266,008,193).



| | 14. | Share based compensation
| | --- | ------------------------



Restricted/Performance share units



Certain employees of Provident
are granted restricted share units (RSUs) and/or performance share units (PSUs), both of which entitle the employee to receive
cash compensation in relation to the value of a specific number of underlying notional share units. The grants are based on criteria
designed to recognize the long-term value of the employee to the organization. RSUs typically vest evenly over a period of three
years commencing at the grant date. Payments are made on the anniversary dates of the RSU to the employees entitled to receive
them on the basis of a cash payment equal to the value of the underlying notional share units. PSUs vest three years from the date
of grant and can be increased to a maximum of double the PSUs granted or a minimum of nil PSUs depending on the Company’s
performance based on certain benchmarks.



The fair value estimate associated
with the RSUs and PSUs is expensed in the statement of operations over the vesting period. At December 31, 2011, $20.0 million
(December 31, 2010 - $7.4 million) is included in accounts payable and accrued liabilities for this plan and $11.5 million (December
31, 2010 - $10.4 million) is included in other long-term liabilities. The following table reconciles the expense recorded for RSUs
and PSUs.



|                                      |  | Year ended December 31, |       
|------------------------------------- |  | ----------------------- | ------
|                                      |  | 2011                    |       
|General and administrative            |  | $                       | 19,162
|Production, operating and maintenance |  |                         | 1,491 
|                                      |  | $                       | 20,653













The following table
provides a continuity of the Company’s RSU and PSU plans:



|Units outstanding                     |  | RSUs |           |   | PSUs | 
|------------------------------------- |  | ---- | --------- | - | ---- | 
|Opening balance January 1, 2010       |  |      | 1,576,123 |   |      | 
|Grants                                |  |      | 672,155   |   |      | 
|Reinvested through notional dividends |  |      | 105,956   |   |      | 
|Exercised                             |  |      | (857,751  | ) |      | 
|Forfeited                             |  |      | (321,475  | ) |      | 
|Ending balance December 31, 2010      |  |      | 1,175,008 |   |      | 
|Grants                                |  |      | 550,065   |   |      | 
|Reinvested through notional dividends |  |      | 77,378    |   |      | 
|Exercised                             |  |      | (562,028  | ) |      | 
|Forfeited                             |  |      | (16,579   | ) |      | 
|Ending balance December 31, 2011      |  |      | 1,223,844 |   |      | 



At December 31, 2011, all RSUs
and PSUs have been valued using Provident’s share price and each PSU has been valued using a multiplier of 1.25, 1.40, and
1.20, for the 2009, 2010, and 2011 grants, respectively.



| | 15. | Income taxes
| | --- | ------------



|Income tax expense (recovery)                  |  | Year ended December 31, |       
|---------------------------------------------- |  | ----------------------- | ------
|($000s)                                        |  | 2011                    |       
|                                               |  |                         |       
|Current tax expense (recovery):                |  |                         |       
|Current tax on profits for the year            |  | $                       | 654   
|Total current tax expense (recovery)           |  |                         | 654   
|                                               |  |                         |       
|Deferred tax expense (recovery):               |  |                         |       
|Origination and reversal of timing differences |  |                         | 67,832
|Total deferred tax expense (recovery)          |  |                         | 67,832
|Income tax expense (recovery)                  |  | $                       | 68,486



The income tax provision differs
from the expected amount calculated by applying the Company’s combined federal and provincial/state income tax rate of 26.83
percent (2010 - 33.35 percent) as follows:



|Reconciliation between provision for income taxes and pre-tax income |  | Year ended December 31, |        
|-------------------------------------------------------------------- |  | ----------------------- | -------
|($000s)                                                              |  | 2011                    |        
|                                                                     |  |                         |        
|Income from continuing operations before tax                         |  | $                       | 165,703
|Tax rate                                                             |  |                         | 26.83  
|                                                                     |  |                         | 44,458 
|Tax effects:                                                         |  |                         |        
|True up                                                              |  |                         | -      
|Foreign rate differences                                             |  |                         | -      
|Rate change due to corporate conversion                              |  |                         | 24,030 
|Income not subject to tax - income of the Trust                      |  |                         | -      
|Other                                                                |  |                         | (2     
|Income tax expense (recovery)                                        |  | $                       | 68,486 











The analysis of deferred tax
assets and deferred tax liabilities is as follows:



|                                                                 |  | As at        |          |   | As at        |  
|---------------------------------------------------------------- |  | ------------ | -------- | - | ------------ | -
|                                                                 |  | December 31, |          |   | December 31, |  
|($000s)                                                          |  | 2011         |          |   | 2010         |  
|Deferred tax assets:                                             |  |              |          |   |              |  
|Deferred tax asset to be recovered after more than 12 months     |  | $            | 131,872  |   |              | $
|Deferred tax asset to be recovered within 12 months              |  |              | 32,000   |   |              |  
|                                                                 |  |              |          |   |              |  
|Deferred tax liabilities:                                        |  |              |          |   |              |  
|Deferred tax liability to be recovered after more than 12 months |  |              | (160,444 | ) |              |  
|Deferred tax liability to be recovered within 12 months          |  |              | (466     | ) |              |  
|Deferred income taxes                                            |  | $            | 2,962    |   |              | $



The components of the deferred
tax assets and deferred tax liabilities are as follows:

|                                       |  | As at        |          |   | As at        |  
|-------------------------------------- |  | ------------ | -------- | - | ------------ | -
|                                       |  | December 31, |          |   | December 31, |  
|($000s)                                |  | 2011         |          |   | 2010         |  
|Deferred tax asset:                    |  |              |          |   |              |  
|Decomissioning liabilities             |  | $            | 23,052   |   |              | $
|Loss carryforward                      |  |              | 114,808  |   |              |  
|Tax credits                            |  |              | 177      |   |              |  
|Financial derivative instruments       |  |              | 18,752   |   |              |  
|Other deductible temporary differences |  |              | 9,666    |   |              |  
|Gross deferred tax asset               |  |              | 166,455  |   |              |  
|Valuation allowance                    |  |              | (2,583   | ) |              |  
|Total deferred tax asset               |  | $            | 163,872  |   |              | $
|                                       |  |              |          |   |              |  
|Deferred tax liability:                |  |              |          |   |              |  
|Property, plant and equipment          |  | $            | (157,105 | ) |              | $
|Other taxable temporary differences    |  |              | (3,805   | ) |              |  
|Total deferred tax liability           |  | $            | (160,910 | ) |              | $
|Deferred income taxes                  |  | $            | 2,962    |   |              | $



The movement of the deferred
income tax account is as follows:



|                                                    |  | Year ended December 31, |        
|--------------------------------------------------- |  | ----------------------- | -------
|($000s)                                             |  | 2011                    |        
|Deferred income tax asset (liability)               |  |                         |        
|Opening balance, beginning of year                  |  | $                       | 72,699 
|(Expense) recovery from the statement of operations |  |                         | (67,832
|Change related to discontinued operations           |  |                         | -      
|Foreign exchange differences                        |  |                         | (26    
|Acquisition of subsidiary, Three Star               |  |                         | (1,879 
|Deferred income taxes, end of year                  |  | $                       | 2,962  



Included in the future income
tax asset is estimated non-capital loss carry forwards that expire in 2026 through 2030. Provident’s valuation allowance
applies to other temporary differences that reduce the amount recorded to the expected amount to be realized.











As at December 31, 2011, the
aggregate temporary differences associated with investments in subsidiaries for which no deferred tax liabilities have been recognized
is $244.3 million (December 31, 2010 - $242.6 million). The amount and timing of reversals of temporary differences depends on
Provident’s future operating results, acquisitions and dispositions of assets and liabilities, and dividend policy. A significant
change in any of the preceding assumptions could materially affect Provident’s estimate of the deferred tax balance.



Prior
to conversion to a corporation effective January 1, 2011, IFRS required temporary differences at the Trust level to be reflected
at the highest rate at which individuals would be taxed on undistributed profits. Upon corporate conversion, deferred tax balances
are determined using the applicable statutory rate for corporations.



| | 16. | Financial instruments
| | --- | ---------------------



Risk Management overview



Provident has a comprehensive
Enterprise Risk Management program that is designed to identify and manage risks that could negatively affect its business, operations
or results. The program’s activities include risk identification, assessment, response, control, monitoring and communication.



Provident’s Risk Management
Committee (“RMC”) oversees execution of the program and regular reports are provided to the Audit Committee and Board
of Directors.



Provident has established and
implemented market risk management strategies, policies and limits that are monitored by Provident’s Risk Management group.
The derivative instruments Provident uses include put and call options, costless collars, participating swaps, and fixed price
products that settle against indexed referenced pricing. The purchase of put option contracts effectively create a floor price
for the commodity, while allowing for full participation if prices increase. The purchase of call options allow for a commodity
to be purchased at a fixed price at the option of the contract holder. Costless collars are contracts that provide a floor and
a ceiling price and allowing participation within a set range. Participating swaps are contracts that provide a floor and also
provide a ceiling for a certain percentage of the volume of the contract. Fixed price swaps are contracts that specify a fixed
price at which a certain volume of product will be bought or sold at in the future.



The Risk Management group monitors
risk exposure by generating and reviewing mark-to-market reports and counterparty credit exposure of Provident’s outstanding
derivative contracts. Additional monitoring activities include reviewing available derivative positions, regulatory changes and
bank and analyst reports.



The market risk management program
is designed to protect a base level of operating cash flow in order to support cash dividends and capital programs. The market
risk management program manages commodity price volatility, as well as fluctuating interest and foreign exchange rates. Provident
utilizes a variety of financial instruments to protect margins on a portion of its frac spread production and sales, and to manage
physical contract exposure for periods of up to two years. As well, the Provident market risk management strategy reduces foreign
exchange risk due to the exposure arising from the conversion of U.S. dollars into Canadian dollars.



Fair Values



Fair value measurement of assets
and liabilities recognized on the consolidated statement of financial position are categorized into levels within a fair value
hierarchy based on the nature of valuation inputs. The three levels of the fair value hierarchy are:



| | · | Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
| | - | -----------------------------------------------------------------------------------------

| | · | Level 2 – Inputs other than quoted prices that are observable for the asset or liability
either directly or indirectly; and
| | - | ---------------------------------------------------------------------------------------------------------------------------

| | · | Level 3 – Inputs that are not based on observable market data.
| | - | --------------------------------------------------------------



Provident’s financial
derivative instruments have been classified as Level 2 instruments with the exception of the redemption liability related to the
acquisition of the Company’s subsidiary, Three Star, which is classified as a Level 3 instrument. The financial instruments
are carried at fair value as at December 31, 2011 and 2010. The fair values of Level 2 financial derivative instruments are determined
by reference to independent monthly forward settlement prices, interest rate yield curves, currency rates, quoted market prices
for Provident’s shares, and volatility rates at the period-end dates.













The redemption liability related
to Three Star is classified as a Level 3 instrument, as the fair value is determined by using inputs that are not based on observable
market data. The liability represents a put option, held by the non-controlling interest of Three Star,to sell the remaining one-third of the business to Provident after the third anniversary of the acquisition date (October 3, 2014).
The put price to be paid by Provident for the residual interest upon exercise is based on a multiple of Three Star’s earnings
during the three year period prior to exercise, adjusted for associated capital expenditures and debt based on management estimates.
These estimates are subject to measurement uncertainty and the effect on the financial statements of future periods could be material.



|Financial instruments classified as Level 3 |  | Year ended December 31, |       
|------------------------------------------- |  | ----------------------- | ------
|($000s)                                     |  | 2011                    |       
|Redemption liability, beginning of year     |  | $                       | -     
|Acquisition of Three Star (note 6)          |  |                         | 9,054 
|Accretion of liability                      |  |                         | 26    
|Gain on revaluation                         |  |                         | (1,532
|Redemption liability, end of year           |  | $                       | 7,548 



Provident has also reflected
management’s assessment of nonperformance risk, including credit risk, into the fair value measurement. In evaluating the
credit risk component of nonperformance risk, Provident has considered prevailing market credit spreads.



|As at December 31, 2011 ($ 000s)           |  | Held for Trading |         |  | Loans and Receivables |   |         | Other Liabilities |  |   | Total Carrying Value | 
|------------------------------------------ |  | ---------------- | ------- |  | --------------------- | - | ------- | ----------------- |  | - | -------------------- | 
|                                           |  |                  |         |  |                       |   |         |                   |  |   |                      | 
|Assets                                     |  |                  |         |  |                       |   |         |                   |  |   |                      | 
|Accounts receivable                        |  | $                | -       |  |                       | $ | 230,457 |                   |  | $ | -                    | 
|Financial derivative instruments           |  |                  |         |  |                       |   |         |                   |  |   |                      | 
|- current assets                           |  |                  | 4,571   |  |                       |   | -       |                   |  |   | -                    | 
|                                           |  | $                | 4,571   |  |                       | $ | 230,457 |                   |  | $ | -                    | 
|                                           |  |                  |         |  |                       |   |         |                   |  |   |                      | 
|Liabilities                                |  |                  |         |  |                       |   |         |                   |  |   |                      | 
|Accounts payable and accrued liabilities   |  | $                | -       |  |                       | $ | -       |                   |  | $ | 276,480              | 
|Cash dividends payable                     |  |                  | -       |  |                       |   | -       |                   |  |   | 8,353                | 
|Current portion of long-term debt          |  |                  | -       |  |                       |   | -       |                   |  |   | 9,199                | 
|Financial derivative instruments           |  |                  |         |  |                       |   |         |                   |  |   |                      | 
|- current liabilities                      |  |                  | 56,901  |  |                       |   | -       |                   |  |   | -                    | 
|Long-term debt - bank facilities and other |  |                  | -       |  |                       |   | -       |                   |  |   | 184,936              | 
|Long-term debt - convertible debentures    |  |                  | -       |  |                       |   | -       |                   |  |   | 315,786              | 
|Financial derivative instruments           |  |                  |         |  |                       |   |         |                   |  |   |                      | 
|- long-term liabilities                    |  |                  | 52,373  |  |                       |   | -       |                   |  |   | -                    | 
|Other long-term liabilities                |  |                  | -       |  |                       |   | -       |                   |  |   | 20,551               | 
|                                           |  | $                | 109,274 |  |                       | $ | -       |                   |  | $ | 815,305              | 











|As at December 31, 2010 ($ 000s)           |  | Held for Trading |        |  | Loans and Receivables |   |         | Other Liabilities |  |   | Total Carrying Value | 
|------------------------------------------ |  | ---------------- | ------ |  | --------------------- | - | ------- | ----------------- |  | - | -------------------- | 
|                                           |  |                  |        |  |                       |   |         |                   |  |   |                      | 
|Assets                                     |  |                  |        |  |                       |   |         |                   |  |   |                      | 
|Cash and cash equivalents                  |  | $                | -      |  |                       | $ | 4,400   |                   |  | $ | -                    | 
|Accounts receivable                        |  |                  | -      |  |                       |   | 206,631 |                   |  |   | -                    | 
|Financial derivative instruments           |  |                  |        |  |                       |   |         |                   |  |   |                      | 
|- current assets                           |  |                  | 487    |  |                       |   | -       |                   |  |   | -                    | 
|                                           |  | $                | 487    |  |                       | $ | 211,031 |                   |  | $ | -                    | 
|                                           |  |                  |        |  |                       |   |         |                   |  |   |                      | 
|Liabilities                                |  |                  |        |  |                       |   |         |                   |  |   |                      | 
|Accounts payable and accrued liabilities   |  | $                | -      |  |                       | $ | -       |                   |  | $ | 227,944              | 
|Cash dividends payable                     |  |                  | -      |  |                       |   | -       |                   |  |   | 12,646               | 
|Current portion of long-term debt          |  |                  | -      |  |                       |   | -       |                   |  |   | 148,981              | 
|Financial derivative instruments           |  |                  |        |  |                       |   |         |                   |  |   |                      | 
|- current liabilities                      |  |                  | 37,849 |  |                       |   | -       |                   |  |   | -                    | 
|Long-term debt - bank facilities and other |  |                  | -      |  |                       |   | -       |                   |  |   | 72,882               | 
|Long-term debt - convertible debentures    |  |                  | -      |  |                       |   | -       |                   |  |   | 251,891              | 
|Financial derivative instruments           |  |                  |        |  |                       |   |         |                   |  |   |                      | 
|- long-term liabilities                    |  |                  | 29,187 |  |                       |   | -       |                   |  |   | -                    | 
|Other long-term liabilities                |  |                  | -      |  |                       |   | -       |                   |  |   | 19,634               | 
|                                           |  | $                | 67,036 |  |                       | $ | -       |                   |  | $ | 733,978              | 



Except
as disclosed in note 11in connection with the convertible debentures, there were no
significant differences between the carrying value of these financial instruments and their estimated fair value as at December
31, 2011.



The following table is a summary
of the net financial derivative instruments liability:



|                                                          |  | As at        |         |   | As at        |  
|--------------------------------------------------------- |  | ------------ | ------- | - | ------------ | -
|                                                          |  | December 31, |         |   | December 31, |  
|($000s)                                                   |  | 2011         |         |   | 2010         |  
|                                                          |  |              |         |   |              |  
|Frac spread related                                       |  |              |         |   |              |  
|Crude oil                                                 |  | $            | 10,196  |   |              | $
|Natural gas                                               |  |              | 30,579  |   |              |  
|Propane                                                   |  |              | (4,784  | ) |              |  
|Butane                                                    |  |              | 2,969   |   |              |  
|Condensate                                                |  |              | 3,100   |   |              |  
|Foreign exchange                                          |  |              | 3,747   |   |              |  
|Sub-total frac spread related                             |  |              | 45,807  |   |              |  
|Management of exposure embedded in physical contracts     |  |              | 12,878  |   |              |  
|Corporate                                                 |  |              |         |   |              |  
|Electricity                                               |  |              | (734    | ) |              |  
|Interest rate                                             |  |              | 2,246   |   |              |  
|Other financial derivatives                               |  |              |         |   |              |  
|Conversion feature of convertible debentures              |  |              | 36,958  |   |              |  
|Redemption liability related to acquisition of Three Star |  |              | 7,548   |   |              |  
|Net financial derivative instruments liability            |  | $            | 104,703 |   |              | $



For convertible debentures containing
a cash conversion option, the conversion feature is measured at fair value through profit and loss at each reporting date, with
any unrealized gains or losses arising from fair value changes reported in the consolidated statement of operations. This resulted
in Provident recording a loss of approximately $19.0 million (2010 - $0.4 million) on the revaluation on the conversion feature
of convertible debentures on the consolidated statement of operations.











Market Risk



Market risk is the risk that
the fair value of a financial instrument will fluctuate because of changes in market prices. Market risk is generally comprised
of price risk, currency risk and interest rate risk.



a)	Price
risk



The decisions to enter into financial
derivative positions and to execute the market risk management strategy are made by senior officers of Provident who are also members
of the RMC. The RMC receives input and commodity expertise from the business managers in the decision making process. Strategies
are selected based on their ability to help Provident provide stable cash flow and dividends per share rather than to simply lock
in a specific commodity price.



Commodity price volatility and
market location differentials affect the Midstream business. In addition, Midstream is exposed to possible price declines between
the time Provident purchases natural gas liquid (NGL) feedstock and sells NGL products, and to narrowing frac spreads. Frac spreads
are the difference between the selling prices for propane-plus and the input cost of the natural gas required to produce the respective
NGL products.



Provident
responds to these risks using a market risk managementprogramto protect margins on a portion of its frac spreads production and sales, and to manage physical contract exposure for periods
of up to two yearswhile retaining some ability to participate in a widening margin environment. Subject
to market conditions, Provident’s intention is to hedge approximately 50 percent of its production and sales volumes exposed
to frac spreads on a rolling 12 month basis. Also, subject to market conditions, Provident may add additional positions as appropriate
for up to 24 months.



| | b) | Currency risk
| | -- | -------------



Provident’s commodity sales
are exposed to both positive and negative effects of fluctuations in the Canadian/U.S. exchange rate. Provident manages this exposure
by matching a significant portion of the cash costs that it expects with revenues in the same currency. As well, Provident uses
derivative instruments to manage the U.S. cash requirements of its business.



Provident regularly sells or
purchases forward a portion of expected U.S. cashflows. Provident’s strategy also manages the exposure it has to fluctuations
in the U.S./Canadian dollar exchange rate when the underlying commodity price is based upon a U.S. index price. Provident may also
use derivative products that provide for protection against a stronger Canadian dollar, while allowing it to participate if the
currency weakens relative to the U.S. dollar.



| | c) | Interest rate risk
| | -- | ------------------



Provident’s
revolving term credit facilities bear interest at a floating rate. Using debt levels as at December 31, 2011, an increase/decrease
of 50 basis points in the lender’s base rate would result in an increase/decrease of annual interest expense of approximately
$1.0million (2010 - $0.4 million). Provident has mitigated this risk by entering into
interest rate financial derivative contracts for a portion of the outstanding long-term debt. The contracts settle against Canadian
Bankers Acceptance CDOR rates.



Financial derivative
sensitivity analysis



The following tables show the
impact on (loss) gain on financial derivative instruments if the underlying risk variables of the financial derivative instruments
changed by a specified amount, with other variables held constant.











|                                                      |  |                                             |  |   |          |   |   |          |  
|----------------------------------------------------- |  | ------------------------------------------- |  | - | -------- | - | - | -------- | -
|As at December 31, 2011 ($ 000s)                      |  |                                             |  |   | + Change |   |   | - Change |  
|                                                      |  |                                             |  |   |          |   |   |          |  
|Frac spread related                                   |  |                                             |  |   |          |   |   |          |  
|Crude oil                                             |  | (WTI +/- $5.00 per bbl)                     |  | $ | (7,255   | ) | $ | 7,333    |  
|Natural gas                                           |  | (AECO +/- $1.00 per gj)                     |  |   | 20,349   |   |   | (20,346  | )
|NGLs (includes propane, butane)                       |  | (Belvieu +/- US $0.10 per gal)              |  |   | (10,033  | ) |   | 10,033   |  
|Foreign exchange ($U.S. vs $Cdn)                      |  | (FX rate +/- $ 0.05)                        |  |   | (14,217  | ) |   | 14,217   |  
|                                                      |  |                                             |  |   |          |   |   |          |  
|Management of exposure embedded in physical contracts |  |                                             |  |   |          |   |   |          |  
|Crude oil                                             |  | (WTI +/- $5.00 per bbl)                     |  |   | (5,647   | ) |   | 5,647    |  
|NGLs (includes propane, butane and condensate)        |  | (Belvieu +/- US $0.10 per gal)              |  |   | 4,908    |   |   | (4,908   | )
|                                                      |  |                                             |  |   |          |   |   |          |  
|Corporate                                             |  |                                             |  |   |          |   |   |          |  
|Interest rate                                         |  | (Rate +/- 50 basis points)                  |  |   | 1,599    |   |   | (1,599   | )
|Electricity                                           |  | (AESO +/- $5.00 per MW/h)                   |  |   | 218      |   |   | (218     | )
|                                                      |  |                                             |  |   |          |   |   |          |  
|Conversion feature of convertible debentures          |  | (Provident share price +/- $0.50 per share) |  | $ | (7,077   | ) | $ | 6,487    |  



|As at December 31, 2010 ($ 000s)                      |  |                                             |  |   | + Change |   |   | - Change |  
|----------------------------------------------------- |  | ------------------------------------------- |  | - | -------- | - | - | -------- | -
|                                                      |  |                                             |  |   |          |   |   |          |  
|Frac spread related                                   |  |                                             |  |   |          |   |   |          |  
|Crude oil                                             |  | (WTI +/- $5.00 per bbl)                     |  | $ | (9,964   | ) | $ | 9,892    |  
|Natural gas                                           |  | (AECO +/- $1.00 per gj)                     |  |   | 22,264   |   |   | (22,272  | )
|NGLs (includes propane, butane)                       |  | (Belvieu +/- US $0.10 per gal)              |  |   | (9,160   | ) |   | 9,330    |  
|Foreign exchange ($U.S. vs $Cdn)                      |  | (FX rate +/- $ 0.05)                        |  |   | (2,839   | ) |   | 2,840    |  
|                                                      |  |                                             |  |   |          |   |   |          |  
|Management of exposure embedded in physical contracts |  |                                             |  |   |          |   |   |          |  
|Crude oil                                             |  | (WTI +/- $5.00 per bbl)                     |  |   | (5,506   | ) |   | 5,509    |  
|NGLs (includes propane, butane and condensate)        |  | (Belvieu +/- US $0.10 per gal)              |  |   | 2,480    |   |   | (2,482   | )
|                                                      |  |                                             |  |   |          |   |   |          |  
|Corporate                                             |  |                                             |  |   |          |   |   |          |  
|Interest rate                                         |  | (Rate +/- 50 basis points)                  |  |   | 2,392    |   |   | (2,392   | )
|Electricity                                           |  | (AESO +/- $5.00 per MW/h)                   |  |   | 435      |   |   | (435     | )
|                                                      |  |                                             |  |   |          |   |   |          |  
|Conversion feature of convertible debentures          |  | (Provident share price +/- $0.50 per share) |  | $ | (1,827   | ) | $ | 1,654    |  



Liquidity Risk



Liquidity risk is the risk Provident
will not be able to meet its financial obligations as they come due. Provident’s approach to managing liquidity risk is to
ensure that it always has sufficient cash and credit facilities to meet its obligations when due, without incurring unacceptable
losses or damage to Provident’s reputation.



Management
typically forecasts cash flows for a period of twelve months to identify financing requirements. These requirements are then addressed
through a combination of committed and demand credit facilities and access to capital markets, as discussed in note 17.











The following table outlines
the timing of the cash outflows relating to financial liabilities.



|As at December 31, 2011                                |  | Payment due by period |          
|------------------------------------------------------ |  | --------------------- | ---------
|($000s)                                                |  | Total                 |          
|Accounts payable and accrued liabilities               |  | $                     | 276,480  
|Cash dividends payable                                 |  |                       | 8,353    
|Financial derivative instruments - current             |  |                       | 56,901   
|Long-term debt - bank facilities and other (1) (2) (3) |  |                       | 214,552  
|Long-term debt - convertible debentures(2)             |  |                       | 473,944  
|Long-term financial derivative instruments             |  |                       | 52,373   
|Other long-term liabilities (2)                        |  |                       | 21,917   
|Total                                                  |  | $                     | 1,104,520

(1)The terms of the credit facility have a revolving
three year period expiring on October 14, 2014.

(2)Includes associated interest or accretion and
principal payments.

(3)Includes current portion of long-term debt.



Credit Risk



Provident's Credit Policy governs
the activities undertaken to mitigate the risks associated with counterparty (customer) non-payment. The Policy requires a formal
credit review for counterparties entering into a commodity contract with Provident. This review determines an approved credit limit.
Activities undertaken include regular monitoring of counterparty exposure to approved credit limits, financial review of all active
counterparties, utilizing master netting arrangements and International Swap Dealers Association (ISDA) agreements and obtaining
financial assurances where warranted. Financial assurances include guarantees, letters of credit and cash. In addition, Provident
has a diversified base of creditors.



Substantially all of Provident’s
accounts receivable are due from customers and joint venture partners in the oil and gas and midstream services and marketing industries
and are subject to credit risk. Provident partially mitigates associated credit risk by limiting transactions with certain counterparties
to limits imposed by Provident based on management’s assessment of the creditworthiness of such counterparties. The carrying
value of accounts receivable reflects management's assessment of the associated credit risks. As at December 31, 2011 amounts past
due and not impaired included in accounts receivable is $7.2 million (December 31, 2010 – nil).



Settlement of financial derivative
contracts



Midstream financial derivative contract
buyout



In April 2010, Provident completed
the buyout of all fixed price crude oil and natural gas swaps associated with the Midstream business for a total realized loss
of $199.1 million. The carrying value of these specific contracts at March 31, 2010 was a liability of $177.7 million resulting
in an offsetting unrealized gain in the second quarter of 2010. The buyout of Provident’s forward mark-to-market positions
allows Provident to refocus its market risk management program on protecting margins on a portion of its frac spread production
and managing physical contract exposure for a period of up to two years.



The following table summarizes
the impact of the loss on financial derivative instruments during the years ended December 31, 2011 and 2010. The loss on revaluation
of conversion feature of convertible debentures and redemption liability, realized loss on buyout of financial derivative instruments
and unrealized gain offsetting buyout of financial derivative instruments are not included in the table as these items are separately
disclosed on the consolidated statement of operations.











|                                                      |  | Year ended December 31, |        
|----------------------------------------------------- |  | ----------------------- | -------
|Loss on financial derivative instruments              |  | 2011                    |        
|($ 000s except volumes)                               |  |                         |        
|Realized loss on financial derivative instruments     |  |                         |        
|Frac spread related                                   |  |                         |        
|Crude oil                                             |  | $                       | (6,186 
|Natural gas                                           |  |                         | (12,695
|Propane                                               |  |                         | (36,630
|Butane                                                |  |                         | (7,909 
|Condensate                                            |  |                         | (4,833 
|Foreign exchange                                      |  |                         | (2,205 
|Sub-total frac spread related                         |  |                         | (70,458
|Corporate                                             |  |                         |        
|Electricity                                           |  |                         | 2,627  
|Interest rate                                         |  |                         | (743   
|Management of exposure embedded in physical contracts |  |                         | 2,053  
|                                                      |  |                         | (66,521
|Unrealized loss on financial derivative instruments   |  |                         | (3,235 
|Loss on financial derivative instruments              |  | $                       | (69,756



| | (1) | The above table represents aggregate volumes that were bought/sold over the periods. Crude oil and NGL volumes are listed in
millions of barrels and natural gas is listed in millions of gigajoules.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





The financial derivative contracts in place
at December 31, 2011 are summarized in the following tables:



Midstream



|     |  |                  |  | Volume     |  |       |  |                                                                                        
|---- |  | ---------------- |  | ---------- |  | ----- |  | ---------------------------------------------------------------------------------------
|Year |  | Product          |  | (Buy)/Sell |  | Terms |  | Effective Period                                                                       
|2012 |  | Crude Oil        |  | 1,507      |  | Bpd   |  | US $97.57 per bbl (3) (10)                                                             
|     |  |                  |  | 5,548      |  | Bpd   |  | US $95.43 per bbl (3) (11)                                                             
|     |  |                  |  | 2,217      |  | Bpd   |  | US $86.71 per bbl (3) (12)                                                             
|     |  |                  |  | 1,421      |  | Bpd   |  | US $93.95 per bbl (3) (10)                                                             
|     |  |                  |  | 978        |  | Bpd   |  | Cdn $101.82 per bbl (3) (10)                                                           
|     |  |                  |  | 1,445      |  | Bpd   |  | Participating Swap Cdn $85.19 per bbl (Average Participation 27% above the floor price)
|     |  |                  |  | 1,352      |  | Bpd   |  | Participating Swap US $72.22 per bbl (Average Participation 51% above the floor price) 
|     |  | Natural Gas      |  | (44,057)   |  | Gjpd  |  | Cdn $3.53 per gj(2) (10)                                                               
|     |  |                  |  | (9,578)    |  | Gjpd  |  | Participating Swap Cdn $8.55 per gj (Average Participation 28% below the ceiling price)
|     |  | Propane          |  | 7,473      |  | Bpd   |  | US $1.55 per gallon (4) (10)                                                           
|     |  |                  |  | (3,297)    |  | Bpd   |  | US $1.0094 per gallon (4) (11)                                                         
|     |  |                  |  | (989)      |  | Bpd   |  | US $1.3375 per gallon(5) (11)                                                          
|     |  | Normal Butane    |  | (2,654)    |  | Bpd   |  | US $1.7352 per gallon (6) (11)                                                         
|     |  |                  |  | 2,445      |  | Bpd   |  | US $1.7434 per gallon (6) (10)                                                         
|     |  | ISO Butane       |  | (1,454)    |  | Bpd   |  | US $1.7807 per gallon (7) (11)                                                         
|     |  | Condensate       |  | (2,217)    |  | Bpd   |  | US $2.225 per gallon (8) (12)                                                          
|     |  | Foreign Exchange |  |            |  |       |  | Sell US $24,641,529 per month @ 0.9862 (13)                                            
|     |  |                  |  |            |  |       |  | Sell US $2,633,333 per month @ 1.016 (13)                                              
|     |  |                  |  |            |  |       |  | Sell US $5,785,714 per month @ 0.996 (13)                                              
|     |  |                  |  |            |  |       |  | Sell US $5,144,444 per month @ 0.996 (13)                                              
|     |  |                  |  |            |  |       |  | Sell US $2,875,000 per month @ 1.050 (13)                                              
|     |  |                  |  |            |  |       |  | Sell US $2,016,783 per month @ 1.0119 (13)                                             
|     |  |                  |  |            |  |       |  | Sell US $1,041,721 per month @ 0.9413(13)                                              
|     |  |                  |  |            |  |       |  | Sell US $2,666,667 per month @ 1.042 (13)                                              
|     |  |                  |  |            |  |       |  | Sell US $681,260 per month @ 0.9850 (13)                                               
|     |  |                  |  |            |  |       |  | Sell US $1,437,986 per month @ 0.9659 (13)                                             
|     |  |                  |  |            |  |       |  | Sell US $1,634,227 per month @ 0.9829 (13)                                             
|     |  |                  |  |            |  |       |  | Sell US $1,420,538 per month @ 0.9995(13)                                              











Midstream continued



|     |  |                  |  | Volume     |  |       |  |                                                                                        
|---- |  | ---------------- |  | ---------- |  | ----- |  | ---------------------------------------------------------------------------------------
|Year |  | Product          |  | (Buy)/Sell |  | Terms |  | Effective Period                                                                       
|2013 |  | Crude Oil        |  | 1,700      |  | Bpd   |  | US $96.65 per bbl (3) (10)                                                             
|     |  |                  |  | 1,250      |  | Bpd   |  | Participating Swap Cdn $84.90 per bbl (Average Participation 25% above the floor price)
|     |  |                  |  | 758        |  | Bpd   |  | Participating Swap US $85.62 per bbl (Average Participation 30% above the floor price) 
|     |  | Natural Gas      |  | (15,000)   |  | Gjpd  |  | Cdn $4.58 per gj (2) (10)                                                              
|     |  |                  |  | (9,524)    |  | Gjpd  |  | Participating Swap Cdn $8.87 per gj (Average Participation 22% below the ceiling price)
|     |  | Foreign Exchange |  |            |  |       |  | Sell US $1,651,990 per month @ 0.9829 (13)                                             
|     |  |                  |  |            |  |       |  | Sell US $1,397,250 per month @ 0.9995 (13)                                             
|     |  |                  |  |            |  |       |  | Sell US $5,000,000 per month @ 1.050(13)                                               



|Corporate |  |               |  |   |            
|--------- |  | ------------- |  | - | -----------
|          |  |               |  |   | Volume     
|Year      |  | Product       |  |   | (Buy)/Sell 
|          |  | Electricity   |  |   | (5)        
|          |  | Interest Rate |  | $ | 180,000,000
|          |  |               |  | $ | 50,000,000 



| | (1) | The above table represents a number of transactions entered into over an extended period of time.
| | --- | -------------------------------------------------------------------------------------------------

| | (2) | Natural gas contracts are settled against AECO monthly index.
| | --- | -------------------------------------------------------------

| | (3) | Crude Oil contracts are settled against NYMEX WTI Calendar Average.
| | --- | -------------------------------------------------------------------

| | (4) | Propane contracts are settled against Belvieu C3 TET.
| | --- | -----------------------------------------------------

| | (5) | Propane contracts are settled against Conway C3.
| | --- | ------------------------------------------------

| | (6) | Normal Butane contracts are settled against Belvieu NC4 NON TET & Belvieu NC4 TET.
| | --- | ----------------------------------------------------------------------------------

| | (7) | ISO Butane contracts are settled against Belvieu IC4 NON TET.
| | --- | -------------------------------------------------------------

| | (8) | Condensate contracts are settled against Belvieu NON-TET Natural Gasoline.
| | --- | --------------------------------------------------------------------------

| | (9) | Electricity contracts are settled against the hourly price of Electricity as published by the AESO in $/MWh.
| | --- | ------------------------------------------------------------------------------------------------------------

| | (10) | FRAC spread contracts.
| | ---- | ----------------------

| | (11) | Management of physical contract exposure - NGL Product contracts.
| | ---- | -----------------------------------------------------------------

| | (12) | Management of physical contract exposure - Rail contracts.
| | ---- | ----------------------------------------------------------

| | (13) | US Dollar forward contracts are settled against the Bank of Canada noon rate average. Selling notional US dollars for Canadian
dollars at a fixed exchange rate results in a fixed Canadian dollar price for the underlying commodity.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (14) | Interest rate forward contract settles monthly against 1M CAD BA CDOR.
| | ---- | ----------------------------------------------------------------------



| |     |                   
| | --- | ------------------
| | 17. | Capital management



Provident considers its total
capital to be comprised of net debt and shareholders’ equity. Net debt is comprised of long-term debt and working capital
surplus, excluding balances for the current portion of financial derivative instruments. The balance of these items at December
31, 2011 and December 31, 2010 were as follows:



|                                           |  | As at        |         |   | As at        |  
|------------------------------------------ |  | ------------ | ------- | - | ------------ | -
|                                           |  | December 31, |         |   | December 31, |  
|($000s)                                    |  | 2011         |         |   | 2010         |  
|Working capital surplus (1)                |  | $            | (97,561 | ) |              | $
|Long-term debt (including current portion) |  |              | 509,921 |   |              |  
|Net debt                                   |  |              | 412,360 |   |              |  
|Shareholders' equity                       |  |              | 579,058 |   |              |  
|Total capitalization                       |  | $            | 991,418 |   |              | $
|                                           |  |              |         |   |              |  
|Net debt to total capitalization           |  |              | 42      | % |              |  

(1) The working capital surplus excludes balances
for the current portion of financial derivative instruments.



Provident’s primary objective
for managing capital is to maximize long-term shareholder value by:

| | · | providing an appropriate return to shareholders relative to the risk of Provident’s underlying
assets; and
| | - | ----------------------------------------------------------------------------------------------------------

| | · | ensuring financing capacity for Provident’s internal development opportunities and acquisitions
that are expected to add value to shareholders.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------











Provident makes adjustments
to its capital structure based on economic conditions and Provident’s planned capital requirements. Provident has the ability
to adjust its capital structure by issuing new equity or debt, controlling the amount it returns to shareholders, and making adjustments
to its capital expenditure program. Provident relies on cash flow from operations, proceeds received from the DRIP program, external
lines of credit and access to capital markets to fund capital programs and acquisitions.



On January 1, 2011, the Trust
completed a conversion from an income trust structure to a corporate structure pursuant to a plan of arrangement. The conversion
resulted in the reorganization of the Trust into a publicly traded, dividend-paying corporation under the name “Provident
Energy Ltd.”



| | 18. | Product sales and service revenue
| | --- | ---------------------------------



For
the year ended December 31, 2011, included in product sales and service revenue is $259.6 million
(2010 - $202.7 million) associated with U.S. midstream sales.



| | 19. | Supplemental disclosures
| | --- | ------------------------



Consolidated statements of operations presentation



The following table details
the amount of total employee compensation costs included in the cost of goods sold, production, operating and maintenance, and
general and administrative line items in the consolidated statements of operations for the years ended December 31, 2011 and 2010:



|Employee compensation costs         |  | Year ended December 31, |       
|----------------------------------- |  | ----------------------- | ------
|($000s)                             |  | 2011                    |       
|Salaries and short-term benefits(1) |  | $                       | 29,657
|Share based compensation(1)         |  |                         | 20,653
|Total                               |  | $                       | 50,310

(1) Excludes amounts classified as strategic review
and restructuring in 2010.



Compensation of key management



Compensation awarded to key
management included:



|Remuneration of directors and senior management |  | Year ended December 31, |       
|----------------------------------------------- |  | ----------------------- | ------
|($000s)                                         |  | 2011                    |       
|Salaries and short-term benefits                |  | $                       | 4,744 
|Termination benefits                            |  |                         | 336   
|Share based compensation                        |  |                         | 5,783 
|Total                                           |  | $                       | 10,863

(1) For the year ended December 31, 2010, a portion
of the expenses were included in discontinued operations.



Key management includes the Company’s officers
and directors.











| | 20. | Other income and foreign exchange
| | --- | ---------------------------------



Other income and foreign exchange is comprised of:



|Other income and foreign exchange          |  | Year ended December 31, |       
|------------------------------------------ |  | ----------------------- | ------
|($000s)                                    |  | 2011                    |       
|Realized (gain) loss on foreign exchange   |  | $                       | (669  
|Loss (gain) on sale of assets              |  |                         | 1     
|Other                                      |  |                         | (6,442
|                                           |  |                         | (7,110
|Unrealized (gain) loss on foreign exchange |  |                         | (473  
|Gain on termination of agreement           |  |                         | -     
|Other                                      |  |                         | 59    
|                                           |  |                         | (414  
|Total                                      |  | $                       | (7,524



For the year ended December 31, 2011, Provident recognized
other income of $6.4 million from third parties relating to payments received for certain contractual volume commitments at the
Empress facilities.



During the third quarter of
2010, Provident agreed to terminate a multi-year condensate storage and terminalling services agreement with a third party in exchange
for a parcel of land valued at $4.9 million. The transaction was accounted for as a non-monetary transaction and included in property,
plant and equipment on the consolidated statement of financial position with a corresponding gain included in “Other income
and foreign exchange” on the consolidated statement of operations.



In the third quarter of 2010,
Provident received proceeds of $3.3 million from the sale of certain asset-backed commercial paper investments that had previously
been written off. Provident recorded a gain on sale in “Other income and foreign exchange” on the consolidated statement
of operations.



| | 21. | Commitments
| | --- | -----------



Provident has entered into operating
leases for offices that extend through June 2022. However, a significant portion will be recovered through subleases with third
parties. In relation to the Midstream business, Provident is committed to minimum lease payments under the terms of various tank
car leases for five years. Additionally, under an arrangement to use a third party interest in the Younger Plant, Provident has
a commitment to make payments calculated with reference to a number of variables including return on capital.



Future minimum lease payments
under non-cancelable operating leases are as follows:



|As at December 31, 2011 |  | Payment due by period |        
|----------------------- |  | --------------------- | -------
|($000s)                 |  | Total                 |        
|Operating Leases        |  |                       |        
|Office leases           |  | $                     | 60,781 
|Sublease recovery       |  |                       | (39,751
|                        |  |                       | 21,030 
|Rail tank cars          |  |                       | 35,809 
|Younger plant           |  |                       | 21,578 
|Total                   |  | $                     | 78,417 















| | 22. | Strategic review and restructuring
| | --- | ----------------------------------



In 2010, Provident completed
a strategic transaction to separate its Upstream and Midstream businesses. An agreement was reached with Midnight Oil Exploration
Ltd. (“Midnight”) to combine the remaining Provident Upstream business with Midnight in a $416 million transaction.
Closing of this arrangement occurred on June 29, 2010. In conjunction with this transaction and other initiatives, Provident completed
an internal reorganization to continue as a pure play, cash distributing natural gas liquids (NGL) infrastructure and logistics
business which resulted in staff reductions at all levels of the organization, including senior management.



On January 1, 2011, the Trust
completed a conversion from an income trust structure to a corporate structure pursuant to a plan of arrangement. The conversion
resulted in the reorganization of the Trust into a publicly traded, dividend-paying corporation under the name “Provident
Energy Ltd.”



For the year ended December
31, 2011, no strategic review and restructuring costs were incurred (2010 - $31.7 million, of which $13.8 million were attributable
to continuing operations). The costs were comprised primarily of severance, consulting and legal costs related to the sale of the
Upstream business. In the fourth quarter of 2010, $1.9 million in costs were incurred related to Provident’s reorganization
into a dividend paying corporation effective January 1, 2011.



| | 23. | Discontinued operations (Provident Upstream)
| | --- | --------------------------------------------



On June 29, 2010, Provident
completed a strategic transaction in which Provident combined the remaining Provident Upstream business with Midnight to form Pace
Oil & Gas Ltd. (“Pace”) pursuant to a plan of arrangement under the Business Corporations Act (Alberta) (the “Midnight
Arrangement”). Under the Midnight Arrangement, Midnight acquired all outstanding shares of Provident Energy Resources Inc.,
a wholly-owned subsidiary of Provident Energy Trust which held all of the producing oil and gas properties and reserves associated
with Provident’s Upstream business. Total consideration from the transaction was $423.7 million, consisting of $115 million
in cash and approximately 32.5 million shares of Pace valued at $308.7 million at the time of the closing. Associated transaction
costs were $8.1 million. Under the terms of the Midnight Arrangement, Provident unitholders divested a portion of each of their
Provident units to receive 0.12225 shares of Pace, which was recorded as a non-cash distribution by the Trust, valued at $308.7
million. Provident recorded a loss on sale of $79.8 million and $58.1 million in deferred tax recovery related to this transaction.
This transaction completed the sale of the Provident Upstream business in a series of transactions between September 2009 to June
2010.



The following table presents
information on the net loss from discontinued operations.



|                                                                                                |  | Year ended December 31, |  
|----------------------------------------------------------------------------------------------- |  | ----------------------- | -
|Net loss from discontinued operations ($ 000s)                                                  |  | 2011                    |  
|Production revenue, net of royalties                                                            |  | $                       | -
|Loss from discontinued operations before taxes and impact of sale of discontinued operations(1) |  |                         | -
|Loss on sale of discontinued operations                                                         |  |                         | -
|Current tax expense                                                                             |  |                         | -
|Deferred income tax recovery                                                                    |  |                         | -
|Net loss from discontinued operations for the year                                              |  | $                       | -
|Per unit                                                                                        |  |                         |  
|- basic and diluted                                                                             |  | $                       | -





| | (1) | For the year ended December 31, 2010 interest expense of $2.5 million was allocated to discontinued operations on a prorata
basis calculated as the proportion of net assets of the Upstream business to the sum of total net assets of the Trust plus long-term
debt.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------













The carrying amounts of major classes of assets and
liabilities included as part of the Upstream business as at the date of the sale were as follows:



|Canadian dollars (000s)       |  |   |        
|----------------------------- |  | - | -------
|                              |  |   |        
|Property, plant and equipment |  | $ | 568,880
|Decommissioning liabilities   |  |   | (65,184
|Other                         |  |   | (8,340 
|                              |  | $ | 495,356



Assets held for sale



IFRS requires that assets held
for sale be presented separately on the statement of financial position. Previous Canadian GAAP made an exception to this rule
for certain upstream oil and gas related transactions. The sale of West Central Alberta assets held in the Upstream business was
announced in December 2009. Therefore, assets and associated decommissioning liabilities of $186.4 million and $2.8 million, respectively,
related to this transaction have been presented separately on the January 1, 2010 statement of financial position, at their fair
value, determined with reference to the negotiated sales price adjusted for earnings between December 31, 2009 and the date of
closing on March 1, 2010. This transaction resulted in a loss on sale of $8.1 million in the first quarter of 2010.



Additional accounting policies



Accounting policies solely related
to Provident’s Upstream business are as follows:



| | i) | Financial instruments
| | -- | ---------------------



Financial
Assets



| | a) | Available for sale
| | -- | ------------------



The
Company’s investments are classified as available for sale financial assets. A gain or loss on an available for sale financial
asset shall be recognized directly in other comprehensive income, except for impairment losses and foreign exchange gains and losses.
When the investment is derecognized or determined to be impaired, the cumulative gain or loss previously recorded in equity is
recognized in profit or loss.



| | ii) | Property, plant & equipment
| | --- | ---------------------------



Oil and natural gas properties



Oil and natural gas properties
are stated at cost, less accumulated depletion and depreciation and accumulated impairment losses. Costs incurred subsequent to
the determination of technical feasibility and commercial viability and the costs of replacing parts of property, plant and equipment
are recognized as oil and natural gas properties only when they increase the future economic benefits embodied in the specific
properties to which they relate. All other expenditures are recognized in profit or loss as incurred. Such capitalized oil and
natural gas properties represent costs incurred in developing proved and probable reserves and bringing in or enhancing production
from such reserves and are accumulated on a cost centre basis.



Development costs



Expenditures on the construction,
installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells, including
unsuccessful development or delineation wells, are capitalized within property, plant and equipment.











Depletion



The provision for depletion and
depreciation for oil and natural gas assets is calculated, at a component level using the unit-of-production method based on current
period production divided by the related share of estimated total proved and probable oil and natural gas reserve volumes, before
royalties. Production and reserves of natural gas and associated liquids are converted at the energy equivalent ratio of 6,000
cubic feet of natural gas to one barrel of oil. In determining its depletion base, the Company includes estimated future costs
for developing proved and probable reserves, and excludes estimated salvage values of tangible equipment and the cost of exploration
and evaluation assets.



| | iii) | Exploration and Evaluation assets
| | ---- | ---------------------------------



Pre-license costs



General prospecting and evaluation
costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the statement of operations
in the period in which they are incurred.



Exploration and evaluation
costs



Once the legal right to explore
has been acquired, all costs incurred to assess the technical feasibility and commercial viability of resources are capitalized
as exploration and evaluation (“E&E”) intangible assets until the drilling of the well is complete and the results
have been evaluated. These costs may include costs of license acquisition, technical services and studies, seismic acquisition,
exploration drilling and testing, directly attributable overhead and administration expenses, including remuneration of production
personnel and supervisory management, the projected costs of retiring the assets (if any), and any activities in relation to evaluating
the technical feasibility and commercial viability of extracting mineral resources. Such items are initially measured at cost.
After initial recognition, the Company measures E&E costs using the cost model whereby the asset is carried at cost less accumulated
impairment losses.



Intangible exploration assets
are not depleted and carried forward until the Company has determined the technical feasibility and commercial viability of extracting
a mineral resource. If no reserves are found and management determines that the Company no longer intends to develop or otherwise
extract value from the discovery, the costs are written off to profit or loss. Upon determination of proven and probable reserves,
E&E assets attributable to those reserves are first tested for impairment at the cash generating unit level, and then reclassified
to oil and natural gas properties, a separate category within property, plant and equipment. Once these costs have been transferred
to property, plant and equipment, they are subject to impairment testing at the cash generating unit level similar to other oil
and natural gas assets within property, plant and equipment.



| | iv) | Joint arrangements
| | --- | ------------------



Certain of the Company’s
activities in the Upstream business were conducted through interests in jointly controlled assets and operations, where the Company
has a direct ownership interest in and jointly control the assets and/or operations of the venture. Accordingly, the income, expenses,
assets, and liabilities of these jointly controlled assets and operations are included in the consolidated financial statements
of the Company in proportion to the Company’s interest.



| | v) | Decommissioning liabilities
| | -- | ---------------------------



For upstream operations, the
amount recognized represents management’s estimate of the present value of the estimated future expenditures to abandon and
reclaim the Company’s net ownership in wells and facilities determined in accordance with local conditions and requirements
as well as an estimate of the future timing of the costs to be incurred.



Decommissioning is likely to
occur when the fields are no longer economically viable. This in turn depends on future oil and gas prices, which are inherently
uncertain.











| | vi) | Significant accounting judgments, estimates and assumptions
| | --- | -----------------------------------------------------------



Reserves base



The Company’s reserves
have been evaluated in accordance with the Canadian Oil and Gas Evaluation Handbook Volumes 1 and 2 (“COGEH”) and comply
with the standards that govern all aspects of reserves as prescribed in National Instrument 51-101 (NI 51-101). Under NI 51-101,
proved reserves are defined as having a high degree of certainty to be recoverable. Probable reserves are defined as those reserves
that are less certain to be recovered than proved reserves. The targeted levels of certainty, in aggregate, are at least 90 percent
probability that the quantities recovered will equal or exceed the estimated proved reserves and at least 50 percent probability
that the quantities recovered will equal or exceed the sum of the estimated proved plus probable reserves. Under NI 51-101 standards,
proved plus probable are considered a “best estimate” of future recoverable reserves.



The estimation of oil and gas
reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production, estimated commodity
prices, and the timing of future expenditures. The Company expects reserve estimates to be revised based on the results of future
drilling activity, testing, production levels, and economics of recovery based on cash flow forecasts. Future development costs
are estimated using assumptions as to number of wells required to produce the reserves, the cost of such wells and associated production
facilities, and other capital costs.



Carrying
value of oil and gas assets



Oil
and gas development and production properties are depreciated on a unit-of-production basis at a rate calculated by reference to
proved plus probable reserves and incorporate the estimated future costs of developing and extracting those reserves.



The
calculation of unit-of production rate of amortization could be impacted to the extent that actual production in the future is
different from current forecast production based on proved plus probable reserves. This would generally result from significant
changes in any of the factors or assumptions used in estimating reserves and could include:



| | · | Changes in proved plus probable reserves;
| | - | -----------------------------------------

| | · | The effect on proved plus probable reserves of differences between actual commodity prices and commodity price assumptions;
or
| | - | ------------------------------------------------------------------------------------------------------------------------------

| | · | Unforeseen operational issues.
| | - | ------------------------------





Impairment
indicators



The
recoverable amounts of cash generating units and individual assets have been determined based on the higher of value in use calculations
and fair values less costs to sell. These calculations require the use of estimates and assumptions.



For
the Upstream business, it is reasonably possible that the commodity price assumptions may change which may then impact the estimated
life of the field and may then require a material adjustment to the carrying value of its tangible and intangible assets. The Company
monitors internal and external indicators of impairment relating to its tangible and intangible assets.



Impairment of available
for sale financial assets



The Company classifies certain
assets as available for sale and recognizes movements in their fair value in equity. Subsequent to initial recognition, when the
fair value declines, management makes assumptions about the decline in value whether it is an impairment that should be recognized
in profit or loss.











| | 24. | Subsequent event
| | --- | ----------------



Arrangement agreement with
Pembina Pipeline Corporation



On January 15, 2012, Provident
and Pembina Pipeline Corporation (“Pembina”) entered into an agreement (the “Arrangement Agreement”) for
Pembina to acquire all of the issued and outstanding common shares of Provident by way of a plan of arrangement (the “Pembina
Arrangement”) under the Business Corporations Act (Alberta).



Under the terms of the Arrangement
Agreement, Provident shareholders will receive 0.425 of a Pembina share for each Provident share held (the "Provident Exchange
Ratio"). Pembina will also assume all of the rights and obligations relating to Provident’s convertible debentures.
The conversion price of each class of convertible debentures will be adjusted based on the Provident Exchange Ratio. Following
closing of the Pembina Arrangement, Pembina will be required to make an offer for the Provident convertible debentures at 100 percent
of their principal values plus accrued and unpaid interest. The repurchase offer will be made within 30 days of closing of the
Pembina Arrangement. Should a holder of the Provident convertible debentures elect not to accept the repurchase offer, the debentures
will mature as originally set out in their respective indentures. Holders who convert their Provident convertible debentures following
completion of the Pembina Arrangement will receive common shares of Pembina. In addition, Provident immediately suspended its DRIP
plan following the announcement of the Pembina Arrangement.



The proposed transaction will
be carried out by way of a court-approved plan of arrangement and will require the approval of at least 66 2/3% of holders of Provident
shares represented in person or by proxy at a special meeting of Provident shareholders to be held on March 27, 2012 to consider
the Pembina Arrangement. The Pembina Arrangement is also subject to obtaining the approval of a majority of the votes cast by the
holders of Pembina shares at a special meeting of Pembina shareholders to be held on March 27, 2012 to consider the issuance of
Pembina shares in connection with the Pembina Arrangement. In addition to shareholder and court approvals, the proposed transaction
is subject to applicable regulatory approvals and the satisfaction of certain other closing conditions customary in transactions
of this nature, including compliance with the Competition Act (Canada) and the acceptance of the Toronto Stock Exchange. Subject
to receipt of all required approvals, closing of the Pembina Arrangement is expected to occur on or about April 1, 2012.