Royalty Agreement



Table of Contents



Exhibit 10.1



ROYALTY AGREEMENT



Between



Computershare Trust Company of Canada

As Trustee of the



PARAMOUNT ENERGY TRUST


and



Paramount Energy Operating Corp.

As Trustee of the



PARAMOUNT OPERATING TRUST


Effective as of July 1, 2002


 







TABLE OF CONTENTS




									
	ARTICLE 1 INTERPRETATION
		1.1 Definitions
		1.2 Definitions Incorporated by Reference
		1.3 Construction of Terms
		1.4 Amendments to Agreements and Laws
		1.5 References
		1.6 Choice of Law
		1.7 Attornment
		1.8 Monetary Sums
		1.9 Accrual Method of Calculation
		1.10 Estimates
		1.11 No Duplication
		1.12 References to Acts Performed by the a Trust
		1.13 Tax Act
	ARTICLE 2 ROYALTY
		2.1 Royalty Grant
		2.2 Royalty Applicable to After Acquired Properties
		2.3 Deferred Royalty Purchase Payments
		2.4 Adjustments to Payment for Royalty
		2.5 Right to Take in Kind
		2.6 Royalty Share of Production not Taken in Kind
		2.7 Petroleum Substances Lost or Used in Operations
		2.8 Not an Interest in Land
		2.9 Reimbursement of Non-Deductible Crown Royalties.
	ARTICLE 3 ACCOUNTING
		3.1 Payments from Grantor to Royalty Owner
		3.2 Statements
		3.3 Overpayment
		3.4 Carry Forward of Permitted Royalty Deductions
		3.5 Collection of Production Revenues and Other Revenues
		3.6 Payment of Permitted Royalty Deductions
		3.7 Payments from Royalty Owner to Grantor
	ARTICLE 4 RESERVE AND RECLAMATION FUND
		4.1 Establishment
		4.2 Contributions to the Reserve
		4.3 Use of Reserve and Reclamation Fund
		4.4 Reduction and Termination of Reserve
		4.5 Reclamation Trust
	ARTICLE 5 OPERATIONS
		5.1 General
		5.2 No Obligation to Develop
		5.3 Amendment and Waiver of Provisions in Title and Operating Documents
		5.4 Rights and Obligations
		5.5 Marketing
		5.6 Additional Title and Operating Documents
		5.7 Future Acquisitions
		5.8 Capital Expenditures
		5.9 Borrowing
		5.10 Costs of Tangibles and Miscellaneous Interests
	ARTICLE 6 DISPOSITIONS
		6.1 Restrictions on Disposition of Properties
		6.2 Dispositions of Tangibles and Miscellaneous Interests
		6.3 Dispositions of Petroleum and Natural Gas Rights
		6.4 Merger of Interests On Concurrent Disposition
		6.5 Proceeds of a Concurrent Disposition
		6.6 Concurrent Disposition Documentation
		6.7 Merger upon Farmout
	ARTICLE 7 TERM OF AGREEMENT
		7.1 Term
	ARTICLE 8 BOOKS AND RECORDS
		8.1 Examination
		8.2 Audit
		8.3 Confidentiality
		8.4 Extension of Time under Limitations Act
	ARTICLE 9 POOLING, UNITIZATION, SURRENDER AND ABANDONMENT
		9.1 Pooling and Unitization
		9.2 Surrender
		9.3 Abandonment
	ARTICLE 10 ASSIGNMENT
		10.1 Restrictions on Assignment
		10.2 Multiple Royalty Owners
		10.3 Grant and Assignment of Security
		10.4 Enforcement of Security
		10.5 Dispositions Subject to This Agreement
	ARTICLE 11 INSURANCE
		11.1 Maintenance
	ARTICLE 12 NOTICES AND PAYMENTS
		12.1 Addresses for Service and Payments
		12.2 Delivery and Deemed Receipt of Notices
		12.3 Addresses and Telefacsimile Numbers for Service
		12.4 Change of Address
	ARTICLE 13 MISCELLANEOUS
		13.1 Enurement
		13.2 Waivers in Writing
		13.3 Time of Essence
		13.4 No Partnership
		13.5 Severability
		13.6 Amendments
	ARTICLE 14 CONCERNING THE TRUSTEE AND PEOC
		14.1 Acknowledgement
	Amending Agreement
	Opinion of Gowling Lafleur Henderson LLP
	Opinion of Felesky Flynn LLP
	Opinion of Stikeman Elliott
	Opinion of Carter Ledyard & Milburn
	Royalty Agreement
	Third Amending Agreement to Commitment Letter
	Consent of KPMG LLP
	Awareness Letter
	Consent of McDaniel & Associates
	Consent of Scotia Capital Inc.








Table of Contents










Table of Contents




	 	 	 	 	 
	ARTICLE 1 INTERPRETATION
	1.1	 	
Definitions
	 	  2
	1.2	 	
Definitions Incorporated by Reference
	 	14
	1.3	 	
Construction of Terms
	 	14
	1.4	 	
Amendments to Agreements and Laws
	 	15
	1.5	 	
References
	 	15
	1.6	 	
Choice of Law
	 	15
	1.7	 	
Attornment
	 	15
	1.8	 	
Monetary Sums
	 	15
	1.9	 	
Accrual Method of Calculation
	 	15
	1.10	 	
Estimates
	 	16
	1.11	 	
No Duplication
	 	16
	1.12	 	
References to Acts Performed by the a Trust
	 	16
	1.13	 	
Tax Act
	 	16
	
ARTICLE 2 ROYALTY
	2.1	 	
Royalty Grant
	 	17
	2.2	 	
Royalty Applicable to After Acquired Properties
	 	17
	2.3	 	
Deferred Royalty Purchase Payments
	 	17
	2.4	 	
Adjustments to Payment for Royalty
	 	18
	2.5	 	
Right to Take in Kind
	 	19
	2.6	 	
Royalty Share of Production not Taken in Kind
	 	20
	2.7	 	
Petroleum Substances Lost or Used in Operations
	 	20
	2.8	 	
Not an Interest in Land
	 	21
	2.9	 	
Reimbursement of Non-Deductible Crown Royalties
	 	21
	
ARTICLE 3 ACCOUNTING
	3.1	 	
Payments from Grantor to Royalty Owner
	 	21
	3.2	 	
Statements
	 	22
	3.3	 	
Overpayment
	 	22
	3.4	 	
Carry Forward of Permitted Royalty Deductions
	 	22
	3.5	 	
Collection of Production Revenues and Other Revenues
	 	22
	3.6	 	
Payment of Permitted Royalty Deductions
	 	23
	3.7	 	
Payments from Royalty Owner to Grantor
	 	23
	
ARTICLE 4 RESERVE AND RECLAMATION FUND
	4.1	 	
Establishment
	 	23
	4.2	 	
Contributions to the Reserve
	 	23
	4.3	 	
Use of Reserve and Reclamation Fund
	 	23
	4.4	 	
Reduction and Termination of Reserve
	 	24
	4.5	 	
Reclamation Trust
	 	24



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ARTICLE 5 OPERATIONS
	5.1	 	
General
	 	25
	5.2	 	
No Obligation to Develop
	 	25
	5.3	 	
Amendment and Waiver of Provisions in Title and Operating Documents
	 	25
	5.4	 	
Rights and Obligations
	 	26
	5.5	 	
Marketing
	 	26
	5.6	 	
Additional Title and Operating Documents
	 	26
	5.7	 	
Future Acquisitions
	 	26
	5.8	 	
Capital Expenditures
	 	27
	5.9	 	
Borrowing
	 	27
	5.10	 	
Costs of Tangibles and Miscellaneous Interests
	 	27
	
ARTICLE 6 DISPOSITIONS	 	 
	6.1	 	
Restrictions on Disposition of Properties
	 	27
	6.2	 	
Dispositions of Tangibles and Miscellaneous Interests
	 	27
	6.3	 	
Dispositions of Petroleum and Natural Gas Rights
	 	28
	6.4	 	
Merger of Interests On Concurrent Disposition
	 	28
	6.5	 	
Proceeds of a Concurrent Disposition
	 	28
	6.6	 	
Concurrent Disposition Documentation
	 	29
	6.7	 	
Merger upon Farmout
	 	29
	
ARTICLE 7 TERM OF AGREEMENT	 	 
	7.1	 	
Term	 	29
	
ARTICLE 8 BOOKS AND RECORDS
	8.1	 	
Examination
	 	30
	8.2	 	
Audit
	 	30
	8.3	 	
Confidentiality
	 	31
	8.4	 	
Extension of Time under Limitations Act
	 	31
	
ARTICLE 9 POOLING, UNITIZATION, SURRENDER AND ABANDONMENT
	9.1	 	
Pooling and Unitization
	 	31
	9.2	 	
Surrender
	 	32
	9.3	 	
Abandonment
	 	32
	
ARTICLE 10 ASSIGNMENT
	10.1	 	
Restrictions on Assignment
	 	32
	10.2	 	
Multiple Royalty Owners
	 	33
	10.3	 	
Grant and Assignment of Security
	 	33
	10.4	 	
Enforcement of Security
	 	34
	10.5	 	
Dispositions Subject to This Agreement
	 	34



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ARTICLE 11 INSURANCE	 	 
	11.1	 	
Maintenance	 	35
	
ARTICLE 12 NOTICES AND PAYMENTS
	12.1	 	
Addresses for Service and Payments
	 	35
	12.2	 	
Delivery and Deemed Receipt of Notices
	 	35
	12.3	 	
Addresses and Telefacsimile Numbers for Service
	 	36
	12.4	 	
Change of Address
	 	36
	
ARTICLE 13 MISCELLANEOUS	 	 
	13.1	 	
Enurement
	 	36
	13.2	 	
Waivers in Writing
	 	37
	13.3	 	
Time of Essence
	 	37
	13.4	 	
No Partnership
	 	37
	13.5	 	
Severability
	 	37
	13.6	 	
Amendments
	 	37
	
ARTICLE 14 CONCERNING THE TRUSTEE AND PEOC	 	 
	14.1	 	
Acknowledgement
	 	37



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ROYALTY AGREEMENT



THIS ROYALTY AGREEMENT is made
effective as of the 1st day of July, 2002


BETWEEN:



		
	 	Computershare Trust Company of Canada, a trust company
incorporated under the laws of Canada, having an
registered office in Calgary, Alberta, as trustee for
and on behalf of the PARAMOUNT ENERGY TRUST, a trust
formed in accordance with the laws of Alberta (the
“Royalty Owner”)



and



		
	 	Paramount Energy Operating Corp., a corporation
incorporated under the laws of Alberta, having its
registered office and principal place of business in
Calgary, Alberta, as trustee for and on behalf of the
PARAMOUNT OPERATING TRUST, a trust formed in
accordance with the laws of Alberta (the “Grantor”).



WHEREAS:



	A.	 	The Grantor acquired certain assets that are Canadian resource properties
(as hereinafter defined) (the “Initial Assets”), as well as certain assets
that are not Canadian resource properties, from Paramount Resources Ltd.
(“Paramount”) pursuant to that certain Initial Assets Purchase Agreement
(the “Initial Assets Purchase Agreement”) made effective as of July 1,
2002;
	 
	B.	 	Paramount and the Grantor have entered into the Take-Up Agreement made
effective as of July 1, 2002 (the “Take-Up Agreement”) pursuant to which
the Grantor agrees to purchase from Paramount certain additional assets
that are Canadian resource properties or an undivided interest therein on
the terms and conditions therein contained (the “Additional Assets”), as
well as certain assets that are not Canadian resource properties;
	 
	C.	 	The Grantor wishes to enter into this Agreement for the purpose of
granting the Royalty, as hereinafter defined, to the Royalty Owner and the
Royalty Owner wishes to accept and pay for the Royalty on the terms of
this Agreement;
	 
	D.	 	The Royalty shall apply to the Initial Assets and any other Properties
(as hereinafter defined) acquired by the Grantor including, without
limitation, the Additional Assets.



NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth,
each Party hereby agrees as follows:


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ARTICLE 1

INTERPRETATION






1.1 Definitions



In this Agreement, including the recitals and this Article 1, the following
words and expressions shall have the following meanings, except where the
context otherwise necessarily requires:


“Acquisition” means an acquisition by the Grantor of Petroleum and Natural Gas
Rights or interests therein, either by themselves or together with interests in
related Tangibles and Miscellaneous Interests;


“Acquisition Costs” means all costs and expenses incurred by the Grantor in
making any Acquisition including, without limitation, the net purchase price
paid for such an Acquisition, brokers fees, commissions, costs of registration
of conveyances of title, and costs of consultants, lawyers, landmen, engineers
and other technical advisors;


“Agreement”, “herein”, “hereto”, “hereof” and similar expressions refer to this
agreement, including the recitals to this agreement, and not to any particular
article, section, subsection or other subdivision of this agreement and any
agreements or schedules supplemental or ancillary hereto, as any of the same
may be amended, restated or replaced from time to time;


“ARTC” means credits or rebates in respect of Crown Royalties that are paid or
credited by the Crown, including those paid or credited under the Alberta
Corporate Tax Act that are commonly known as “Alberta Royalty Tax Credits”;


“BOE” means the number of barrels of crude oil and crude oil equivalent,
determined on the basis that 6 mcf of natural gas is equivalent to one barrel
of crude oil and one barrel of natural gas liquids is equivalent to one barrel
of crude oil;


“Business Day” means any day other than a Saturday, Sunday, statutory holiday
in the Province of Alberta or any other day on which banks in Calgary, Alberta,
are not open for business;


“Canadian resource property” has the meaning attributable to such term in the
Tax Act;


“Capital Expenditures” means with respect to any period, all of the Grantor’s
costs respecting the drilling, completion, equipping, abandonment or
recompletion of wells, the construction, acquisition or installation of
gathering systems, batteries, plants, pipelines or other facilities, or any
other operations or activities undertaken in respect of the Properties,
acquisition costs of Properties acquired from time to time by the Grantor and
all other costs relating to the Properties that are “capital costs” under GAAP
and are accrued during such period, but excluding Production Costs and costs
reasonably allocable to earning Other Revenues;


“Closing” means the closing of the transactions contemplated by the Initial
Assets Purchase Agreement and this Agreement;


“Closing Date” means the date upon which the Closing occurs;


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“Commodity Price and Currency Swaps” means exchange, swap, hedging and similar
arrangements made by the Grantor, from time to time, in respect of commodity
prices or rates of exchange of currencies, the purpose of which is to mitigate
or eliminate exposure to fluctuations in prices of commodities or rates of
exchange of currencies which affect Production Costs or Royalty Revenues;


“Concurrent Disposition” means any sale in which:



	 	(a)	 	the Grantor sells any interest in the Petroleum and Natural
Gas Rights comprised in the Properties;
	 
	 	(b)	 	the Royalty Owner concurrently sells a portion of the Royalty
determined with reference to production from or relating to such
interests; and
	 
	 	(c)	 	each of the criteria set forth in Section 6.3 is satisfied in
respect of such sale;




“Credit Facilities” means any credit facilities and loans made available to the
Grantor, from time to time, to fund the payment of or to refinance the payment
of Acquisition Costs, Production Costs, Capital Expenditures, the
Royalty, working capital or otherwise, including for greater
certainty, any liabilities, obligations or indebtedness for which the Grantor
becomes primarily liable as a result of having given a guarantee or provided
any indemnity in respect of the liabilities, obligations or indebtedness of
another Person and being called upon to honour such guarantee or indemnity;


“Crown” means Her Majesty the Queen in Right of Canada or a Province thereof;



“Crown Royalties” with respect to any period, means any amount paid or payable
to or received or receivable by the Crown respecting such period by virtue of
an obligation imposed by statute or a contractual obligation substituted for an
obligation imposed by statute such as a royalty, tax (other than municipal or
school tax), lease rental, or bonus or other amount in lieu (or in respect of
the late or non-payment) thereof that may be reasonably regarded as being in
relation to petroleum and natural gas rights or the production of Petroleum
Substances;


“Debt Service Costs” with respect to any period, means each of the following
amounts accrued in such period:




	 	(a)	 	all interest, penalties, fees, indemnities, legal costs, and
other costs, expenses and disbursements for which the Grantor is
liable pursuant to the Credit Facilities or any document or
instrument entered into by the Grantor and the Lender or made by the
Grantor in favour of the Lender in connection therewith, including
without limitation:
	 




	 	(i)	 	all amounts paid or payable pursuant to Credit
Facilities:
	 





	 	(A)	 	on account of principal, including,
without limitation, scheduled, prepaid, whether
voluntary or mandatory, and accelerated payments of
principal; and



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	 	(B)	 	on account of banker’s acceptances or
letters of credit, except for amounts included in
subsection (a) above;
	 
	 	provided that the difference between the face amount of a
banker’s acceptance that was issued and accepted pursuant to
Credit Facilities and the discount proceeds of such banker’s
acceptance, if any, shall be accounted for as interest
expense of the Grantor at the times that such interest
expense is considered to accrue in accordance with GAAP, and
provided that when the Grantor becomes liable to pay the face
amount of a banker’s acceptance, the face value or the
discount proceeds paid by the Grantor in respect of such
banker’s acceptance, as the case may be, shall be accounted
for as principal paid by the Grantor; plus
	 





	 	(b)	 	any net loss or minus any net profit, as the case may be,
actually realized from Interest Rate Swaps;



but does not include any of such amounts as are reasonably allocable to earning
Other Revenues;


“Deferred Royalty Purchase Payment” means that amount payable by the Royalty
Owner to the Grantor pursuant to Section 2.3 hereof;


“Discount Rate” on any particular day shall be the lesser of:



	 	(a)	 	twice the yield on ten (10) year Government of Canada Bonds
on the fifth Business Day preceding the particular date, rounded
down to the nearest whole percentage point;
	 
	 	(b)	 	the yield on ten year Government of Canada Bonds on the fifth
Business Day preceding the particular date plus eight percent (8%),
rounded down to the nearest whole percentage point; or
	 
	 	(c)	 	fifteen percent (15%);



provided that the Grantor’s Board of Directors may determine the Discount Rate
to be such other rate as they, acting reasonably and in accordance with prudent
oil and gas industry practices, designate from time to time;


“Drilling Credits” means all allowable work credits, drilling credits, grouping
rights, dryhole contributions, bottomhole contributions, geophysical and
petroleum incentive payments and other similar incentive benefits resulting
from any expenses incurred with respect to the Properties which are borne by
the Grantor;


“Future Acquisition” means any Acquisition made after the Closing Date;


“Future Offering” has the meaning set out in subsection 2.3(a)(iv);


“GAAP” means, as of any time, the generally accepted accounting principles used
in Canada as at such time;


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“General and Administrative Expenses” with respect to any period, means all
general and administrative costs and expenses incurred by the Grantor in such
period that are:



	 	(a)	 	reasonably and necessarily incurred by the Grantor in
connection with the management and administration of the business
and affairs of the Grantor or the Royalty Owner, or the ownership,
operation and maintenance of the Properties, including, without
limitation, costs and expenses incurred in respect of auditing,
accounting, bookkeeping, rent and other leasehold expenses, legal,
land administration, engineering, travel, telephone, data
processing, reporting, executive and management time and salaries;
or
	 
	 	(b)	 	approved by the Grantor’s Board of Directors either
specifically or as part of an approved budget or policy statement;



but does not include any of such amounts as are reasonably allocable to earning
Other Revenues;


“Grantor’s Board of Directors” means the board of directors of PEOC, acting in
its capacity as the board of directors of the Grantor’s trustee;


“Grantor Security Interests” has the meaning set out in Section 10.3 hereof;


“Grantor’s Share of Production” means that portion of any Petroleum Substances
produced from the Properties or properties pooled or unitized therewith to
which the Grantor is entitled for any reason whatsoever, where the said portion
is determined as if the Royalty did not exist;


“Initial Assets” has the meaning set out in recital A hereof, and which
properties are for convenience described in Schedule A hereto;


“Initial Assets Purchase Agreement” has the meaning set out in recital A
hereof;


“Interest Rate Swaps” means exchange, swap, hedging and similar arrangements
made by the Grantor, from time to time, in respect of interest rates, the
purpose of which is to mitigate or eliminate exposure to fluctuations in
interest rates associated with the Credit Facilities;


“Lease” means any lease, licence, permit, reservation, certificate of title or
other document of title by virtue of which the Grantor is entitled to explore
for, recover, remove or dispose of Petroleum Substances within, upon or under
any lands forming part of the Petroleum and Natural Gas Rights or any lands
pooled or unitized therewith;


“Lender” means:



	 	(a)	 	any Person (including for greater certainty, the Royalty
Owner) that has agreed alone or together with other Persons to
provide the Grantor with Credit Facilities;
	 
	 	(b)	 	any Person with whom the Grantor makes Swap Arrangements; and
	 
	 	(c)	 	any Person to whom the Grantor becomes primarily liable as a
result of having given a guarantee or provided any indemnity in
respect of the indebtedness,



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	 	 	 	liabilities or obligations of another Person and being called upon
to honour such guarantee or indemnity;



“Miscellaneous Interests” means all properties, assets, rights and interests of
any nature whatsoever which are related to Petroleum and Natural Gas Rights or
Tangibles, excepting Petroleum and Natural Gas Rights and Tangibles, and
including without limitation:



	 	(a)	 	Title and Operating Documents;
	 
	 	(b)	 	Surface Rights;
	 
	 	(c)	 	books of account and records;
	 
	 	(d)	 	well files, production records and similar data and
information;
	 
	 	(e)	 	injection wells;
	 
	 	(f)	 	geological, seismic and similar data; and
	 
	 	(g)	 	permits, licences, authorizations and similar instruments
required to own, operate or exploit the Petroleum and Natural Gas
Rights or Tangibles;



“Month” means the period from 8:00 a.m. Calgary time on the Closing Date to
8:00 a.m. Calgary time on the first day of the immediately following calendar
month, and any period that commences at 8:00 a.m. Calgary time on the first day
of any calendar month subsequent to the calendar month within which the Closing
occurs and ends at 8:00 a.m. Calgary time on the first day of the immediately
following calendar month;


“Monthly Royalty Payment” means, in respect of a Month, ninety-nine percent
(99%) of Royalty Income for such Month payable by the Grantor to the Royalty
Owner in accordance with Section 3.1;


“Non-Deductible Crown Royalties” means Crown Royalties that are:



	 	(a)	 	required to be included in taxable income pursuant to
paragraph 12(1)(o) of the Tax Act or any replacement of such
paragraph; or
	 
	 	(b)	 	not permitted to be used as deductions in computing taxable
income pursuant to paragraph 18(1)(m) of the Tax Act or any
replacement of such paragraph;



“Operating Procedure” means the 1990 Canadian Association of Petroleum
Landmen’s form of operating procedure;


“Other Revenues” with respect to any period means all of the Grantor’s revenues
with respect to such period, including without limitation:



	 	(a)	 	fees and similar payments made by any Third Party to the
Grantor for the gathering, compression, treatment, processing,
transportation or storage of their Petroleum Substances by use of
the Tangibles;



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	 	(b)	 	proceeds from the sale of any interest in Tangibles or
Miscellaneous Interests comprised in the Properties;
	 
	 	(c)	 	insurance proceeds paid to the Grantor, including any
proceeds paid in respect of business interruption insurance,
property damage insurance and third party liability insurance;
	 
	 	(d)	 	proceeds from the sale or licensing of geological, seismic,
and similar data;
	 
	 	(e)	 	income from investing the Reserve; and
	 
	 	(f)	 	overhead and other cost recoveries;



and for greater certainty, not including:



	 	(g)	 	any proceeds of sale from any Concurrent Disposition that are
allocated pursuant to Section 6.5 to the interests in the Royalty
sold by the Royalty Owner;
	 
	 	(h)	 	Production Revenues;
	 
	 	(i)	 	funds paid to the Grantor by the Royalty Owner on account of
any Non-Deductible Crown Royalties paid by the Grantor;
	 
	 	(j)	 	ARTC payable to the Royalty Owner in respect of
Non-Deductible Crown Royalties which the Royalty Owner reimburses to
the Grantor;
	 
	 	(k)	 	funds paid to the Grantor by the Royalty Owner on account of
the Deferred Royalty Purchase Payment;
	 
	 	(l)	 	funds withdrawn by the Grantor from the Reserve; or
	 
	 	(m)	 	any funds advanced to the Grantor pursuant to any Credit
Facilities;



“Party” means each of the Royalty Owner and the Grantor;


“PEOC” means Paramount Energy Operating Corp. in its capacity as trustee of the
Grantor and includes any successor trustee of the Grantor;


“Permitted Investments” means:



	 	(a)	 	obligations issued or guaranteed by the government of Canada
or any province of Canada or any agency thereof;
	 
	 	(b)	 	term deposits, guaranteed investment certificates,
certificates of deposit or bankers’ acceptances of or guaranteed by
any Canadian chartered bank or similar financial institution;



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	 	(c)	 	short-term debt or deposits which have a rating of no lower
than A, or the equivalent thereof, as determined by Standard &
Poor’s, Moody’s Investors Service, Inc. or Dominion Bond Rating
Service Limited;
	 
	 	(d)	 	commercial paper that matures not later than one hundred and
eighty ( 180) days after the date of acquisition, and which has a
rating of no lower than A, or the equivalent thereof, as determined
by Standard & Poor’s, Moody’s Investors Service, Inc. or Dominion
Bond Rating Service Limited; and
	 
	 	(e)	 	money market instruments or funds which constitute secure
investments, as determined by the Grantor acting reasonably and
prudently;



“Permitted Royalty Deductions” means with respect to any period, the following
amounts with respect to such period:



	 	(a)	 	Production Costs;
	 
	 	(b)	 	Debt Service Costs;
	 
	 	(c)	 	Taxes;
	 
	 	(d)	 	General and Administrative Expenses;
	 
	 	(e)	 	Capital Expenditures;
	 
	 	(f)	 	any amounts paid into the Reserve;
	 
	 	(g)	 	any Permitted Royalty Deductions that are carried forward
pursuant to Section 3.4 into such period;



except to the extent that such amounts are reasonably allocable to activities
or assets used for the purpose of earning Other Revenue and except to the
extent that such amounts are funded by:



	 	(h)	 	withdrawals from the Reserve during such period;
	 
	 	(i)	 	advances made pursuant to the Credit Facilities during such
period;
	 
	 	(j)	 	Non-Deductible Crown Royalties reimbursed to the Grantor by
the Royalty Owner in respect of such period;
	 
	 	(k)	 	Deferred Royalty Purchase Payments made by the Royalty Owner
to the Grantor during such period; or
	 
	 	(l)	 	Other Revenues during such period;



“Person” shall be interpreted broadly and includes any individual, partnership,
joint venture, body corporate, association, trust, unincorporated organization,
foundation, government or governmental authority or any jurisdiction (whether federal, provincial, state
or municipal) or any other entity or subject;


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“Petroleum and Natural Gas Rights” means all of the right, title, estate and
interest, whether absolute or contingent, legal or beneficial, present or
future, vested or not, and whether or not an “interest in land”, held by the
Grantor in or to any of the following, by whatever name the same are known:



	 	(a)	 	rights to explore for, drill for, extract, win, produce,
take, save or market Petroleum Substances;
	 
	 	(b)	 	rights to a share of the production of Petroleum Substances;
	 
	 	(c)	 	rights to a share of the proceeds of, or to receive payment
calculated by reference to, the quantity or value of the production
of Petroleum Substances, other than the rights under agreements for
the sale of Petroleum Substances;
	 
	 	(d)	 	the interests set forth in Schedule A hereto;
	 
	 	(e)	 	rights to acquire any of the rights described in paragraphs
(a) through (d) of this definition; and
	 
	 	(f)	 	interest in any rights described in paragraphs (a) of (d) of
this definition;



including, without limitation, all interests and rights known as working
interests, royalty interests, overriding royalty interests, gross overriding
royalty interests, production payments, profits interests, net profits
interests, revenue interests, net revenue interests, economic interests, and
other interests, fractional or undivided, in any of the foregoing, and all
freehold, leasehold or other interests in and to Petroleum Substances to the
extent that such interests apply to the Royalty Lands and the Leases;


“Petroleum Substances” means petroleum, crude bitumen, oil sands, natural gas,
coal bed methane, natural gas liquids, related hydrocarbons and any and all
other substances, whether liquid, solid or gaseous, whether hydrocarbons or
not, produced or producible in association with any of the foregoing, including
hydrogen sulphide and sulphur;


“Probable Reserves” means those reserves which analysis of drilling,
geological, geophysical and engineering data does not demonstrate to be proved,
but where such analysis suggests the likelihood of their existence and future
recovery under current technology and existing or anticipated economic
conditions, provided that the Probable Reserves to be obtained by the
application of enhanced recovery processes shall be the increased recovery over
and above that included in Proved Reserves which can be realistically estimated
for the pool on the basis of enhanced recovery processes which can be
reasonably expected to be instituted in the future;


“Production Costs” for any period means the amount of all obligations incurred
in such period for operating, maintaining or utilizing the Properties or
equipment for the recovery of Petroleum Substances from the Properties or on
other lands with which the same are pooled or unitized
insofar as such expenditures are, pursuant to the applicable Leases, reasonably
allocable to the Grantor’s interest in the Properties, including, without
limitation:


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	 	(a)	 	all amounts expended, including labour, benefits and travel
expenses, materials, supplies and services, and whether by the
Grantor or by another operator, for operating, reworking, replacing,
repairing, maintaining and utilizing wells, casing, flow lines,
pumps, treaters, dehydrators, compressors, processing facilities,
vehicles, equipment and field offices on or serving the Properties
and all costs for the creation of any petroleum and/or natural gas
unit or units in which any of the Properties are or may be included
and any other amounts (including overhead recoveries) paid to any
operator of the Properties and overhead charges of operators
(whether the Grantor or not) pursuant to applicable operating
procedures, if any;
	 
	 	(b)	 	costs of third party storage, transportation, freight, tank
car and other expenses to move Petroleum Substances produced from or
attributable to the Properties to the point where it is sold;
	 
	 	(c)	 	lessors’ royalties including Crown Royalties, overriding
royalties, net profits interests, carried interests, production
payments and other royalties, lease burdens and encumbrances which
are paid on, or in respect of, production from or attributable to
the Properties;
	 
	 	(d)	 	payments required to maintain an interest in the Properties,
including those to acquire or maintain any Surface Rights or Leases,
including without limitation, deposits, bonus payments, rentals,
delay rentals, renewal or extension fees, and royalties;
	 
	 	(e)	 	all money required to be expended to produce any Petroleum
Substances and the fair market value of any Petroleum Substances
which are supplied, in kind, by the Grantor from lands other than
the Properties, where any buyer of Petroleum Substances has prepaid
for the delivery of Petroleum Substances attributable to the
Properties or otherwise and thereafter such buyer has requested
delivery of the Petroleum Substances and the Grantor is not
reasonably able to meet delivery requirements with Petroleum
Substances produced from the Properties;
	 
	 	(f)	 	sales and use taxes and customs and excise duties and taxes
levied on Petroleum Substances produced from or attributable to the
Properties and not payable by the party purchasing such Petroleum
Substances, taking into account any adjustment thereto including
additional assessments and refunds;
	 
	 	(g)	 	ad valorem, property, production, severance, mineral,
occupation, gross production and similar taxes and assessments,
imposed by any competent governmental authority based on or measured
by the ownership of property or the production of Petroleum
Substances or any of them or the receipt of proceeds therefrom,
taking into account any adjustment thereof including additional
assessments and refunds; and
	 
	 	(h)	 	all other taxes, rates and charges, charged, levied or rated
by any competent governmental authority on the Properties, the
production of Petroleum Substances



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	 	 	 	therefrom or attributable thereto
or the revenues therefrom including without limitation any new or
additional tax or levy which may hereafter be levied or imposed on
the Properties, the production of Petroleum Substances therefrom or
attributable thereto or the revenues therefrom;



provided that the following amounts shall not be included in Production Costs:



	 	(i)	 	Taxes;
	 
	 	(j)	 	Debt Service Costs;
	 
	 	(k)	 	General and Administrative Costs;
	 
	 	(l)	 	Capital Expenditures;
	 
	 	(m)	 	any payments made to the Reserve; and
	 
	 	(n)	 	any amount that is reasonably allocable to earning Other
Revenues;



“Production Revenues” for any period means all of the Grantor’s revenues during
such period with respect to the Petroleum and Natural Gas Rights, including
without limitation the following:



	 	(a)	 	the gross proceeds from the sale of the Grantor’s Share of
Production;
	 
	 	(b)	 	income from royalties, net profits interests and other
similar interests;
	 
	 	(c)	 	the net profit or loss (which shall be a negative amount for
this purpose in the event of a loss) from Commodity Price and
Currency Swaps;
	 
	 	(d)	 	payments received in cash in the period by the Grantor for
Petroleum Substances expected to be recoverable from or attributable
to the Properties pursuant to a “take or pay” contract for the sale
of Petroleum Substances which are not taken at the time of payment
therefor, and payments made by the buyer of Petroleum Substances received in cash in the period by the Grantor in lieu of
or as a compromise for payments otherwise required to be made under
a “take or pay” contract and payments received in cash in the
period by the Grantor in consideration of a waiver or compromise of
any buyer’s obligations under a “take or pay” contract; provided
that in the event that the sales proceeds are later adjusted as
between the buyer and the seller of the Petroleum Substances, then
the Grantor and the Royalty Owner shall adjust such proceeds
likewise by way of, if possible, a set-off against the Royalty
Income or by such other reasonable means available;
	 
	 	(e)	 	all grants, incentives, rebates, or reimbursements, other
than credits or rebates or other similar amounts under applicable
income tax legislation in respect of the Properties or any
production of Petroleum Substances therefrom;
	 
	 	(f)	 	all Drilling Credits in respect of the Properties that are
received in cash; and



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	 	(g)	 	any amount that the Grantor determines pursuant to Section
4.4. is excess to the Reserve’s requirements and causes to be
released from the Reserve;



provided that to the extent that any “take or pay” or similar payments that
have been accounted for in Other Revenues are thereafter credited or set off
against or otherwise used to reduce the proceeds of sale of the Grantor’s Share
of Production, only the proceeds of such sale, if any, after taking such
reduction into account, shall be included in Production Revenues;


“Properties” means the interests of any nature whatsoever in Petroleum and
Natural Gas Rights, Tangibles, Miscellaneous Interests and similar interests
which the Grantor may beneficially own from time to time including, without
limitation, the Initial Assets, the Additional Assets and all other Petroleum
and Natural Gas Rights, Tangibles, Miscellaneous Interests and similar
interests which the Grantor may acquire through Acquisition or otherwise;


“Proved Reserves” means reserves estimated as recoverable with a high degree of
certainty under current technology and existing economic conditions in the case
of constant price and cost analyses, and anticipated economic conditions in the
case of escalated price and cost analyses, from that portion of a reservoir
which can be reasonably evaluated as economically productive on the basis of
analysis of drilling, geological, geophysical and engineering data, including
the reserves to be obtained by enhanced recovery processes demonstrated to be
economic and technically successful in the subject reservoir;


“Quarter” means the period from 8:00 a.m. Calgary time on the Closing Date to
8:00 a.m. Calgary time on the first to occur of the first day of the following
January, April, July or October; and any period of three consecutive Months
thereafter which commences on the first day of January, April, July or October;


“Quarterly Royalty Payment” means, in respect of a Quarter, ninety-nine percent
(99%) of the Royalty Income for such Quarter payable by the Grantor to the
Royalty Owner in accordance with Section 3.1;


“Reclamation Fund” means the fund established by the Grantor pursuant to
Section 4.1 as part of the Reserve for the purpose of providing for any future
reclamation and environmental obligations and liabilities for which the Grantor
may be liable;


“Record Date” means March 31, June 30, September 30, and December 31 in each
year in relation to the payment of the Quarterly Royalty Payment and the last
day of each Month in relation to the payment of the Monthly Royalty Payment or
such other date as may be determined by the Royalty Owner pursuant to the Trust
Indenture;


“Reserve” means the reserve established by the Grantor pursuant to Section 4.1
for the purpose of funding the payment of Production Costs for which the
Grantor may be liable, and includes the Reclamation Fund;


“Reserve Value” means, in respect of any Property at any time, the present
worth at such time of all of the estimated pre-tax net cash flows from Proved
Reserves and fifty percent (50%) of the estimated pre-tax net cash flows from
Probable Reserves as shown in the most recent independent engineering report
relating to such Property, adjusted for production since the date


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of the
report, using escalating price and cost assumptions, and discounted at the
internal rate of return that is equal to the Discount Rate over the life of
Proved Reserves and Probable Reserves, as determined after taking into account
any cost of any nature whatsoever associated with such Property;


“RO Facilities” has the meaning set out in Section 10.3 hereof;


“RO Lenders” has the meaning set out in Section 10.3 hereof:


“Royalty” means



	 	(a)	 	the entitlement under Section 3.1 hereof to receive the
Quarterly Royalty Payment or the Monthly Royalty Payment, as
applicable; and
	 
	 	(b)	 	the entitlement to take in kind the Royalty Share of
Production for any Quarter or any Month pursuant to and in
accordance with Section 2.5;



“Royalty Income” means, in respect of a period, the amount by which the Royalty
Revenues that accrue in such period exceed the Permitted Royalty Deductions
that accrue in such period;


“Royalty Lands” means any lands to which the Petroleum and Natural Gas Rights
comprised in the Properties relate;


“Royalty Revenues” means Production Revenues, except for Production Revenues
from the sale of any Petroleum Substances that were taken in kind by the
Royalty Owner;


“Royalty Share of Production” means ninety nine percent (99%) of the Grantor’s
Share of Production;


“Secured Party” has the meaning set out in Section 10.3 hereof;


“Special Resolution” means a resolution passed as a Special Resolution of
Unitholders under the Trust Indenture;


“Surface Rights” means all rights to use the surface of land in connection with
the Properties including, without limitation, all rights to enter upon and
occupy the surface of land on which the Tangibles and Wells are located and
rights to cross or otherwise use the surface of land for access to the
Properties;


“Swap Arrangements” means Commodity Price and Currency Swaps and Interest Rate
Swaps;


“Tangibles” means the Grantor’s interest in facilities and in all tangible
depreciable property and assets used or intended to be used in connection with
production, gathering, treatment, storage, compression, processing,
transportation, injection, removal or other operations relating to the
Petroleum and Natural Gas Rights and situated within or upon or about the lands
with which they have been pooled, including, without limitation, the tangible
equipment, if any, relating to the wells and down-hole equipment;


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“Tax Act” means the Income Tax Act, Revised Statutes of Canada 1985, Chapter 1
(5th Supplement) and the regulations thereto, both as amended from time to
time;


“Taxes” means income taxes and other similar taxes or governmental charges
imposed on the Grantor;


“Third Party” means any Person other than the Grantor, the Royalty Owner or the
Trustee;


“Title and Operating Documents” means, in respect of the Properties:



	 	(a)	 	any contract or agreement pursuant to which the Grantor
derives any interest in the Properties, including without
limitation, any Lease, agreements of purchase and sale, farm-in
agreements, unit agreements and royalty agreements; and
	 
	 	(b)	 	any contract or agreement entered into in the normal course
of the oil and gas business in respect of the exploitation of
Petroleum and Natural Gas Rights or the operation of facilities,
including without limitation, joint operating agreements, unit
operating agreements, farmout agreements, pooling agreements,
royalty agreements, common stream agreements, gas processing
agreements, gas gathering agreements, agreements for the sale of
Petroleum Substances, agreements relating to Surface Rights,
agreements for the construction, ownership or operation of
facilities and agreements for the transportation of Petroleum
Substances;



“Trust Indenture” means the First Amended and Restated Trust Indenture made
effective as of the 1st day of August, 2002 between BMO Nesbitt Burns Inc., as
settlor, Computershare Trust Company of Canada, as trustee, and the Grantor, as
the same may be further amended, restated or replaced from time to time,
relating to the Royalty Owner;


“Trustee” means Computershare Trust Company of Canada in its capacity as
trustee of the Royalty Owner and includes any successor trustee of the Royalty
Owner;


“Trust Unit” means a unit of the Royalty Owner created, issued and registered
under the Trust Indenture and entitled to the benefits thereof; and


“Unitholder” means a holder of one or more Trust Units.





1.2 Definitions Incorporated by Reference



Terms that are defined in clause 101 of the Operating Procedure and which are
not otherwise defined herein shall have the meaning herein ascribed to such
terms therein.





1.3 Construction of Terms



Words importing the singular number only shall include the plural, and vice
versa, and words importing gender shall include the masculine, feminine and
neuter genders. References in this Agreement to “this Royalty Agreement”, “this
Agreement”, “hereto”, “herein”, “hereof”, “hereby”, “hereunder” and similar
expressions shall be deemed, in the absence of express


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language to the
contrary, to refer to this Agreement and not to any particular Article, Section
or portion hereof and include any and every agreement or other instrument
supplemental or ancillary hereto or in implementation hereof.





1.4 Amendments to Agreements and Laws



References herein to any agreement or instrument, including this Agreement,
shall be deemed to be a reference to the agreement or instrument as varied,
amended, modified, supplemented, or replaced from time to time and any specific
reference herein to any enactment of law shall be deemed to include reference
to such enactment as the same may be amended or re-enacted from time to time
and every statute that may be substituted therefor, and in the case of any such
amendment, re-enactment and substitution, any reference to such enactment
should be read as referring to the amended, re-enacted or substituted
provisions therefor .





1.5 References



The table of contents and headings herein are for convenience of reference only
and shall not affect the construction or interpretation of this Agreement. A
reference herein to an Article, Section or subsection without further reference
shall be a reference to an Article, Section or subsection of this Agreement.





1.6 Choice of Law



This Agreement shall be governed by the laws of the Province of Alberta and the
laws of Canada applicable therein and shall be construed and interpreted in
accordance therewith.





1.7 Attornment



Any legal action or proceedings with respect to this Agreement shall be brought
in the courts of the Province of Alberta and the courts of appeal therefrom.
Each Party hereby submits and
attorns to and accepts for itself and in respect of its assets, irrevocably and
unconditionally, the jurisdiction of such courts in respect of all matters
arising out of this Agreement.





1.8 Monetary Sums



All references herein to dollar amounts or sums of money are to lawful funds of Canada.





1.9 Accrual Method of Calculation



Except as otherwise specifically provided in this Agreement, all amounts to be
calculated pursuant to this Agreement, including without limitation Capital
Expenditures, Debt Service Costs, Permitted Royalty Deductions, General and
Administrative Expenses, Other Revenues, Production Costs and Production
Revenues, shall be calculated on an accrual basis in accordance with GAAP,
provided that:



	 	(a)	 	costs and expenses of goods supplied, work performed or
services provided shall be treated as being incurred when the goods
are supplied, the work is performed or the services are provided;



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	 	(b)	 	rentals and similar payments in respect of Surface Rights,
any Lease, insurance premiums, property taxes and assessments and
amounts payable in respect of Third Party liability claims shall be
deemed to accrue when they are paid;
	 
	 	(c)	 	amounts payable on account of royalties and similar burdens
in respect of the production of Petroleum Substances, other than
sulphur stored in pads, shall be deemed to accrue in the calendar
month in which the Petroleum Substances are produced, provided that
such amounts which are payable in respect of sulphur stored in pads
shall be deemed to accrue in accordance with GAAP; and
	 
	 	(d)	 	abandonment and reclamation costs shall be deemed to accrue
as and when the abandonment and reclamation work is done.






1.10 Estimates



In calculating Royalty Income for any period, the Grantor may, in accordance
with good industry accounting practice, estimate any amounts that may not be
definitively determined in a timely manner for the purposes of: making such
calculation, provided that any such estimate shall be reconciled with actual
results in calculating Royalty Income for the next following period.





1.11 No Duplication



For greater certainty, it is the intention of the Parties that in calculating
the various amounts required pursuant to this Agreement, no amount shall be
counted more than once as either a deduction or inclusion.





1.12 References to Acts Performed by the a Trust



For greater certainty, where any reference is made herein to an act to be
performed by (a) the Royalty Owner, such reference shall be construed and
applied for all purposes as if it referred to an act to be performed by the
Trustee on behalf of the Royalty Owner or by some other person duly authorized
to do so by the Trustee or pursuant to the provisions hereof; and (b) the
Grantor, such reference shall be construed and applied for all purposes as if
it referred to an act to be performed by PEOC on behalf of the Grantor or by
some other person duly authorized to do so by PEOC or pursuant to the
provisions hereof.





1.13 Tax Act



Any reference herein to a particular provision of the Tax Act shall include a
reference to that provision as it may be renumbered or amended from time to
time. Where there are proposals for amendments to the Tax Act that have not
been enacted into law or proclaimed into force on or before the date on which
such proposals are to become effective, the Parties may take such proposals
into consideration and apply the provisions hereof as if such proposals had
been enacted into law and proclaimed into force.


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ARTICLE 2

ROYALTY






2.1 Royalty Grant



In consideration of the sum of Sixty-Four Million One Hundred Fifty-Two
Thousand Dollars to be paid in accordance with the terms of that certain
Funding Agreement between Paramount, the Grantor, the Royalty Owner of even
date herewith, together with an amount equal to interest on such consideration
from July 1, 2002 at the annual rate of six and one half percent per annum
(6.5%) until the consideration is paid in full by the Royalty Owner, the
Grantor hereby grants to the Royalty Owner the Royalty with respect to the
Initial Assets and all other Properties that may be acquired by the Grantor
subsequent to this Agreement.





2.2 Royalty Applicable to After Acquired Properties



The Parties acknowledge, for greater certainty, that:



	 	(a)	 	subject to Sections 5.7 through 5.10, the Grantor may acquire
Properties through Future Acquisitions, Capital Expenditures and
otherwise;
	 
	 	(b)	 	in accordance with the definitions of the terms “Properties”,
“Production Revenues”, “Production Costs” and certain other terms in
Section 1.1 hereof, the Royalty Income from any Properties so
acquired by the Grantor shall be included in the calculation of
Royalty Income without further action by the Parties hereto or any
other party; and
	 
	 	(c)	 	the Royalty Owner shall not acquire any additional interest
in the Royalty as a result of the Grantor’s acquisition of
additional Properties until the Royalty Owner pays the Deferred
Royalty Purchase Payment, if any, required respecting such
acquisition, at which time the Grantor shall be deemed to dispose
of Canadian resource property with a value equal to the amount of
the Deferred Royalty Purchase Payment so made, and the Royalty
Owner shall be deemed to acquire a Canadian resource property
having the same value.






2.3 Deferred Royalty Purchase Payments




	 	(a)	 	The Royalty Owner shall pay to the Grantor as additional
consideration for the Royalty, certain amounts (the “Deferred
Royalty Purchase Payment”) in respect of Future Acquisitions and
Capital Expenditures, other than those described in paragraph
6.5(b)(iii) hereof, incurred by the Grantor in respect of Petroleum
and Natural Gas Rights, on the following terms:
	 





	 	(i)	 	if the Grantor acquires any additional Properties
as a result of a Future Acquisition, the Royalty Owner shall
make a Deferred Royalty Purchase Payment to the Grantor in an
amount equal to ninety-nine percent (99%) of the amount of the
purchase price (including adjustments) for such additional
Properties that is allocated to Canadian resource property, to
the




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	 	 	 	extent that such portion of such purchase price is not
financed with indebtedness incurred or assumed by the Grantor;
	 
	 	(ii)	 	if the Grantor designates any Capital
Expenditures made with respect to a Canadian resource property
on or before the date on which the same are incurred, the
Royalty Owner shall make a Deferred Royalty Purchase Payment
to the Grantor in an amount equal to ninety-nine percent (99%)
of the amount of such designated Capital Expenditures to the
extent that such portion of such Capital Expenditures are not
financed with indebtedness incurred or assumed by the Grantor;
	 
	 	(iii)	 	if at any time while the Royalty Owner has an
obligation to make a Deferred Royalty Purchase Payment to the
Grantor, the Grantor is indebted to the Royalty Owner, the
Deferred Royalty Purchase Payment may, at the Grantor’s
option, be set off against such indebtedness;
	 
	 	(iv)	 	if the Royalty Owner issues any Trust Units after
the Closing Date (a “Future Offering”), the Royalty Owner
shall make, if requested to do so by the Grantor, a Deferred
Royalty Purchase Payment to the Grantor in such amount as may
be specified by the Grantor, not exceeding the lesser of:
	 





	 	(A)	 	the net proceeds of the Future
Offering after deducting, without limitation,
underwriters’ fees and legal, accounting, engineering,
professional fees and other disbursements; and
	 
	 	(B)	 	ninety-nine percent (99%) of the
principal amount of any outstanding indebtedness under
the Credit Facility which reasonably relates to the
Canadian resource property purchase price component of
any Property acquired by the Grantor by way
of Acquisition or Capital Expenditure on or before such
Future Offering with the proceeds of the Credit
Facility for which the Royalty Owner has not paid to
the Grantor a Deferred Royalty Purchase Payment.
	 




	 	(b)	 	The Grantor, by notice in writing to the Royalty Owner at
least ten (10) days before Acquisition Costs or Capital Expenditures
are to be incurred by the Grantor, shall advise the Royalty Owner
that the Grantor proposes to make a Future Acquisition or to incur
Capital Expenditures and shall designate in such notice the portion
of the Acquisition Costs in respect of such Future Acquisition or
such Capital Expenditures, as the case may be, that shall constitute
part of the Deferred Royalty Purchase Payment.






2.4 Adjustments to Payment for Royalty



The Initial Assets Purchase Agreement and any purchase agreement in respect of
a Future Acquisition may provide for an adjustment to the purchase price of the
Properties acquired thereunder. Such an adjustment may result in a
corresponding decrease or increase of the


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Acquisition Costs for such
Properties. If Acquisition Costs are decreased by such an adjustment, the
Grantor shall pay to the Royalty Owner ninety-nine percent (99%) of the amount
of such adjustment allocated to Canadian resource properties. If the
Acquisition Costs are increased by such an adjustment, the Grantor shall be
entitled to set off ninety-nine percent (99%) of the amount of such adjustment
allocated to Canadian resource properties against any Quarterly Royalty Payment
or Monthly Royalty Payment.





2.5 Right to Take in Kind




	 	(a)	 	Subject to the Title and Operating Documents, the Royalty
Owner shall be entitled to take in kind all, but not less than all,
of the Royalty Share of Production for any Month or Quarter, only
if, prior to such Month or Quarter as the case may be:




	 	(i)	 	the Grantor is insolvent;
	 
	 	(ii)	 	the Royalty Owner has provided notice to the
Grantor, the Lenders and the RO Lenders of its intention to
take the Royalty Share of Production for such Month or Quarter
in kind not less than ninety (90) days prior to the
commencement of such Month or Quarter;
	 
	 	(iii)	 	the Royalty Owner has arranged for the sale and
transportation from the well-site of the Royalty Share of
Production to be taken in kind by the Royalty Owner;
	 
	 	(iv)	 	the Royalty Owner has provided evidence
satisfactory to the Grantor that the arrangements in respect
of the sale and transportation from the well-site of the
Royalty Share of Production to be taken in kind by the Royalty
Owner exist and can reasonably be expected to be performed;
	 
	 	(v)	 	the Royalty Owner covenants to be bound by and
perform all contracts applicable to the marketing and sale of
the Royalty Share of Production to be taken in kind by the
Royalty Owner;
	 
	 	(vi)	 	the Royalty Owner covenants to reimburse the
Grantor for ninety nine percent (99%) of the aggregate of
Production Costs and losses from Commodity Price and Currency
Swaps, for the period in which the Royalty Owner takes the
Royalty Share of Production in kind; and
	 
	 	(vii)	 	the Royalty Owner has provided concurrently with
the subsection 2.5(a)(ii) notice an irrevocable, assignable
documentary letter of credit which shall be:




	 	(A)	 	issued by one (1) of the five (5)
largest Canadian chartered banks;
	 
	 	(B)	 	for a term of at least one (1) year;



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	 	(C)	 	in an amount equal to the aggregate
of the Production Costs for the four (4) complete
Quarters immediately prior to the Month or Quarter in
which the Royalty Owner provides the subsection
2.5(a)(ii) notice, as determined from the statements
delivered by the Grantor to the Royalty Owner pursuant
to Section 3.2;
	 
	 	(D)	 	payable by one or more sight drafts,
with the only draw condition to be the certification by
the Grantor that the Royalty Owner has defaulted upon
its obligations under subsection 2.5(a)(vi); and
	 
	 	(E)	 	on terms satisfactory to the Grantor,
acting reasonably.




	 	(b)	 	Any exercise by the Royalty Owner of its entitlement to take
in kind all of the Royalty Share of Production for any Month or
Quarter shall continue for all subsequent Months or Quarters, unless
the Royalty Owner has failed to:





	 	(i)	 	comply with subsection 2.5(a)(iii) in respect of
any Month or Quarter for which the Royalty Owner has taken or
desires to take the Royalty Share of Production in kind;
	 
	 	(ii)	 	reimburse the Grantor in accordance with
subsection 2.5(a)(vi); or
	 
	 	(iii)	 	replace the letter of credit required by
subsection 2.5(a)(vii), prior to the expiry of such letter of
credit, with a letter of credit which shall be in an amount
equal to the Production Costs for the four (4) complete
Quarters immediately preceding the Month or Quarter in which
the Royalty Owner replaces such letter of credit.





	 	(c)	 	The Royalty Owner may provide notice to the Grantor of its
intention to cease to take the Royalty Share of Production in kind
not less than ninety (90) days prior to the end of any Month or
Quarter in which the Royalty Owner is taking the
Royalty Share of Production in kind, and the Royalty Owner shall so
cease to take the Royalty Share of Production in kind on the date
stipulated in such notice.
	 
	 	(d)	 	The Grantor shall cause any Royalty Share of Production that
the Royalty Owner takes in kind to be delivered to the Royalty Owner
at the well site from which such Royalty Share of Production is
produced.






2.6 Royalty Share of Production not Taken in Kind



The Royalty Owner shall not own any of the Grantor’s Share of Production,
except for the Royalty Share of Production that the Royalty Owner elects to
take in kind pursuant to and in accordance with Section 2.5.





2.7 Petroleum Substances Lost or Used in Operations



The Royalty shall not apply to any of the Grantor’s Share of Production that is
lost, consumed or used otherwise in respect of any operations of any nature
whatsoever.


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2.8 Not an Interest in Land




	 	(a)	 	The Royalty shall not:




	 	(i)	 	be a covenant attached to or running with the
Royalty Lands;
	 
	 	(ii)	 	attach to or form part of any Lease; and
	 
	 	(iii)	 	constitute an interest in land or in real
property.




	 	(b)	 	Ownership of the Properties shall remain vested in the
Grantor.






2.9 Reimbursement of Non-Deductible Crown Royalties.



The Royalty Owner shall reimburse to the Grantor, ninety nine percent (99%) of
all Non-Deductible Crown Royalties payable by the Grantor in respect of the
Properties or the production of Petroleum Substances therefrom, provided that
the Grantor may at its sole discretion elect to waive its right to any part of
or all of such reimbursement. The Grantor shall be entitled to set off such
reimbursable amounts against any Quarterly Royalty Payment or Monthly Royalty
Payment.





ARTICLE 3

ACCOUNTING






3.1 Payments from Grantor to Royalty Owner




	 	(a)	 	Subject to Section 3.1(b) hereof, at the end of each Quarter,
the Grantor shall calculate and pay the Quarterly Royalty Payment to
the Royalty Owner on the fifteenth (15th) day of the Month following
the end of such Quarter, or the next following Business Day if such
day is not a Business Day.
	 
	 	(b)	 	If at any time the Grantor’s Board of Directors so resolves,
at the end of each Month the Grantor shall calculate the Monthly
Royalty Payment and pay such Monthly Royalty Payment to the Royalty
Owner on the fifteenth (15th) day of the month next following or on
the next Business Day if such day is not a Business Day. If the
Grantor’s Board of Directors resolves to have the Grantor pay the
Monthly Royalty Payment as provided for above, it may at any time
thereafter resolve to have the Grantor return to the payment of the
Quarterly Royalty Payment as provided for in Section 3.1(a) above as
at the commencement of a Quarter in respect of which no Monthly
Royalty Payment has been made. For greater certainty, there shall
be no Quarterly Royalty Payment for any period in respect of which
the Grantor calculates and pays the Monthly Royalty Payment and
vice-versa.



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3.2 Statements



Each Quarterly Royalty Payment or Monthly Royalty Payment shall be accompanied
by a statement setting forth such information as the Royalty Owner may from
time to time reasonably request, including without limitation:



	 	(a)	 	the amount of the Quarterly Royalty Payment or Monthly
Royalty Payment;
	 
	 	(b)	 	all calculations used in determining the Quarterly Royalty
Payment or Monthly Royalty Payment;
	 
	 	(c)	 	the Grantor’s Share of Production, itemized by product, that
was sold during such Quarter or Month, except for any Royalty Share
of Production that the Royalty Owner took in kind during such
Quarter or Month;
	 
	 	(d)	 	the Production Revenues and Other Revenues for such Quarter
or Month; and
	 
	 	(e)	 	an itemized list of the Production Costs and Permitted
Royalty Deductions for such Quarter or Month.






3.3 Overpayment



If the payment made by the Grantor on account of the Royalty for a Quarter or
Month is in excess of the actual amount of the Quarterly Royalty Payment for
such Quarter or Monthly Royalty Payment for such Month, as the case may be, the
Grantor shall be entitled to set off the amount of the excess against any
Quarterly Royalty Payment payable in subsequent Quarters or Monthly Royalty
Payment payable in subsequent Months.





3.4 Carry Forward of Permitted Royalty Deductions



If the Permitted Royalty Deductions for a Quarter or Month are in excess of the
Royalty Revenues for such Quarter or Month, there shall be no Quarterly Royalty
Payment or Monthly Royalty Payment for such Quarter or Month, as the case may
be, and the amount of the excess Permitted Royalty Deductions shall be carried
forward and treated as Permitted Royalty Deductions in the following Quarter or
Month.





3.5 Collection of Production Revenues and Other Revenues



The Grantor shall use all commercially reasonable efforts to obtain the payment
of Production Revenues and Other Revenues, excluding Production Revenues from
the Royalty Share of Production that the Royalty Owner took in kind. Provided
that the Grantor makes such commercially reasonable efforts, the Grantor shall
have no liability to the Royalty Owner respecting such revenues in the event
that the Grantor fails to collect same.


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3.6 Payment of Permitted Royalty Deductions



Provided that such payment does not result in any adverse income tax
consequences to the Grantor, the Royalty Owner or the Unitholders, the Grantor
may use Other Revenues to pay amounts that would, but for such payment, be
included in Permitted Royalty Deductions.





3.7 Payments from Royalty Owner to Grantor



The Royalty Owner shall pay any amounts payable by the Royalty Owner to the
Grantor pursuant to this Agreement as soon as reasonably practicable after the
receipt of an invoice by the Royalty Owner from the Grantor for such amounts.





ARTICLE 4

RESERVE AND RECLAMATION FUND






4.1 Establishment



The Grantor shall establish a reserve (the “Reserve”) that may be used to fund
the payment of Production Costs and any well bore, facility abandonment and
environmental and reclamation obligations and liabilities for which the Grantor
may be liable. The Grantor shall also establish a specific fund (the
“Reclamation Fund”) within the Reserve for the purposes of funding any such
well bore, facility abandonment, environmental and reclamation obligations and
liabilities. The Grantor shall own the Reserve, including the Reclamation
Fund, and the Royalty Owner shall, subject to Section 4.4, have no interest
therein. Interest and other amounts earned from the investment of the Reserve
shall form part of the Reserve.





4.2 Contributions to the Reserve



The Grantor shall pay into the Reserve such amounts as the Grantor, acting
reasonably and in accordance with prudent oil and gas industry practices,
designates from time to time, as being required to fund the Reserve and which
shall be paid to the Reserve prior to the fifteenth (15th) day of the second
Month following the end of the Quarter in which the Grantor makes such a
designation.





4.3 Use of Reserve and Reclamation Fund




	 	(a)	 	Subject to section 10.3 hereof, the Grantor shall use the
Reserve only for the purposes designated in this Article 4 and shall
not use the Reserve in any other manner whatsoever. The Grantor
may:




	 	(i)	 	deposit the funds of the Reserve in one or more
bank accounts;
	 
	 	(ii)	 	commingle the funds of the Reserve with any other
funds; and
	 
	 	(iii)	 	invest the funds of the Reserve in Permitted
Investments.



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	 	(b)	 	Subject to this Article 4, the Reclamation Fund shall only be
used to pay future well bore, facility abandonment, environmental
and reclamation obligations and liabilities for which the Grantor
may be liable.






4.4 Reduction and Termination of Reserve




	 	(a)	 	In the event that the Grantor determines, acting reasonably
and in accordance with prudent oil and gas industry practices, that
the Reserve contains an amount that is in excess of its reasonably
foreseeable requirements, the Grantor may withdraw such amount from
the Reserve, and include such amount in Production Revenues for the
period during which it is withdrawn.
	 
	 	(b)	 	When the term of this Agreement expires pursuant to
subsection 7.1(a), the funds in the Reserve shall be used to pay all
obligations and liabilities of the Grantor (whether then due or
thereafter becoming due) incurred in the business or affairs of the
Grantor while otherwise complying with the terms hereof, the Trust
Indenture and any other related agreements and when, in the
reasonable opinion of the Grantor, all such obligations and
liabilities of the Grantor have been paid, the Reserve (including
the Reclamation Fund) shall be collapsed and the remainder of the
funds in the Reserve, up to an amount equal to ninety-nine percent
(99%) of such amount, shall be paid to the Royalty Owner, provided
that such payment to the Royalty Owner does not result in any
material adverse income tax consequences to the Grantor, the Royalty
Owner or the Unitholders, and the balance of the funds in the
Reserve, if any, shall be retained by the Grantor.






4.5 Reclamation Trust



The Grantor and the Royalty Owner covenant that if changes are made to the Tax
Act so as to permit the formation of a vehicle which:



	 	(a)	 	has characteristics similar to those of a mining reclamation
trust, as defined in the Tax Act;
	 
	 	(b)	 	may be used to secure or otherwise provide funding for any
well bore, facility abandonment, environmental or reclamation
obligations and liabilities in respect of the Properties for which
the Grantor may be liable; and
	 
	 	(c)	 	would have beneficial income tax consequences for the
Grantor, as determined by the Grantor acting reasonably;



then:



	 	(d)	 	the Grantor may cause such a vehicle to be formed and shall
control such vehicle;
	 
	 	(e)	 	the amount contained in the Reclamation Fund at the time of
the formation of such vehicle shall immediately be paid into such
vehicle;



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	 	(f)	 	after the formation of such vehicle, any amounts which would
have been paid into the Reclamation Fund pursuant to this Article 4
shall be paid directly into such vehicle; and
	 
	 	(g)	 	after the formation of such vehicle, for the purpose of
computing the Royalty, payments to or from such vehicle shall be
deemed to be payments to or from the Reserve.






ARTICLE 5

OPERATIONS






5.1 General



Subject to the provisions of the Title and Operating Documents and the
Grantor’s rights and obligations in respect of each agreement thereunder, the
Grantor shall use all reasonable efforts such that:



	 	(a)	 	operations on the Royalty Lands and lands pooled or unitized
therewith for the recovery of Petroleum Substances and the operation
of the Tangibles are conducted in a good and workmanlike manner, in
accordance with good oilfield and engineering practice and in
compliance with all applicable statutes, regulations, permits and
governmental approvals;
	 
	 	(b)	 	all of its duties and obligations under the Title and
Operating Documents are diligently and promptly performed and all
amounts payable as rental, royalty or similar charges from time to
time due in respect of the Properties are paid and all other actions
as may be reasonably necessary to maintain the Title and Operating
Documents in good standing at all times are taken, subject to the
terms and provisions hereof; and
	 
	 	(c)	 	all Surface Rights needed for the proper operation of the
Properties and Tangibles are acquired and maintained in good
standing and all taxes, rates, assessments and other amounts from
time to time payable in respect of the Properties are promptly paid.






5.2 No Obligation to Develop



Nothing contained in this Agreement shall impose any obligation, expressed or
implied, upon the Grantor to explore or develop the Royalty Lands.





5.3 Amendment and Waiver of Provisions in Title and Operating Documents



The Grantor covenants to and in favour of the Royalty Owner that, except as
provided in Section 9.1, the Grantor shall not, without the written consent of
the Royalty Owner, which consent shall not be unreasonably withheld or delayed,
agree to the amendment or termination of any Title and Operating Documents or
waive or consent to a departure from the performance by any Person of that
Person’s obligations pursuant to any Title and Operating Documents, where such
amendment, waiver or consent to departure may reasonably be expected to have a
material,


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adverse effect on the Royalty or the rights and obligations of the
Royalty Owner in respect of the Royalty, provided, however, that acts or
omissions by any Person, including operators, beyond the reasonable control of
the Grantor and without the specific authorization of the Grantor, shall not
constitute a breach of this Section 5.3.





5.4 Rights and Obligations



Except for the Royalty Owner’s rights and obligations under Section 2.5 with
respect to the Royalty Share of Production which it elects to take in kind, as
between the Royalty Owner and the Grantor, the Grantor shall have exclusive
control and authority over the development and recovery of Petroleum Substances
from the Royalty Lands and lands pooled or unitized therewith, including,
without limitation, control over all decisions in respect of whether, when and
how to drill, complete, equip, produce, suspend, abandon and shut-in wells and
whether to elect to convert royalty interests to working interests. The
Royalty Owner shall not be entitled to any interest in the Properties or the
Title and Operating Documents and shall not be liable for any of the duties or
obligations arising under the Title and Operating Documents or in connection
with the Acquisition or operation of the Properties, except as set forth in
subsections 2.5(a)(iii) and 2.5(a)(vi).





5.5 Marketing



The Grantor shall act reasonably, and in accordance with prudent oil and gas
industry practices, to arrange for the sale of the Grantor’s Share of
Production for the best prices and on the best terms as are reasonably
available. Subject to the foregoing, the Grantor shall have complete
discretion as to the terms, conditions and length of any contract entered into
for the sale of the Grantor’s Share of Production. The Grantor shall not be
responsible for any loss or alleged loss that may occur by reason of any change
in economic or political circumstances or otherwise.





5.6 Additional Title and Operating Documents



Provided that the Grantor acts reasonably and in accordance with prudent oil
and gas industry practices, the Grantor shall have the right to enter into and,
subject to Section 5.3, amend Title and Operating Documents, from time to time,
on such terms and conditions as it considers appropriate in its sole
discretion.





5.7 Future Acquisitions




	 	(a)	 	Subject to subsection 5.7(b) hereof, the Grantor shall make
no Future Acquisition unless:




	 	(i)	 	the Properties that are the subject of such
Future Acquisition have a Reserve Value that is twenty percent
(20%) or less of the Reserve Value of all Properties; or
	 
	 	(ii)	 	the Grantor’s Board of Directors determines that
such Future Acquisition, or class of Future Acquisitions into
which such Future Acquisition falls, is in the best interests
of each of the Grantor and the Royalty Owner.



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	 	(b)	 	The Grantor’s Board of Directors may provide and amend from
time to time the criteria pursuant to which the Grantor may make
Future Acquisitions, including for greater certainty, the provisions
of subsection 5.7(a).






5.8 Capital Expenditures



The Grantor may approve and fund Capital Expenditures reasonably required to
maintain or improve production from the Properties and such other Capital
Expenditures as are approved from time to time either specifically or by
general policy of the Grantor’s Board of Directors.





5.9 Borrowing



The Grantor may:



	 	(a)	 	borrow funds and grant guarantees pursuant to the Credit
Facilities to finance Future Acquisitions, Capital Expenditures or
other financial obligations or encumbrances in respect of the
Properties or to provide working capital or meet any other
requirement for funds approved either specifically or by general
policy of the Grantor’s Board of Directors; and
	 
	 	(b)	 	grant guarantees, provide indemnities, and otherwise act as
surety of the Royalty Owner in respect of the RO Facilities and
grant security on the Properties in priority to the Royalty in
accordance with Section 10.3.






5.10 Costs of Tangibles and Miscellaneous Interests



The cost of Tangibles and Miscellaneous Interests comprising any Properties to
be acquired pursuant to a Future Acquisition shall be paid for by the Grantor
utilizing its own working capital or funds borrowed by it for such purposes
pursuant to the Credit Facilities.





ARTICLE 6

DISPOSITIONS






6.1 Restrictions on Disposition of Properties



Except as permitted by Article 9 and Sections 5.9, 6.2, 6.3, 6.7, 10.1 and
10.3, the Grantor shall not sell, assign, transfer, convey, mortgage, pledge,
charge, grant a security interest in or otherwise dispose of or encumber any
interest in the Properties.





6.2 Dispositions of Tangibles and Miscellaneous Interests



Notwithstanding anything in this Agreement, the Grantor, acting reasonably and
in accordance with prudent oil and gas industry practices, shall be entitled
to:



	 	(a)	 	dispose of Tangibles and Miscellaneous Interests which are
not required to exploit the Petroleum and Natural Gas Rights
comprised in the Properties; and



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	 	(b)	 	license geological, seismic and similar data comprised in the
Properties on such terms and conditions as the Grantor considers
appropriate.






6.3 Dispositions of Petroleum and Natural Gas Rights



Notwithstanding anything in this Agreement, the Grantor, acting reasonably and
in accordance with prudent oil and gas industry practices, shall be entitled to
sell its interest in Petroleum and Natural Gas Rights comprised in the
Properties, either by themselves or together with interests in related
Tangibles and Miscellaneous Interests, and the Royalty Owner shall concurrently
sell the portion of the Royalty that is calculated with reference to production
from or otherwise relates to such interests, provided that each of the
following criteria is satisfied with respect to such sale:



	 	(a)	 	the Grantor is of the reasonable opinion that such sale is in
the best interests of the Royalty Owner;
	 
	 	(b)	 	the Grantor’s Board of Directors has approved such sale,
provided that such approval shall only be required in the event that
the Properties that are the subject of such sale have a Reserve
Value that is greater than twenty percent (20%) of the Reserve Value
of all Properties; and
	 
	 	(c)	 	the Unitholders have approved such sale by Special
Resolution, provided that such approval shall only be required in
the event that the Properties that are the subject of such sale have
a Reserve Value that is greater than fifty percent (50%) of the
Reserve Value of all Properties.






6.4 Merger of Interests On Concurrent Disposition



Upon the date of completion of any Concurrent Disposition, the interest in the
portion of the Royalty sold by the Royalty Owner on such Concurrent Disposition
shall merge in the interest in the Properties sold by the Grantor in such
Concurrent Disposition, and such interest in the Royalty shall terminate.





6.5 Proceeds of a Concurrent Disposition




	 	(a)	 	Subject to Section 10.4, if a sale of Properties involves a
sale of Petroleum and Natural Gas Rights comprised therein and
constitutes a Concurrent Disposition, ninety nine percent (99%) of
the net proceeds allocated to such Petroleum and Natural Gas Rights
under the purchase agreement in respect of such Concurrent
Disposition shall be allocated to the interests in the Royalty sold
by the Royalty Owner in such Concurrent Disposition and one percent
(1%) of the net proceeds
allocated to such Petroleum and Natural Gas Rights under the
purchase agreement in respect of such Concurrent Disposition shall
be allocated to the interests in Petroleum and Natural Gas Rights
sold by the Grantor in such Concurrent Disposition;
	 
	 	(b)	 	The Grantor shall hold the proceeds of sale allocated to the
interests in the Royalty pursuant to subsection 6.5(a) in trust for
the Royalty Owner, shall invest such proceeds of sale in Permitted
Investments and shall, at its option:



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	 	(i)	 	pay to the Royalty Owner such proceeds of sale,
and interest and other income received in respect thereof, or
from time to time part thereof, with, but not as part of, a
Monthly Royalty Payment or Quarterly Royalty Payment, as the
case may be;
	 
	 	(ii)	 	use such proceeds of sale, and interest and other
income received in respect thereof, or from time to time part
thereof, to fund on behalf of the Royalty Owner the portions
of the Deferred Royalty Purchase Payment payable by the
Royalty Owner pursuant to Section 2.3 in respect of Future
Acquisitions; or
	 
	 	(iii)	 	use such proceeds of sale, and interest and
other income received in respect thereof, or from time to time
part thereof, to make Future Acquisitions or incur Capital
Expenditures.






6.6 Concurrent Disposition Documentation



In any Concurrent Disposition, the Royalty Owner, upon request from and as
reasonably required by the Grantor, shall do all acts and things and execute
and deliver to the Grantor any document or instrument required by the Grantor
to effect the disposition of any interest comprised in such Concurrent
Disposition.





6.7 Merger upon Farmout



Notwithstanding anything in this Agreement, the Grantor shall be entitled to
enter into farmout agreements with any Person in respect of the Petroleum and
Natural Gas Rights comprised in the Properties, whereby such Person may acquire
an interest in such Petroleum and Natural Gas Rights in exchange for the
payment of capital costs, or other consideration, incurred with a view to
exploit such Petroleum and Natural Gas Rights. Upon the date on which any
Person earns any interest in the Petroleum and Natural Gas Rights comprised in
the Properties pursuant to such a farmout agreement, the interest in the
portion of the Royalty to the extent it is calculated with reference to
production from or otherwise relates to such Petroleum and Natural Gas Rights
shall merge in the interest in such Petroleum and Natural Gas Rights and such
interest in the Royalty shall thereupon terminate. Any interest retained by or
acquired by the Grantor pursuant to such farmout agreements shall form part of
the Properties and be subject to the Royalty.





ARTICLE 7

TERM OF AGREEMENT






7.1 Term




	 	(a)	 	The term of this Agreement shall commence on the date hereof
and shall continue for so long as there are Properties to which the
Royalty applies or the Grantor holds any proceeds of sale from
Properties that have been allocated to the interests in the Royalty.



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	 	(b)	 	Upon the expiration of the term of this Agreement pursuant to
subsection 7.l(a), the Grantor and the Royalty Owner shall have no
further obligations or liabilities under this Agreement except for:




	 	(i)	 	any obligations or liabilities of the Grantor or
the Royalty Owner hereunder which are then accrued and
unfulfilled; and
	 
	 	(ii)	 	the obligations and liabilities of the Grantor
and the Royalty Owner in respect of Articles 8, 12 and 14 and
Sections 2.4, 4.4 and 10.4, which shall survive the expiration
of such term and continue in full force and effect.






ARTICLE 8

BOOKS AND RECORDS






8.1 Examination




	 	(a)	 	During the term of this Agreement and for a period of two (2)
years after the expiration of the term hereof pursuant to subsection
7.1(a), the Grantor shall maintain complete books and records in
respect of:




	 	(i)	 	the Royalty;
	 
	 	(ii)	 	the quantity of the Grantor’s Share of Production
sold by the Grantor;
	 
	 	(iii)	 	the quantity of the Grantor’s Share of
Production that was lost, consumed or used otherwise in
respect of any operations of any nature whatsoever; and
	 
	 	(iv)	 	all calculations made by the Grantor to determine
the amount of payments made on account of the Royalty.




	 	(b)	 	The Royalty Owner shall have the right at all reasonable
times during business hours to inspect such books and records to the
extent reasonably necessary to verify the amounts paid or payable
hereunder in respect of the Royalty.






8.2 Audit



Upon notice to the Grantor, the Royalty Owner shall have the right to audit the
books and records referred to in Section 8.1 within the two (2) year period
that next follows the end of the calendar year to which such books and records
relate. The costs of any such audit shall be borne by the Royalty Owner. Any
claims of discrepancies disclosed by such audit shall be made in writing to the
Grantor within two (2) months of the completion of such audit. The Grantor
shall respond to any such claims within six (6) months of the receipt of such
claims. If the Grantor is unable to respond to the claims during the six (6)
month period, one (1) extension of three (3) months shall be allowed if
requested in writing by the Grantor within such six (6) month period.


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8.3 Confidentiality



The Royalty Owner shall keep all information provided to it pursuant to this
Agreement (including, without limitation, information made available to it in
connection with any audit, examination or inspection conducted by the Royalty
Owner pursuant to this Article 8) strictly confidential, and shall not make any
disclosure with respect to same except:



	 	(a)	 	to its officers, directors and employees, contractors,
lenders, and its and their professional advisors to the extent
necessary for the implementation of this Agreement, the RO
Facilities or any other agreement contemplated hereby, on a
confidential basis;
	 
	 	(b)	 	to the extent reasonably necessary for the enforcement of
this Agreement;
	 
	 	(c)	 	in connection with any legal proceedings hereunder;
	 
	 	(d)	 	when ordered to do so by a Court of competent jurisdiction;
and
	 
	 	(e)	 	information which is or becomes publicly available through no
act or omission of the Royalty Owner, or which becomes available to
the Royalty Owner, with no confidentiality restrictions attached
thereto, from a source other than the Grantor.






8.4 Extension of Time under Limitations Act



The two (2) year period for seeking a remedial order under section 3(1)(a) of
the Limitations Act (Alberta) as amended from time to time, for any claim (as
defined in that Act) arising in connection with this Agreement is extended to:



	 	(a)	 	two (2) years after the time this Agreement permitted that
audit to be performed for claims disclosed by an audit; and
	 
	 	(b)	 	four (4) years for all other claims.






ARTICLE 9

POOLING, UNITIZATION, SURRENDER AND ABANDONMENT






9.1 Pooling and Unitization



Notwithstanding anything in this Agreement, the Grantor shall have full right,
power and authority to pool or unitize any of the Petroleum and Natural Gas
Rights comprised in the Properties with any other Petroleum and Natural Gas
Rights without the prior consent of the Royalty Owner, provided that the
Grantor, acting in a reasonable and prudent manner, determines that the pooling
or unitization and the terms thereof are in accordance with prudent oil and gas
industry practises.


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9.2 Surrender



Notwithstanding anything in this Agreement and subject to the Title and
Operating Documents, the Grantor shall be entitled to surrender any Lease, in
whole or in part, to the lessor thereunder without the prior consent of the
Royalty Owner, provided that the Grantor, acting reasonably and in accordance
with prudent oil and gas industry practises determines that all of the wells
located on the lands subject to such Lease are incapable of producing Petroleum
Substances in commercially feasible quantities. In respect of any Lease, this
Agreement and the Royalty shall apply only to matters that occur prior to the
time of surrender of such Lease and shall not apply to any matters that occur
from and after the time of such surrender.





9.3 Abandonment



Notwithstanding anything in this Agreement, the Grantor shall have, in respect
of the Properties, full right, power and authority to authorize the abandonment
of any well without the prior consent of the Royalty Owner, provided that the
Grantor, acting reasonably and in accordance with prudent oil and gas industry
practises, determines that such well is incapable of producing Petroleum
Substances in commercially feasible quantities. In respect of any Well, this
Agreement and the Royalty shall apply only to matters that occur prior to the
time of abandonment of such Well and shall not apply to any matters that occur
from and after the time of such abandonment.





ARTICLE 10

ASSIGNMENT






10.1 Restrictions on Assignment



Except as permitted by Section 10.3, neither the Grantor nor the Royalty Owner
shall sell, assign, transfer, convey, mortgage, pledge, charge, or grant (in
this Section 10.1, an “Assignment”) any security interest in, or otherwise
dispose of or encumber (in this Section 10.1, an “Encumbrance”) any interest in
this Agreement, unless the written consent to any such Assignment or
Encumbrance is first obtained from the non-disposing or non-encumbering Party,
as the case may be, which consent shall not be unreasonably withheld. No such
Assignment or Encumbrance shall be effective against the non-assigning or
non-encumbering Party unless an agreement satisfactory to the non-assigning or
non-encumbering Party, acting reasonably, is first executed by:



	 	(a)	 	each Party making such Assignment or Encumbrance;
	 
	 	(b)	 	the Person that is the grantee of such Assignment or
Encumbrance; and
	 
	 	(c)	 	the non-assigning or non-encumbering Party.



In such agreement, the Person that is the grantee of such Assignment or
Encumbrance shall covenant to be bound by any of the terms and conditions of
this Agreement that may apply to any interest transferred by such Assignment or
Encumbrance.


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10.2 Multiple Royalty Owners



Notwithstanding that more than one Person may beneficially own a portion of the
Royalty, the Grantor shall be entitled to communicate exclusively with the
Royalty Owner in respect of any matter arising pursuant to this Agreement, and
to deliver to the Royalty Owner any payment, statement, designation, notice or
any similar type of communication required hereunder.





10.3 Grant and Assignment of Security




	 	(a)	 	The Parties acknowledge that:




	 	(i)	 	the Royalty Owner shall enter into credit
facilities with its lenders (the “RO Lenders”) from time to
time pursuant to which the RO Lenders shall provide various
forms of credit arrangements and accommodations, most of which
shall be for the direct or indirect benefit of the Grantor and
some of which (such as commodity price swaps) may be entered
into directly with the Grantor (such credit arrangements and
accommodations collectively called the “RO Facilities”);
	 
	 	(ii)	 	the RO Facilities shall be secured by, inter
alia, guarantees and indemnities provided by the Grantor and
the Grantor’s obligations thereunder shall be secured by way
of security interests (collectively, together with any
subordination or postponement agreements entered into by the
Grantor with, inter alia, the RO Lenders, called the “Grantor
Security Interests”) granted by the Grantor in all of the
Grantor’s assets charged by such Security Interests, which may
include without limitation the Properties, the Reserve and
this Agreement (the “Collateral”);
	 
	 	(iii)	 	the terms and conditions of the RO Facilities
and the Grantor Security Interests may contain limitations and
restrictions upon the Parties with respect to this Agreement,
the Collateral and the Royalty including, without limitation,
upon the ability of the Parties to amend this Agreement,
assign their rights hereunder in whole or in part, dispose of
the Properties in whole or in part and the use of the proceeds
thereof, and the use of the Reserve;
	 
	 	(iv)	 	the actions of the Parties and their relationship
pursuant to this Agreement shall be subject to the provisions
of the RO Facilities and the Grantor
Security Interests, to the extent so provided therein, and to
the extent of a conflict between the provisions of this
Agreement and the provisions of the RO Facilities or the
Grantor Security Interests, the latter shall govern; and
	 
	 	(v)	 	to the extent provided for therein, the Grantor
Security Interests shall at all times be in priority to and
paramount to the Royalty, including for greater certainty the
grant of the Royalty in respect of any future Properties.




	 	(b)	 	Notwithstanding any other provision of this Agreement:



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	 	(i)	 	each of the Parties shall be entitled to
mortgage, pledge, charge, grant a security interest in,
postpone and subordinate their rights respecting or otherwise
encumber any of the Collateral to secure any present or future
obligation or liability of the Royalty Owner or Grantor in
respect of or in relationship to the RO Facilities, or of the
Grantor that may arise pursuant to the Credit Facilities or
Swap Arrangements, including for greater certainty any
guarantees, indemnities or security interests required of the
Grantor in connection with the Credit Facilities;
	 
	 	(ii)	 	any Lender, or RO Lender, or any receiver,
receiver-manager, enforcement agent or any similar Person
appointed by an RO Lender or Lender (each a “Secured Party”)
enforcing or realizing upon any encumbrance or security
interest that was granted by the Grantor in respect of any
Collateral or by the Royalty Owner in respect of this
Agreement or the Royalty, shall be entitled to sell, assign or
otherwise dispose of in whole or in part (A) any such
encumbrances or security interests or (B) any of such
Collateral;






10.4 Enforcement of Security



If a Secured Party enforces its rights and remedies in respect of any mortgage,
pledge, charge, security interest or other encumbrance or Grantor Security
Interest granted by the Grantor against the Properties or any of them and such
Secured Party sells, assigns or otherwise disposes of the Properties, or any of
them, such sale, assignment or other disposition shall constitute a Concurrent
Disposition for the purposes of this Agreement and any surplus proceeds of such
sale, assignment or other disposition remaining after the liabilities and
obligations secured thereby are indefeasibly satisfied and discharged shall
constitute proceeds of such Concurrent Disposition and shall be dealt with in
accordance with Section 6.5.





10.5 Dispositions Subject to This Agreement



Notwithstanding anything in this Agreement, if either Party assigns, sells,
mortgages, pledges, charges, transfers, conveys, grants any security interest
in, encumbers or otherwise disposes of any interest in this Agreement (other
than to a Lender or pursuant to any Grantor Security Interest, or to any Person
acquiring an interest in any Properties pursuant to an enforcement or
realization thereof), then each Party hereto shall adopt the position in any
matter arising pursuant to this Agreement, that the Person (other than a
Lender, any RO Lender, any Secured Party or
any Person acquiring an interest in any Properties pursuant to an enforcement
or realization of security interests by any of them) that is the grantee of
such disposition is subject to the terms and conditions of this Agreement which
are applicable to any interest transferred by such disposition.


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ARTICLE 11

INSURANCE






11.1 Maintenance



The Grantor shall obtain and maintain property damage and third party liability
insurance coverage to provide protection for the Properties that is at or above
industry standards and which, in any event, shall provide insurance coverage
for property damage, general liability and, where appropriate in the reasonable
opinion of the Grantor, business interruption. Such insurance shall be
maintained with reputable insurers and in such amounts as the Grantor, in its
reasonable opinion, determines to be appropriate, having regard to insurance
maintained pursuant to the Title and Operating Documents and normal oil and gas
industry standards in Canada.





ARTICLE 12

NOTICES AND PAYMENTS






12.1 Addresses for Service and Payments



All payments in respect of the Royalty shall be paid or tendered to the Royalty
Owner at its address for notices specified herein, or at such other place or
depository as the Royalty Owner may specify in a written notice delivered to
the Grantor, provided that no change in the place at which payments in respect
of the Royalty are to be paid or tendered shall be effective unless thirty (30)
days have elapsed after the date on which the Grantor received such written
notice.





12.2 Delivery and Deemed Receipt of Notices




	 	(a)	 	Notwithstanding anything in this Agreement, any notice,
designation, statement or similar communication required by or
permitted in this Agreement shall be in writing;
	 
	 	(b)	 	Any notice, designation, statement or similar communication
may be served upon the Party for whom such communication was
intended by causing such communication to be delivered:




	 	(i)	 	to the address for service, as specified herein,
of such Party, during a Business Day and during the usual
business hours of such Party; or
	 
	 	(ii)	 	by telefacsimile or any similar method in which
printed documents can be electronically transmitted and
reproduced, to the telefacsimile number for service, as
specified herein, of such Party, during a Business Day and
during the usual business hours of such Party;




	 	(c)	 	Any notice, designation, statement or communication delivered
in accordance with either subsection 12.2(b)(i) or 12.2(b)(ii) shall
be deemed to have been received by the Party for whom such
communication was intended on the Business Day on which such
communication was delivered; and



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	 	(d)	 	Any notice, designation, statement or communication delivered
in a manner that is not in accordance with either subsection
12.2(b)(i) or 12.2(b)(ii) shall be deemed to have been received by
the Party for whom such communication was intended on the first
Business Day that follows the day on which such communication was
actually delivered to such Party.






12.3 Addresses and Telefacsimile Numbers for Service




	 	(a)	 	The address and telefacsimile number for service of each of
the Grantor and the Royalty Owner for any notice, designation,
statement or similar communication required by or permitted in this
Agreement shall be:




	 	(i)	 	the Grantor:




		
	 	Paramount Energy Operating Corp.

As Trustee of Paramount Operating Trust

#500, 630 – 4th Avenue S.W.

Calgary, Alberta

T2P 0J9

Attention: The President

Facsimile: (403) 269-4444





	 	(ii)	 	the Royalty Owner:




		
	 	Computershare Trust Company of Canada

#710, 530 – 8th Avenue S.W.

Calgary, Alberta

T2P 3S8

Calgary, Alberta

Attention: Manager, Corporate Trust Department

Facsimile: (403) 267-6598







12.4 Change of Address



Either Party may change its address or telefacsimile number for service by
specifying such change and the new address or telefacsimile number for service,
as the case may be, in a written notice delivered to the other Party in
accordance with Section 12.2.





ARTICLE 13

MISCELLANEOUS






13.1 Enurement



This Agreement shall enure to the benefit of and be binding upon each Party and
their respective successors and permitted assigns.


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13.2 Waivers in Writing



No waiver by either Party of any breach of any of the covenants, terms and
conditions contained herein shall be effective or be binding upon either Party
unless such waiver is expressed in writing. Any such waiver so expressed shall
not limit or affect the waiving Party’s rights in respect of any breach, other
than the breach for which the waiver was intended to apply.





13.3 Time of Essence



Time is of the essence in this Agreement.





13.4 No Partnership



Nothing herein shall be construed as creating a partnership and no Party shall
have any partnership rights or liabilities hereunder or in connection herewith.





13.5 Severability



The terms and provisions of this Agreement shall be severable in the event that
a Court of competent jurisdiction rules that any term or provision hereof is
either unenforceable or invalid. Each Party agrees that the unenforceability
or invalidity of any one or more of the terms or provisions of this Agreement
shall not render any of the other terms or provisions hereof unenforceable or
invalid and that this Agreement shall be construed as if such unenforceable or
invalid term or provision was, to the extent of such unenforceability or
invalidity, not contained herein.





13.6 Amendments



No amendment, alteration or variation of this Agreement or of any of its terms
or conditions shall be binding upon either Party unless such amendment,
alteration or variation is in writing and signed by the duly authorized
representatives of each Party.





ARTICLE 14

CONCERNING THE TRUSTEE AND PEOC






14.1 Acknowledgement



The Parties acknowledge and agree that:



	 	(a)	 	PEOC and the Trustee have entered into this Agreement solely
in their capacities as trustees of the Grantor and the Royalty
Owner, respectively;
	 
	 	(b)	 	the obligations of the Royalty Owner hereunder shall not be
personally binding upon the Trustee or any of the Unitholders in
their respective capacities as such;
	 
	 	(c)	 	the obligations of the Grantor hereunder shall not be
personally binding upon PEOC, any beneficiary of the Grantor or, for
greater certainty, any beneficiary of any such beneficiary, in their
respective capacities as such;



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	 	(d)	 	any recourse against the Royalty Owner, the Trustee or any
Unitholder, in their respective capacities as such, in any manner in
respect of any indebtedness, obligation or liability of the Royalty
Owner arising hereunder or arising in connection herewith or from
the matters to which this Agreement relates, including without
limitation claims based in contract, negligence, tortious behaviour
or otherwise, shall be limited to, and satisfied only out of, the
Trust Fund as defined in the Trust Indenture; and
	 
	 	(e)	 	any recourse against the Grantor, PEOC, any beneficiary of
the Grantor or, for greater certainty, any beneficiary of any such
beneficiary, in their respective capacities as such, in any manner
in respect of any indebtedness, obligation or liability of the
Grantor arising hereunder or arising in connection herewith or from
the matters to which this Agreement relates, including without
limitation claims based in contract, negligence, tortious behaviour
or otherwise, shall be limited to, and satisfied only out of, the
Trust Properties as defined in the First Amended and Restated Trust
Indenture made effective as of August 1, 2002 as the same may be
amended, restated or replaced from time to time, and relating to the
Paramount Operating Trust.



IN WITNESS WHEREOF, each Party has caused this Agreement to be executed as of
the date first above written.



	 	 	 
	Paramount Energy Operating Corp., as

Trustee for and on behalf of

PARAMOUNT OPERATING TRUST

Per:

	 	
Computershare Trust Company of

Canada, as Trustee for and on behalf of the

PARAMOUNT ENERGY TRUST

Per:














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	Schedule A to an Agreement made effective as of July
1, 2002 between Computershare Trust Company of Canada,
as Trustee for and on behalf of Paramount Energy Trust
and Paramount Energy Operating Corp., as Trustee for
and on behalf of Paramount Operating Trust



P&NG Rights