3.	OIL AND GAS PROPERTIES

The Company’s oil sands acreage as of September 30, 2016, covers 43,015 gross acres (34,096 net acres) on 68 sections of land under nine oil sands leases. Until the Company extends the leases “into perpetuity” based on the Alberta governmental regulations, the lease expiration dates of the Company’s nine oil sands leases are as follows:

(iv)

32 sections of land under 5 oil sands leases are set to expire on July 10, 2018. Of the 5 oil sands leases totaling 32 sections of land, it is the Company’s opinion that the Company has already met the governmental requirements on 17 of the 32 sections to continue these sections into perpetuity. These 17 sections contain the majority of the resources identified to date on these 5 oil sands leases. The Company has completed or is in the process of applying for continuation of these leases or parts of the leases where the majority of the oil sands resources have been confirmed;

(v)

31 sections of land under 3 oil sands leases are set to expire on August 19, 2019; and

(vi)

5 sections of land under 1 oil sands lease are set expire on April 9, 2024. It is the Company’s opinion that the Company has already met the governmental requirements for this lease and it will be applying to continue all 5 sections of this lease into perpetuity.

Lease Rental Commitments

The Company has acquired interests in certain oil sands properties located in North Central Alberta, Canada. The terms include certain commitments related to oil sands properties that require the payments of rents as long as the leases are non-producing. As of September 30, 2016, the Company’s net payments due under this commitment are as follows:

	(USD $)		(Cdn $)
2017	$	36,820	$	48,294
2018	$	36,820	$	48,294
2019	$	22,474	$	29,478
2020	$	3,416	$	4,480
2021	$	3,416	$	4,480
Subsequent	$	10,247	$	13,440

The government of Alberta owns this land and the Company has acquired the rights to perform oil activities on these lands. If the Company meets the conditions of the leases the Company will then be permitted to drill on and produce oil from the land into perpetuity. These conditions give the Company until the expiration of the leases to meet the following requirements on its oil sands leases:

The Alberta Department of Energy has relaxed the drilling requirements under section 3(2)(a) option 1 of the Oil Sands Tenure Regulation of the Mines and Minerals Act of Alberta. Under the relaxed rules the Company would now have to drill 26 wells throughout the 68 sections to preserve all of the Company’s nine oil sands leases; or

drill 44 wells within the 68 sections and having acquired and processed two miles of seismic on each other undrilled section.

With the revised requirements, the Company now plans to meet the first of these conditions. As at September 30, 2016 and 2015, out of the 26 wells to be drilled in option 1 above, the Company has an interest in ten wells which it has drilled, logged and cored, which can be counted towards these requirements, and in addition the Company has also identified three other wells drilled and logged through the oil sands zone by others who own or owned the rights to explore zones deeper than the Company’s Bluesky zone where the Company has oil sands rights. The wells drilled by others may be included in the satisfaction of these requirements under option 1 above. Therefore, under option 1 above the Company may have to drill up to another 13 wells to preserve all of the 68 sections. In the event the Company does not drill all or part of the 13 wells the Company can also elect to retain a portion of each lease where the Company has identified the reservoir and has completed the amount of work to retain that portion of the lease. Presently, without drilling any more wells it is the Company’s opinion that under the newer rules the Company can retain about 67% of the lands where the Company has already identified resources.

In the event that the Company uses option 2 above, the Company has also acquired and processed 25 miles of seismic on the leases, which can be counted towards the option 2 requirements. The Company’s joint venture partner and operator of the SAGD Project has also acquired additional seismic that can be used towards the requirements under option 2 above.

The Company follows the full cost method of accounting for costs of oil properties. Under this method, oil and gas properties, for which no proved reserves have been assigned, must be assessed at least annually to ascertain whether or not a write down should occur. Unproven properties are assessed annually, or more frequently as economic events indicate, for potential write down.

This consists of comparing the carrying value of the asset with the asset’s expected future undiscounted cash flows without interest costs. Estimates of expected future cash flows represent management’s best estimate based on reasonable and supportable assumptions. Proven oil properties are reviewed for any write down on a field-by-field basis. No write downs were recognized for the year ended September 30, 2016.

Capitalized costs of proven oil properties will be depleted using the unit-of-production method when the property is placed in production.

Substantially all of the Company’s oil activities are conducted jointly with others. The accounts reflect only the Company’s proportionate interest in such activities.

Farmout Agreement

On July 31, 2013, the Company entered into a Farmout agreement (the “Farmout Agreement”) with an additional joint venture partner (the “Farmee”) to fund the Company’s share of the Alberta Energy Regulator (“AER”) approved SAGD Project at the Company’s Sawn Lake heavy oil reservoir in North Central Alberta, Canada. In accordance with the Farmout Agreement the Farmee has agreed to provide up to $40,000,000 in funding for the Company’s portion of the costs for the SAGD Project, in return for a net 25% working interest in 12 sections where the Company had a working interest of 50% (before the execution of the Farmout Agreement). The Farmee will also provide funding to cover monthly operating expenses of the Company, of which the first such monthly payment began in respect of the month of August 2013 and shall not to exceed $30,000 per month. In addition, until December 31, 2015, as amended on November 17, 2014, the Farmee has the option to elect to obtain a working interest of 45% to 50% working interest in the remaining 56 sections of land where the Company has working interests ranging from 90% to 100%, by committing an additional $110,000,000 of financing to the development of the Company’s Sawn Lake oil sands properties. As of the date of the options expiration, December 31, 2015, the Farmee did not exercise its option to acquire such interests.