BASIC EARTH SCIENCE SYSTEMS,
INC.
PERFORMANCE BONUS
PLAN
The chief
executive officer’s potential cash bonus shall be equal to
100% of his or her annual salary. The bonus shall be determined
based on four (4) criteria, each contributing up to a maximum
of 25% of his or her bonus. The four criteria are (i) increase
in annual production; (ii) increase in reserves; (iii) return
on investment; and (iv) performance of the Company’s
stock price relative to the stock prices of its peer companies. The
percentage awards from each criterion are added to determine the
total percentage of the award. This Bonus Plan shall be effective
for fiscal years beginning with the fiscal year ended
March 31, 2009.
Annual
Production Bonus Award Percentage
The
Compensation Committee believes that increasing production is a
critical measure of performance. Oil and gas reserves are a finite
resource and, if unaddressed, declines in production from previous
levels are expected. Any increase in production from previous
levels is not only an indication of arresting this natural decline
but a strong indicator of growth.
The Annual
Production Bonus Award Percentage shall be based on the annual
percentage increase in production. The annual increase in
production shall be determined by dividing the annual production in
barrels of oil equivalent (BOE) for the most recent fiscal
year by the annual production in BOE for the prior fiscal year and
then subtracting 100%. For each percentage increase in annual
production, the annual production bonus award shall be equal to 2%
of the chief executive officer’s salary as of the end of the
fiscal year to which the bonus relates. In each case the percentage
award shall be a maximum of 25% and a minimum of 0%.
Reserves
Bonus Award Percentage
The
Compensation Committee believes that increasing the Company’s
reserve base is critical to the Company’s future growth. If
the Company does not replace the reserves it produces, the
Company’s production would decline year after year. In order
to grow, it is necessary for the Company to replace these reserves
by discovering new reserves or acquiring producing properties. The
estimation of reserves involves a number of variables, including
commodity prices. Commodity prices are beyond the control of the
chief executive officer. The Compensation Committee believes this
limitation is acceptable, because in those years when commodity
prices are up and have a positive effect on bonus determination,
the Company is more likely to have the funds to pay bonuses.
Likewise, in years that commodity prices are down and have a
negative effect on bonus determination, the Company is less likely
to have the funds to pay bonuses.
The Reserves
Bonus Award Percentage shall be based on the annual percentage
increase in reserves measured in BOE. The annual increase in
reserves shall be determined by dividing the reserves in BOE at the
end of the most recent fiscal year by the reserves in BOE at the
end of the prior fiscal year and then subtracting 100%. For each
percentage increase in annual reserves, the bonus award shall be 2%
of the chief executive officer’s salary as of the end of the
fiscal year to which the bonus relates. In each case the percentage
award shall be a maximum of 25% and a minimum of 0%.
Return on
Investment Bonus Award Percentage
The
Compensation Committee believes that it is important to balance the
incentive to increase production and reserves with a metric that
rewards the effectiveness of those increases. This Return on
Investment metric is intended to evaluate capital expenditures in a
given year (or multiple years in the case of multi-year projects or
those projects that overlap a year end) versus the anticipated cash
flow, if any, that those projects, on an aggregate basis, are
expected to generate.
The Return on
Investment Bonus Percentage shall be calculated first using a
recognized petroleum engineering cash flow model (such as Aries,
PowerTools, etc.) to determine the Internal Rate of Return
(IRR) of anticipated cash flows for the current and future
years less capital expenditures. While calculated on a cash flow
model, the metric conceptually is as follows:
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Return on Investment
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Bonus Award Percentage
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= 2 X
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After Tax IRR
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– 8.0%
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“After
Tax Internal Rate of Return” (IRR) is the discount rate,
expressed as a percentage, at which the summation of all
discounted, after-tax cash flows (including Discounted Future Cash
Flow, Discounted Current Year Cash Flow and Discounted Capital
Expenditures) is equal to zero ($0).
“Discounted Capital Expenditures”
shall mean the capital expenditures that were incurred in the most
recent fiscal year and were associated with GAAP proved properties,
including geological and geophysical costs, land, drilling
(including dry holes), completions, recompletions and acquisitions.
Capital Expenditures that were incurred during the year (or over a
fiscal year end), and for which no reserves have been determined,
shall be deferred and not included in the determination for that
fiscal year. Likewise, Capital Expenditures associated with a GAAP
unproved property shall be deferred and not included in the
determination for that fiscal year. Once a deferred property for
which these Capital Expenditures were i
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