Gas Drilling 101

Fort Worth League of NeighborhoodsEducational EventOctober 23, 2007

Agenda• Gas Drilling Basics• Lease Considerations• Financial Terms and Royalties• Tips for Neighborhoods• Resources

Disclaimers• To lease, or not to lease, is an individual

decision. • The FWLNA is only providing information

and is not making any recommendations.• The information being presented may, in no

way, be construed as legal advice.• The FWLNA is not in the oil and gas

business or receiving any funds from the industry.

Gas Drilling Basics

Ed Ireland, Director of the Barnett Shale Energy Education Council

The Barnett ShaleA layer about 600 feet thick which was deposited 300-320 millionyears ago when this area of the world was part of an ocean.Small organisms were imbedded in the mud and were trappedas the mud hardened to rock. The organic material decomposedand produced methane (natural gas). It has been there for thesehundreds of millions of years waiting for engineers to develop atechnology to extract economically.

• 1980 - Discovered as potentially economic resource• 1995 - Significant research made to make resource economic

through stimulations and testing of horizontal wells. • 2002 - Horizontal drilling & fracturing becomes mainstream

for development. • Currently there are over 6,000 gas wells in the Barnett shale

and 580 active in the city of Fort Worth.

Gas Drilling Issues• Bonus• Royalty• Drill Site Location• Surface Usage• Transportation Costs • Post Production Expenses• Pooling• Mortgage, Insurance, Property Taxes

Facts to Consider

• Process takes a long time• Difficult to get real information from

leasing agents• A lease is a legally binding document• The fine print is there for a reason• The terms are important as well as price• Urban leasing is different from rural

“Landman or Broker”

• Not the operator of the well• Paid if leases are signed• Not used to “urban” leases• Think they have a right to drill• Known to use high pressure tactics

– Hurry or you will be left out– Often confuse the issue– Promise more than they can deliver

Leasing Contacts

• Four Sevens Energy• Colt Exploration• Turner Drilling• Paloma• Dale Resources• Fort Worth Energy

• Western Production• Continental• PFM• Davis• Holland• Mitchell

Definitions• 1 mcf = 1 thousand standard cubic feet• 1 mmcf = 1 million standard cubic feet• 1 bcf = 1 billion standard cubic feet• 1 tcf = 1 trillion standard cubic feet• Standard cubic foot = The volume of one cubic foot

of gas at 60° F and 14.7 psia. • Engineers estimate there are 30 tcf of natural gas

in the Barnett Shale• shale covers an area of over 5000 square miles,

including Fort Worth.

Drilling Terms

• Drill site - A 2 to 4 acre area for drilling wells. Ultimately surface equipment is normally located at the site.

• Lateral - horizontal drilling up to +/- 5000 feet from the drill site.

• 8 to 12 wells with single laterals may be drilled from a drill site.

Side View of Horizontal Well

7,000’ Deep

Barnett Shale

Water SandsCasing Cemented to Surface

Steel Surface Casing Set Below Water Sands

Steel Production Casing Cemented in Place

Steel Production Casing Cemented in Place

Normally < 5,000’ in Length

Top View of Horizontal WellsSurface Hole Locations

Bottom Hole Locations

Bottom Hole Locations

Drilling Flow Process

SEP

WET GAS METER

WATER TRUCKED TO SALT WATER DISPOSAL WELL

M CWATER SEPARATED FROM GAS THRU SEPARATOR ON SITE

H2O TANKS

GAS COMPRESSOR

GAS PRESSURE IS INCREASED THRU COMPRESSOR

DEHYDRATION UNIT

GAS IS DEHYDRATED TO REMOVE WATER TO PIPELINE SPECS

MDRY GAS METER

GAS PROCESSING PLANT

GAS IS PROCESSED FOR RESIDENTIAL & COMMERCIAL USE

Gas Well Surface Site

H2O TANKS

SEPARATORS

COMPRESSOR

WET GAS METERS

Water Storage tank @ 100 yards

Compressors• The two most common applications for Compressors.

C

Gas Compressors are used to increase line pressure from the well to gathering or distribution lines. In this application compressors run 24 hours per day and for long periods (20 years?)

Line Pressure is 400 PSIG Before Compressor

Compressor increases pressure to 900 PSIG

Gas flows 900 PSIG After Compressor

Gas Compressors are used to gas lift water from wells. In this application compressors run 24 hours per day and for shorter periods (<2 months)

CLine Pressure is 400 PSIG Before Compressor

Gas is injected at 700 –900 PSIG between the tubing and production casing to lift water.

Compressor increases from pressure from 400 PSIG to 900 PSIG

Relevant Facts

• Drilling Time - 20 to 30 days per well• Fracture Stimulation Time - 4 to 10 days per

lateral• Flowback Time – Approximately 21 Days• Gas production - Over 20 years

Flowback

• Over 100,000 Barrels of Fresh Water Pumped During Stimulation Process

• Initial water is nearly fresh and as load is recovered water becomes more saline.

• Flowback Time – Approximately 21 Days

- During Flowback which is usually 21 days a water truck will haul water from the drill site every 15 to 30 minutes around the clock

Water• Fresh water zones are isolated from wellbore by cement and three

strings of pipe. Producing gas zones are over a mile below the fresh water intervals. Risk of contamination is low.

• Water pumped into wells is generally less than 15 PPM Cl- (fresh) and is from various sources.

• All produced water is trucked off of location and is disposed of in a commercially permitted salt water disposal well.

• No commercial disposal wells currently exist within the City of Fort Worth. Locations are outside the city.

• Water injected into disposal wells is placed into brackish or saline zones well below fresh water intervals.

• Barnett Shale water usage accounts for 1 to 2%of resource supply.

Lease Considerations

Quality of Life Issues

• No drilling within 600 ft. of homes • Noise restrictions to 5 db above ambient • Restriction on Truck Traffic through

neighborhoods• No eminent domain use (drill site or gas

lines)

“What you are signing”• The common lease states - "Lessor hereby warrants and agrees to

defend title conveyed to Lessee hereunder ..."• If you do not clearly own the interest, this means you are responsible

to defend the interest. By signing the lease you assume the liability to defend the title should another possible owner come forward or should subordination of your current mortgage be required prior to payment of royalties.

• Most deeds to property in older neighborhoods make no mention of mineral rights. Generally, unless mineral interests are withheld in conveyance the mineral interest is conveyed with the surface.

• According to a real estate agent in our neighborhood, agents are asking sellers to prove they own the mineral rights and put that in the new deed as to whether the mineral rights go with the surface ownership or stay with the seller.

• The estimated cost for an attorney to document and prove ownership of the seller's mineral rights may be $1000-2000.

“Other language is out there”For example

• Common language used to address the aforementioned slide/situation that removes the liability from the Lessor or Home owner – "Lessor makes no warranty of title to the leased premises

whatsoever.“

• For more information on Leases, see the FWLNA Website for “Leasing 101 – What to know before you sign your lease.”

Show me the MONEY

James Huling, Kiamachi Energy Corp

Financial Terms• Bonus - Cash paid to the mineral owner for signing a lease. The

amounts have increased over the last year from $500 per lot to $10,000 – $12,000 per acre and usually based on surface acreage.

• Royalty - A percentage of gross sales of gas produced. Most recent offers are 25% proportionately reduced your percentage of acreage within the unit.

• Subordination- Many mortgage companies require this agreement before they will allow the energy company to

Financial Terms

• Severance Taxes - All production is taxed by the state between 2.5 to 7%.

• Ad Val. Taxes (Property Taxes) – County taxes billed every year and normally run 2.5% of revenue.

• Federal income tax – Your bonus, and revenue from royalty are subject to federal income taxes.

Estimate of RoyaltySeveral factors go into estimating the amount of

royalty you can expect to receive. Some of the factors include:

• Estimated recoverable gas and production profile per well.

• Amount of acreage included in production unit. How many acres are pooled together per well.

• Gas price • Gas quality• Taxes

BASIS FOR “THE MONEY”

• Used industry published financial data that is subject to Sarbanes-Oxley Act.

• Estimates from Landmen or Brokers are usually higher and may be optimistic.

• Developed mathematical equation to fit published performance.

• Made economic projection based on expected performance

• Adapted economic projection to simple spreadsheet for a more simplistic model

CHK main website: http://chkenergy.com/Page 15 of the August 2007 presentation: http://phx.corporate-ir.net/phoenix.zhtml?c=104617&p=irol-presentations

Quicksilver main website: http://www.qrinc.com/Page 14 of the June 2007 presentation: http://www.qrinc.com/investor_relations/presentations.shtml

WHERE’S THE MONEY?

+/- $50 per month (before federal income tax) over

a 20 year period

Don’t Forget NA Bonuses

• Energy companies do fell its important to invest in the neighborhoods they are drilling.

• Many NA’s have been able to negotiate donations as high as $75,000 to be used for playgrounds, schools, community centers or other quality of life improvements.

• Make sure this is part of your negotiation.

Tips for Neighborhoods

SUMMARY• An average urban lot can expect to receive somewhere between

$30-$50 per month in royalties based on published production rates.

• In the state of Texas mineral rights take precedence of surface rights. Make sure surface use restrictions are “iron-clad” to insure your property is not disturbed.

• Restrictions need to be in the lease. Ordinances may not be punitive enough to insure compliance.

• Ordinances and regulations can be modified through legislative change.

• The League of Neighborhoods recommends not supporting a lease that does not insure the quality of life in your neighborhood.

• Neighborhood’s that stick together have successfully obtained leases that protect their neighborhood.

• Neighborhood’s that stick together have negotiated terms that are far more financially advantageous (higher bonus and royalty as well as lower deductions and favorable language.)

Neighborhood Top 10 List

1. Stay Together & Act as Group2. Do not get in a hurry, offers do go up3. Understand all the parties involved4. Talk to other neighborhood associations5. Do not give legal advice6. Do not be intimidated7. Consider safety and quality of life issues

Neighborhood Top 10 List

8. Get the FACTS9. Communicate

– E-mail– Phone– Meetings– Flyers

10.Obtain legal assistance

Gas Drilling Resources

• Barnett Shale Newsletter

• Barnett Shale Blog by Fort Worth Star Telegram

• FWCanDo.org

• Drillsite Broadcast• Barnet Shale

Education Agency

Gas Drilling Resources

• FWLNA Website– New Section for

Resources– Includes Gas Drilling

101 & Leasing 101

• Royalty $ Tool– Calculate your royalty

for your lease• Lease Rates

Comparison Chart– Compare your offer to

those others have received

FWLNA has formally requested that the Mayor and Council reconvene the gas drilling task force and conduct an analysis of the situation to date. A time out to make sure our ordinance is working effectively and efficiently.

Urban Gas Drilling in Fort Worth

Wendy Davis, Councilperson District 9

Closing Thoughts

• The Fort Worth Gas Drilling Ordinances do not factor zoning into permitting process.

• In the state of Texas mineral rights take precedence of surface rights. If you do not own the minerals you can not stop the development of minerals.

• Neighborhoods sticking together are the only means currently available to push drilling and operations to desired surface locations.

Special Thanks for Help on this Presentation

Wendy Davis, Councilperson for District 9 Ed Ireland, Director BSEECJames Huling, Kiamichi Energy CorpBill Hall, Mayor of Park CitySarah Fullenwider, Attorney for City of Fort Worth