OIL & GAS DEVELOPMENT AND UNITIZATION LAWS IN VARIOUS STATES MARCH 2010

RULE OF CAPTURE VS CORRELATIVE RIGHTS INTRODUCTION RULE OF CAPTURE VS CORRELATIVE RIGHTS

RULE OF CAPTURE LANDOWNER MAY PRODUCE OIL & GAS UNDER HIS PROPERTY WITHOUT REGARD WHETHER HE DRAINS HIS NEIGHBOR’S PROPERTY AS WELL NO LEGAL LIABILITY UNLESS WASTE RESOURCE OR DAMAGE RESERVOIR

CORRELATIVE RIGHTS EACH OWNER IN A COMMON OIL AND GAS POOL IS AFFORDED AN OPPORTUNITY TO RECOVER HIS JUST & EQUITABLE SHARE OF RESERVES GOAL IS TO LIMIT UNCOMPENSATED DRAINAGE, BUT NOT AN ABSOLUTE RIGHT – MUST EXERCISE RIGHT TO DRILL TO CLAIM CORRELATIVE RIGHT

PETROLEUM GEOLOGY, MINERAL INTERESTS AND REGULATION

PETROLEUM TRAP ELEMENTS PETROLEUM SOURCE ROCK MIGRATIONAL PATHWAY POROUS FORMATION ROCK SEALING IMPERMEABLE CAPROCK OR BED

JURISDICTION OF CONSERVATION AGENCIES TO REGULATE OIL AND GAS DEVELOPMENT

COMMON OIL AND GAS REGULATORY TERMS MEANING OF “POOL” FOR REGULATORY PURPOSES Underground reservoir containing an interconnected common accumulation of crude oil and/or natural gas in pressure communication

COMMON OIL AND GAS REGULATORY TERMS CONCEPT OF A “DRILLING UNIT” Maximum area from which one well can efficiently and economically drain the recoverable oil and gas reserves in a given reservoir

EFFECT OF UNITIZATION ON MINERAL RIGHTS CREATES A LEGAL FICTION THAT OPERATIONS OR PRODUCTION ANYWHERE ON THE UNIT IS AS IF ON EACH AND EVERY LEASE IN THE UNIT NOT A CROSS ASSIGNMENT – EACH LESSEE STILL OWNS AND REMAINS RESPONSIBLE TO HIS OWN LESSOR MUST BE UNIT OPER’NS OR PROD’N

COMPARISON OF OIL AND GAS DEVELOPMENT REGULATORY STRUCTURES IN FIVE STATES

OKLAHOMA WELL SPACING AND POOLING LAW CREATE DRILLING & SPACING UNITS LOCATION EXCEPTIONS INCREASED DENSITY WELLS FORCED POOLINGS

GENERAL STATEWIDE RULE OKLAHOMA WELL SPACING GENERAL STATEWIDE RULE

DRILLING AND SPACING UNITS OKLAHOMA WELL SPACING DRILLING AND SPACING UNITS

DRILLING & SPACING UNIT GENERAL REQUIREMENTS APPROXIMATELY SQUARE OR RECTANGULAR AND USUALLY OF UNIFORM SIZE ACROSS SAME POOL COMBINATION RESERVOIRS MAY HAVE NON-UNIFORM SIZE UNITS < 40 ACRES FOR OIL WELLS < 4,000’ < 80 ACRES FOR OIL WELLS BETWEEN 4,000’ AND 9,990’

OKLAHOMA OFF-CENTER SETBACK / ACREAGE SIZE RULE FOR SPACING UNITS OFF-CENTER S/B ACREAGE SIZE 165 10 or 20 330 40 or 80 660 160 or 320 1,320 640

DRILLING & SPACING UNIT GENERAL REQUIREMENTS > 160 ACRE UNIT HOLDS LEASE ACREAGE OUTSIDE OF UNIT FOR ONLY 90 DAYS AFTER END OF TERM TOTAL UNIT ACRES LIMITED TO 640 ACRES WITH 10% TOLERANCE NO REQUIREMENT UNIT BE SHOWN UNDERLAIN ENTIRELY BY PAY FOR FULL ALLOWABLE

OKLAHOMA LOCATION EXCEPTION

INCREASED DENSITY WELL OKLAHOMA INCREASED DENSITY WELL

FORCED POOLING IN DRILLING AND SPACING UNITS OKLAHOMA FORCED POOLING IN DRILLING AND SPACING UNITS

OKLAHOMA FIELD-WIDE POOLING

KANSAS WELL SPACING AND FIELD-WIDE POOLING LAW General Spacing and Oil Unit Rules Well Spacing and Basic Proration Orders –UNIT ACREAGE TO BE SHOWN REASONABLY PRODUCTIVE Location Exceptions -- YES NO General Compulsory Pooling Law Field-wide Pooling - YES

KANSAS BASIC PRORATION ORDER MODEL

LOCATION EXCEPTIONS METHODS STANDARD ADMINISTRATIVE APPLICATION BPO “SLIDING SCALE” WITHOUT APPLICATION BPO STANDARD GAS WELL SETBACK -> 1250’ WELL LOCATION TO W/IN 330’ OF UNIT LINE DIVIDE DISTANCE FROM LINE BY 1250’, THEN MULTIPLY QUOTIENT BY INITIAL RATE TO DETERMINE PENALTY ON PRODUCTION SUBJECT TO STATEWIDE OVERAGE RULE

LOCATION EXCEPTION METHODS

ALTERNATE TRACT UNITS Novel feature of large gas field BPOs in Kansas - ATUs Combine adjoining tracts from existing units to form new 640-acre ATU – either 4 X 160 acres or 2 X 320 acres One ATU well drilled as near center of ATU as practical Existing units contributing tracts share in ATU production Does not affect allocation from unit wells in existing units Effort to drill in “corners” and along boundary lines not drained by existing production Fairer to competing interests than standard location exceptions

ALTERNATE TRACT UNIT (4 X 160 ACRES)

ALTERNATE TRACT UNIT (2 X 320 ACRES)

LOUISIANA WELL SPACING AND POOLING LAW Unitization – Drilling and Production Units Field-wide “(Reservoirwide”) Units Unitization and Equity among Unit Interests Well Spacing Limited Location Exceptions Replacement (“Substitute Unit”) Wells Increased Density (“Alternate Unit”) Wells

LOUISIANA GENERAL SPACING RULE

TEXAS WELL SPACING AND POOLING LAW Well Spacing and Density (Acreage Requirement) Compulsory Pooling in Texas -- Rare Voluntary Field-wide Unitization Statute w/o Compulsory Pooling Provision by Vote or Otherwise

TEXAS GENERAL SETBACK / ACREAGE SIZE RULE SPACING RULE (From Line-Apart) ACREAGE REQUIREMENT 150 – 300 2 200 – 400 4 330 – 660 10 330 – 933 20 467 – 933 467 – 1200 40 660 – 1320

Texas Compulsory Pooling Voluntary pooling strongly favored Forced pooling only after voluntary efforts prove futile and several prerequisites met Only allowed ~100 times since 1965 Limited to < 160-acre oil units / < 640-acre gas units Voluntary unitization statute for EOR or gas recycling has no compulsory clause

COLORADO WELL SPACING & POOLING LAW Well Spacing – > 2500’ deep: 600’ from lease line / 1200’ from well in same pool; <2500’ deep: 200’ from line / 300’ apart Drilling Units by Order – drained by 1 well Location Exception – waiver>variance>hrg Density Drilling – no set unit size / “area” Forced Pooling and Field-wide Unitization

NOTICE REQUIREMENTS DIFFER FROM STATE TO STATE - TIME PERSONAL NOTICE TO INTERESTED PARTIES AND PUBLICATION NOTICE VIA NEWSPAPERS IN COUNTIES OF AGENCY AND LAND AT ISSUE MULANE STANDARD ESSENTIAL FOR CONSTITUTIONAL SUFFICIENCY AS TO OPPORTUNITY TO APPEAR & HR’G

NOTICE REQUIREMENTS MULANE STANDARD – THAT NOTICE REASONABLE UNDER THE CIRCUMSTANCES CALCULATED TO APPRISE A PROPERTY OWNER OF HIS RIGHT TO APPEAR AND BE HEARD AS TO POTENTIAL ADVERSE LEGAL EFFECT ON HIS PROPERY RIGHTS AS A MATTER OF DUE PROCESS

CONCLUDING COMMENTS QUESTIONS?