DISCLAIMER. D&M s OPINIONS DO NOT NECESSARILY REPRESENT THOSE OF THE SEC. D&M s opinions are subject to revision after the SEC

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1 Estimating Resources and Reserves in Unconventional Gas Reservoirs Creties Jenkins Vice President, P.E., P.G.

2 DISCLAIMER The opinions expressed in this presentation are those of DeGolyer and MacNaughton alone. These opinions represent D&M s current understanding of the Securities and Exchange Commission s Modernization of Oil and Gas Reporting; Final Rule (the revised SEC reporting rules) in the Federal Register. D&M s OPINIONS DO NOT NECESSARILY REPRESENT THOSE OF THE SEC. D&M s opinions are subject to revision after the SEC issues clarifications and guidance to the new rules.

3 Reserves are the Basis of Corporate Value Over 150 publicly-owned U.S. oil and gas producers file reserves data Their total reported oil and gas reserves are valued at over $3 trillion Proved reserves account of over 70 percent of their total market value Inaccurate estimates cause serious problems Reserve write-downs Poor planning and managerial decisions From B.G. Dharan, Improving the Relevance and Reliability of Oil and Gas Reserves Disclosures, Presented to U.S. House Committee on Financial Services

4 Resources and Reserves are Critical For Determining division of ownership Calculating a fair market value Raising i capital for development Establishing s sales contracts and prices Obtaining regulatory approvals Designing and constructing facilities

5 Differentiating Resources and Reserves Prospective Resources Those quantities of petroleum which are estimated, as of a given date, to be potentially recoverable from undiscovered accumulations. Contingent Resources Those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects but which are not currently considered to be commercially recoverable due to one or more contingencies Reserves Those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. From Petroleum Resources Management System, 2007, document at

6 PRMS Classification Framework From Petroleum Resources Management System, 2007, document at

7 Unconventional Reservoirs and PRMS Unconventional resources exist in petroleum accumulations that are pervasive throughout a large area and that t are not significantly ifi affected by hydrodynamic influences For these petroleum accumulations, there typically is a need for increased sampling density to define uncertainty of in-place volumes, variations in quality of reservoir and hydrocarbons, and their detailed spatial distribution Similar to improved recovery projects applied to conventional reservoirs, successful pilots or operating projects in the subject reservoir or successful projects in analogous reservoirs may be required to establish a distribution of recovery efficiencies

8 Types of Unconventional Reservoirs Deep Piceance Basin Alberta Deep Basin (?) Wilcox Sands Coalbed Methane Hybrid Systems Warrior Basin Drunkard s Wash Tight Sands Bossier Shale (?) 2 nd White Specks (?) Gas Shales From Jeff Levine

9 Data to Quantify Resources and Reserves Static Data Core description TOC and Rock Eval Sorbed gas capacity Mechanical properties Gas & water composition Isotopic data Maturity indicators (Ro, TAI, CAI, etc) Petrography and XRD Porosity, K, Sw, So, and Sg from core Electrical properties Wireline logs Resistivity, Density, Neutron, Dipole Sonic, FMI, ECS, etc. Dynamic data Drilling history Well testing Permeability, reservoir pressure, skin factor Completion data Fracture diagnostics Microseismic Chemical Tracers Production data Daily gas and water rates Producing bottom hole pressures Static bottom hole pressures Gradient surveys Surface facility constraints Fluid entry surveys

10 Conventional Prospective Resources Approach P10 P50 P90 Prospect Field Size Distribution Probability of Geologic Success (Pg) the probability of discovering reservoirs that flow petroleum at a measurable rate. Probability of Economic Success (Pe) the probability that a given discovery will be economically viable. From Bill Haskett, SPE 96879

11 Unconventional Prospective Resources Approach 60% 70% Play 80% 85% boundary 90% Well spacing unit 2% 5% ( 10% 15% 20% 30% 40% 50% 95% 98% Low (P90) Well Size Distribution High (P10) Well Size Distribution Estimated Ultimate Recovery per Well (BCF) Probability of Productivity the probability that the play will produce sustainable production somewhere within the play boundaries Probability bilit of Materiality-- the probability bilit that t the sustained production will be large enough and consistent enough to constitute a viable play From Bill Haskett, SPE 96879

12 A Shale Gas Prospective Resource Assessment Input Parameter Low (P90) Best (P50) High (P10) Area (acres) Thickness (feet) Sample Probabilistic Input Data Porosity (percent) Initial gas expansion factor (rcf/mscf) Matrix gas saturation (percent) Gas storage capacity (scf/ton) Density of shale (g/cc), rho Recovery factor, percent You may also want to build in key dependencies such as a positive correlation between matrix porosity and matrix gas saturation

13 Do Prospective Resources Have Value? Farm-ins Lease sales Share price and/or market capitalization Expected Monetary Value (EMV) Can be calculated and used in investment / drilling decisions, farmout decisions and internal rankings Should approximate the real value IF enough similar opportunities are pursued Modified from Richard Moreton, Bell Exploration Ltd

14 PRMS Gas Discovery Flowchart Prospective resources are undiscovered. In order to have contingent resources or reserves, we need to have a discovery! Total GIIP Penetrated by a well? Yes Significant quantity of potentially moveable gas? Yes Sufficient i information to define a project? Yes Discovered GIIP No No No Undiscovered GIIP Modified from David Elliott, SPE

15 Discovered GIIP PRMS Contingent Resource Classification Flowchart Project defined with established technology? Yes Evaluation Mature? Yes Contingencies Present? Yes No Yes Contingencies Surmountable? Yes Projected to be Economic? No Technology under development? No No No Submarginal No Reserves Unrecoverable Unrecoverable Economic Status Undetermined d Yes Marginal After David Elliott, SPE

16 Examples of Project Contingencies Contingencies that impede production Permeabilities that are too low Insufficient porosity or gas saturation Structural or stratigraphic complexities Ineffective fracture stimulations Contingencies that impede development Low gas prices Gas treatment and transport Lack of approvals by partners or regulatory agencies Lack of financing or commitment

17 A Tight Gas Contingent Resource Assessment Parameter P 90 P 50 P 10 Mean Productive area, acres 10,104 10,682 11,291 10,693 Net thickness, feet Matrix porosity Gas saturation Fm volume factor Recovery efficiency Contingent OGIP, BCF Contingent EUR, BCF

18 Important Caveats Application of any risk factor to contingent resources does not equate them with reserves. There is no certainty that it will be commercially viable to produce any portion of the contingent resources evaluated. But who wants to believe an auditor

19 When You Can Believe an Investment Banker

20 Or a Political Leader I believe in natural gas as a clean, cheap alternative to fossil fuels House Speaker Nancy Pelosi August 24, 2008

21 PRMS Classification Framework From Petroleum Resources Management System, 2007, document at

22 Progressing Resources to Reserves Unconventional uncertainty is production dominated in a typical gas play Need a pilot project to quantify rates and costs From Bill Haskett, Decision Strategies

23 What s the Purpose of a Pilot Project? 12 well) R (Bcf/w EUR To determine how many wells must be drilled before we are confident that the average development well will exceed the commerciality threshold Go No Go Number of Wells From Bill Haskett, Decision Strategies

24 How Many Pilot Wells Do I Need? Need to ensure that the piloting result is a true indicator of how the entire project will perform Optimal Number of Wells False results! From Bill Haskett, Decision Strategies 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Pilot Effectiveness

25 Reserves Estimation Techniques Analogous reservoirs Rules of thumb Material balance Decline curve analysis Performance based analysis Numerical modeling

26 CBM Plays: Daily Gas Rate by Year Bcf 100 Bcf Total Daily Rate (bcfd d) Powder River CBM Oak Grove 36.5 Bcf Total Annual Gas Production 3.65 Bcf Drunkards Wash CBM Ignacio Blanco CBM App CBM CDX Bcf Years

27 Reserves Estimation Techniques Analogous reservoirs Rules of thumb Material balance Decline curve analysis Performance based analysis Numerical modeling

28 Relationship Between IP and EUR Pe eak Monthly y Production (MCF/D) 10,000.8 to 4 BCF 1,000, Horizontal Wells Vertical Wells 100 Gas Ultimate (MMCF) , ,000 From Scott Rees, NSAI

29 Reserves Estimation Techniques Analogous reservoirs Rules of thumb Material balance Decline curve analysis Performance based analysis Numerical modeling

30 25000 p/z*, psi ia Eti Estimate t of Initial Pressure Estimate of Original-Gas- In-Place Gp, mmcf Need Accurate estimate of current average reservoir pressure Accurate estimates of reservoir properties (Porosity, PV Compress, etc) Accurate estimates of water influx Reservoir to be initially saturated with respect to the isotherm From John Seidle

31 Reserves Estimation Techniques Analogous reservoirs Rules of thumb Material balance Decline curve analysis Performance based analysis Numerical modeling

32 Haynesville Shale Performance Possibilities 10 1 Rate, MMC CFD.01 Shale Gas Decline Curve Forecast Using 1.5 years of Production Points = Actual Production Well Count b = 1.0 (Harmonic) 5.7 Bcf Gas{b=0.0} b = 1.5 (Super-harmonic) 7.0 Bcf Gas{b=1.50} Gas{b=1.0} b = 0.0 (Exponential) 37Bf 3.7 Bcf b = 05(Hyperbolic) Bcf Gas{b=0.5} Year

33 Reserves Estimation Techniques Analogous reservoirs Rules of thumb Material balance Decline curve analysis Performance based analysis Numerical modeling

34 Guidelines for Performance-Based Analysis From Tom Blasingame, Texas A&M

35 Reserves Estimation Techniques Analogous reservoirs Rules of thumb Material balance Decline curve analysis Performance based analysis Numerical modeling

36 Models to Understand Depletion

37 Numerical Modeling Techniques Finite Element Modeling Solution at the cell nodes Linear interpolation inside Properties at boundaries Need just a few cells to represent linear gradients Finite Difference Modeling Solution at block centers Properties discontinuous at block boundaries Need lots of grid blocks for near-frac accuracy

38 Grid Mesh Adjacent to a Hydraulic Fracture Hydraulic Fracture Wellbore

39 History Matching and Forecasting e Gas SCF) mulative lume (BS Cum Vol Make a production forecast after the history match is completed Time in Days Assess the pressure distribution at EUR

40 SEC and PRMS The SEC Rules have been modernized They yg go into affect at the end of this year Changes bring the SEC rules closer to PRMS Some of the new SEC requirements Optional disclosure of probable & possible reserves Disclosure of technologies used to establish reserves Must list qualifications of the person primarily responsible for overseeing the preparation or audit Average year pricing instead of end-of-year pricing Use of reliable technology to expand PUD s

41 SEC Reserves under the Old Rules Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production PDP PUD

42 Possible Scenario Under the New Rules Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless reliable technology establishes reasonable certainty t of economic producibility at greater distances. Reliable technology is a grouping g of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonably certain results (90% accuracy) with consistency and repeatability in the formation being evaluated or in an analogous formation. PDP PUD

43 Some Examples of Reliable Technology Interference tests Static reservoir pressures Producing gg gas and water rates 3-D seismic data Well correlation sections Structure contour and thickness maps Core descriptions and analyses

44 A Statistical Approach to Reliable Technology

45 A Cautionary Tale from a CBM Pilot Given the huge permeability variations in the four closely-spaced offset wells below, how can PUD s be booked at significant ifi distances from the center well? 7 Seam 4 = 4 md Seam 8 = 62 md 5 6 Seam 4 = 3 md Seam 8 = 9 md Seam 9 = 4 md Seam 4 = 2 md Seam 8 = 39 md Seam 9 = 14 md 8 Seam 4 = 1md Seam 8 = 450 md Seam 9 = 150 md 9 Seam 4 = 1 md Seam 8 = 7 md Seam 9 = 2 md Scale in Meters

46 Key Steps in Unconventional Gas Growth Understanding the fundamentals How do these reservoirs work? Choosing where to play What are my prospective resources? Drilling appraisal wells What data do I need to gather and analyze? Quantifying what s been found What are my contingent resources? Formulating the development plan What type, spacing, and number of wells do I need? Reaping the bounty What are my reserves and how do I report them?

47 Estimating Resources and Reserves in Unconventional Gas Reservoirs Creties Jenkins Vice President, P.E., P.G.