The Shale Lessons Learned & Trends. Arthur J. Wright (# )

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Brittney Holland
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1 The Shale Lessons Learned & Trends Arthur J. Wright (# )

2 Devon Energy to Buy Chief Oil & Gas LLC May Devon Energy of Oklahoma City announced this morning it will buy Chief Oil & Gas LLC of Dallas for $2.2 billion, a deal that will combine the largest and third-largest natural gas producers in the Barnett Shale natural gas field. In a related transaction, CrossTex Energy of Dallas said it will pay $480 million for Chief s gathering lines and processing plant northwest of Fort Worth. CrossTex has just opened a new pipeline linking the Barnett Shale with a national pipeline outlet at Paris in northeast Texas. Chief had put itself up for sale late last year, and the company -- one of the pioneers in the Barnett Shale field -- had attracted numerous bidders. Devon is the largest natural gas producer both in the Barnett Shale and the entire state of Texas. It acquired the former Mitchell Energy of Houston, which opened the Barnett Shale play in the late 1990s, in 2002 for f $3.5 billion. 2

3 Lessons Learned from Chief Midstream Component Independent value Assists development (TXO-Delhi) Defect Acreage/ PUD NRI/WI Acres owned Degrees of Goat Pasture Issue Lakes/Wetlands/Urban 3

4 Net Acre Shortfalls Example The Company s ownership of the Leases is such that, with respect to an Undeveloped Lease identified as such on Exhibit, it entitles the Company as of the Effective Date or the Closing Date to receive, as to any period or periods during the duration of the term of such Lease, fewer Net Leasehold Acres (defined below) for such Undeveloped Lease than that shown on Exhibit. Net Leasehold Acres shall be computed separately for each Lease which is described in Exhibit and shall mean, for each such Lease, (a) the number of acres of lands covered by such Lease (i.e. gross acres), multiplied by (b) the lessor s mineral interests in oil and gas covered by such Lease in such lands, multiplied by (c) the Company s undivided interest in such lease insofar as it covers such lands (provided that if items (b) ) or (c) vary as to different areas covered by the Lease, a separate calculation shall be done for each such area). 4

5 Undeveloped Lease NRI Variance Example The Company s ownership as of the Effective Date or the Closing Date of an Undeveloped Lease is such that it entitles the Company to receive, as to any period or periods during the duration of the term of such Lease, a decimal share of the oil, gas and other hydrocarbons produced from such Undeveloped Lease, which is less than the decimal share set forth on Exhibit with respect to such Undeveloped Lease. 5

6 Can do PUD s or acreage Maps PUD Defects Or Exclude leases with ownership defects Adjust NRI 6

7 Operational Matters Except as disclosed on the Disclosure Schedule, any surface access or use restriction that materially interferes with operations of an oil and gas property or drilling or development of any Lease. 7

8 Midstream Real Value Cash Issues JV with back-in LLC Operating Agreement Gathering Agreement 8

9 Deep/Shallow Acreage Cooperation Agreement What do you do if shallow production? Exclude - only problems Deal with sharing of common leases Responsibility for lease payments, delay rentals, shut in, lease renewals, etc. Reimbursement Obligations Notices lease expiration, abandoning wells, shut in royalties Surface Use Shared expenses (roads, etc.) Shared facilities (pipe, rights of way) 9

10 Deep/Shallow Acreage Cooperation Agreement (cont.) Shared Information Seismic CA Assignment if abandoning Taxes Property Partnership Disclaimer AMI Indemnities Operations/Lease Administration Insurance Additional Insured Levels of insurance Depth Severance Existing JOAs Old AMIs MUI 10

11 What Else? Joint Development Agreements PSA Exhibits Statue of Frauds Arbitration Paying Quantities Objective/Subjective Test What is Production? TX, LA vs. CO and Northeast Separation mineral/surface reasonable use 11

12 12 BUY LOW / SELL HIGH

13 Observations Old shallow production is good! 10-year leases with option to renew. HBP has incredible value. Bigger Fool Theory Crusader proved does not always work. How do you diligence 300,000 acres? Do not CHK/Drill Spot check methodology 13

14 Observations (cont.) KY, WV, PA, VA are not flat Operational Issues Pigging Mechanical separator (not enough) Contract Issues Huron gas is very wet Statoil $3.5 billion JV with CHK in Marcellus (will drill for 20 yrs and produce for 50 yrs) 14

15 Observations (cont.) Anadarko - Year-to to-year 4th Quarter drilling times fell 30% cost per foot fell 20% cut rigs 50% Production dropped 5.5% Liquids production up 6.7% Production up 8% year Marcellus 14 rigs Recent wells - 7 MMcf 15

16 Observations (cont.) Statoil/CHK 13,500 to 17,000 horizontal wells over next 20 yrs 300M Cft per day billion Cf by 2020 China 4000 Tcf unconventional gas potential Europe 510 Tcf Politics in East background noise It will be drilled 16

17 Tax Carried interest need tax partnership Reserved ORRI can turn capital gains into ordinary income 17

18 Wall Street Journal - 12/16/09 Has Natural Gas s Moment Arrived? EIA gas below $7.00 through 2025 Stable Prices Golden Era 2000: $2.50 to $10.00 MMBtu 2001: under $ : $15 then to $7.00 within 2 months Exxon bought XTO future must be gas 18

19 Eagle Ford EOG Eagle Ford among largest oil discoveries in 40 years 120 mile trend Gas with liquids El Paso One well 2.9 MMcfd BD of condensate 14 stage frac 4,100 ft. lateral at 9,950 ft. Shell buys 250,000 acres in Eagle Ford Rosetta 3.2 MMcfd, 350 bbl of condensate, 490 bbl NGLs 4,650 fl lateral and stages of frac St. Mary s 250,000 acres in Eagle Ford ($250 acre) Apache, Conoco, Petrohawk, Newfield and Swift in Eagle Ford CHK 400,000 acres in Eagle Ford looking for JV partner 19

20 NGL/LPG Supply Global LPG Sources 35% gas 24% gas/oil 41% refining Storage limited - so supply demand tends to equalize 20

21 NGL/LPG Supply (cont.) Canada/US produced 24% world supply Natural Gas processing about 62% of supply down 0.6% per year Growth Shale plays high NGL and light oil content so rich gas preferred in low price gas environment OK why not just drill wet gas? Middle East 24% supply and growing each year 3.4 plus % Middle East growing LNG market Producing more and creating more NGLs Limited NGL market 21

22 US NGLs Marcellus Shale Liquids West PA and Northwest VA Propane heavier truck or rail Ethane problem no pipes, Ethylene, crackers, in Ontario or Midwest Wild Cards LNG cheaper than US Shales Then foreign NGLs will flood US and world markets Natural Gas can replace LPG Market for heating and cooking Global Assumption - LPG 50% - residential heating and cooking 25% - petro chemicals 25% - cars, industrial, agricultural 22

23 Joint Ventures/Majors Mitsui JV Anadarko pays $1.4 billion for 30% interest in Anadarko acreage - $14,000 an acre (Marcellus) Reliance pays $1.7 billion to Atlas (Marcellus) Shell pays $4.7 billion for 650,000 net acres (Marcellus) Reliance - 40% of Pioneer/Newpek $1.35 billion deal Enerplus/Chief - $3,500 an acre (Marcellus) Statoil/CHK - $4,325 an acre (Marcellus BP/CHK - $9,900 an acre (Fayetteville) Total/CHK - $33,000 an acre (Barnett) BG/Exco - $19,167 an acre (Haynesville) BP/Lewis $4,000 an acre (Eagle Ford) 23

24 Canada Apache drills near Halifax, Nova Scotia Canada oil sand big consumer of gas 8% oil import in % 35% in 2030 loaded with Shale Gas Where will it go? Bcfd drop in production Sable Island 400 MMcfd ExxonMobil Operator only offshore production Marcellus and Rockies Express (formerly trapped Rockies gas major competition) Canada has no automatic market Nexen 10% ROR at US $4 Mcf for Horn River Gas Ziff capital is flowing out of Canadian conventional gas 80 s War on Canada 24

25 LNG US Projected Supply Builds: Qatar has 3 trains Yemen ramps up US Terminals GDF Boston Commissioned in February 2010 LNG capacity 12 Bcfd Two terminals under construction 3.3 Bcfd EIA imports 2.73 Bcfd Bcfd 2030 Who knows Bloomberg Report Australia may change Qatar as biggest LNG exporter 25

26 Pricing and Stuff Analysts cannot forecast prices or production Coal vs Gas Who knows outcome? Wood McKenzie By 2015 gas $ $7 MMBtu Texas Gas Production Peaked in 1972 at 9.68 Cfd Today 80% of such levels Encana Gas Factory Approach 100 wells in 2010 and 150 in 2011 to hold acreage 8 wells from a single pad Sabine County acreage solid Devon $7 gas needed for most shale 26

27 Conclusion NGLs feast or famine? Carries Uneconomic wells will be drilled What acreage is HBP Midstream and Market access critical Analysts cannot forecast prices or production Engineers have screwed it up 27

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Upstream Developments Generate Growing Hydrocarbon Gas Liquids Supply! Alan Farquharson, SVP - Reservoir Engineering & Economics!

Upstream Developments Generate Growing Hydrocarbon Gas Liquids Supply! Alan Farquharson, SVP - Reservoir Engineering & Economics! June 16, 2015 Forward-Looking Statements Certain statements and information