1 Outline of Recommendations to LTC 2010 Rules and Regulations – Chapters 9 and 13 June 23, 2009 Presented by Bob Adair Chairman, Property Tax Committee Louisiana Mid-Continent Oil and Gas Association

2 Chapter 9 Oil & Gas Properties

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4 Taxable Market Value Valuation of Louisiana Oil and Gas Wells for Property Taxes Legal Conclusions of Taxable Property Valuation Approach? Cost Inflation Factor to Current Cost Less Physical Depreciation (age from serial no., year installed) Review Other Market Data (environmental, operators, buyers, sellers, other) Market Adjustments (obsolescence) Reality Check (% of discounted cash flow value, sale of same property, other) Additional Adjustments (if appropriate) Review Status and Production Data for Shut-In and Low Producing Wells (LDNR, operators, other) Taxable Cost (studies, company books) Preliminary Market Value Replacement Cost New RCNLD Less Some Market Adjustment Red above indicates the major ongoing differences between industry and the LAA. The box indicates where assessors generally stop in their appraisal of wells. Less Shut-In and Low Production Credits

5  Alabama - Installed cost by year of wells (excluding drilling and exploration) and surface equipment. Appraised similar to other personal property – 5 year depreciable life.  Alaska – Installed cost by year of wells (excluding drilling and exploration) and surface equipment. Depreciation based on life of field.  Colorado – Surface equipment and submersible pumps and sucker rods valued as personal. Other subsurface property (including casing and tubing) valued with the land or leasehold. Depreciation based on general condition (very good, average, or minimum).  Michigan – Installed cost by year of wells (excluding drilling and exploration) and surface equipment. Appraised similar to other personal property – 15 year depreciable life. Other States

6  Procedures – Arranged in order of appraisal and 15% applied after determining appraised value.  Cost – US Energy Information Administration Oil & Gas Lease Equipment Cost Alternative: Cost by Year Acquired  Physical Deterioration  5 Years for Horizontal Wells  8 Years for Gas Wells  Floor same as General Business  Obsolescence  Producing < 10 bbl or 100 mcf per day – 40% reduction  Producing < 1 bbl oil or 10 mcf gas per day – 76% reduction Recommendations – Same as 2009

7  Physical Deterioration  12 Years for Oil/Service Wells  Obsolescence  Shut-In < 2 Years – Continue 2009 reduction.  Shut-In 2+ Years – $100 appraised value.  Change “considered” to “recognized” plus any reliable source. Recommendations – Change from 2009

8  Article VII, Section 4(B) states, in part, “No further or additional tax or license shall be levied or imposed upon oil, gas, or sulphur leases or rights. No additional value shall be added to the assessment of land by reason of the presence of oil, gas, or sulphur therein or their production therefrom.”  Using cost from the API Joint Association Survey on Drilling Cost includes significant additional cost that is not taxable.  The EIA cost study is recommended as the most applicable taxable cost for Louisiana wells. It specifically excludes drilling cost. Cost

9  Depreciable lives were selected that more closely tracks the value decline of wells (based on production) and time it reaches the lower range of value.  Horizontal wells (mostly gas) are designed to maximize production as quickly as possible. A 2-3 year life is common.  Vertical gas wells generally have a slower production decline than horizontal, but significantly faster decline than oil.  Oil wells generally have a slower production decline than horizontal or vertical gas wells. The economic life is generally more in line with Marshall Valuation Service’s indication of years.  The recommended depreciable lives of 3 years for horizontal, 8 years for gas, and 12 years for oil/service wells are supported by current operations and LSU study (Exhibit 7).  Floor percent good same as General Business. Physical Deterioration

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11  Producing Wells – In general, the lower the anticipated production/income, the lower the value.  Shut-In Wells  < 2 Years – Other than wells temporarily shut-in for maintenance, some other wells (relatively few) may be brought back to production if shut-in less than two years.  2+ Years – Wells shut-in two years or longer are generally physically incapable of returning to production due to downhole conditions. These wells are definitely a liability, i.e., they are waiting to be plugged and abandoned with a negative net salvage value.  Surface Equipment – This equipment becomes more “super adequate” (more obsolescence) as production declines. Obsolescence

12 Taxable Market Value Valuation of Louisiana Oil and Gas Wells for Property Taxes Legal Conclusions of Taxable Property Valuation Approach? Cost Inflation Factor to Current Cost Less Physical Depreciation (age from serial no.) Review Other Market Data (environmental, operators, buyers, sellers, other) Market Adjustments (obsolescence) Reality Check (% of discounted cash flow value, sale of same property, other) Additional Adjustments (if appropriate) Review Status and Production Data for Shut-In and Low Producing Wells (LDNR, operators, other) Taxable Cost (studies, company books) Preliminary Market Value Replacement Cost New RCNLD Less Some Market Adjustment Red above indicates the major ongoing differences between industry and the LAA. The box indicates where assessors generally stop in their appraisal of wells. Less Shut-In and Low Production Credits

13 Chapter 13 Pipelines (local assessed)