Overlapping CAs A brief history and recent developments Rebecca Paris Federal and Indian Royalty Reporting Supervisor WPX Energy

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved Disclaimer: This presentation only reflects the views of the author/presenter and is not intended as legal, tax or accounting advice. Each recipient should solicit his or her own legal, tax or accounting counsel with respect to any of these issues. Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved Learning Objectives: Learn what a Communitization Agreement (CA) is and why it exists Learn the difference between an overlapping CA and a regular CA. Learn what has changed in recent months regarding overlapping CAs. Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

What is a Communitization Agreement (CA)? 43 CFR § 3217.11 states, “Under communitization agreements (so called drilling agreements), operators who cannot independently develop separate tracts due to well-spacing or well development programs may cooperatively develop such tracts. Lessees may ask BLM to approve a communitization agreement or, in some cases, we may require the lessees to enter into such an agreement.” A way to share in production based on the anticipated drainage of minerals. Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved Simple CA Example Sections 2 & 11 have been communitized into BLUE CA Sections 1 & 12 have been communitized into GREEN CA Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Example 1: Two Federal Leases BLUE CA Section 2 = Federal Lease 12345 Section 11 = Federal Lease 45678 Assume: Royalty rate = 12.5% 100bbls produced from BLUE CA $100/bbl with no transportation costs. For ONRR royalty reporting: Lease 12345 Lease 45678 Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Example 2: One Federal and One Fee (or State) Lease BLUE CA Section 2 = Federal Lease 12345 Section 11 = Fee Lease Same assumptions. For ONRR royalty reporting: Lease 12345 Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved When CAs overlap PAs CAs can also overlap Participating Areas *For this example assume the entire Unit is a Participating Area. Sections 1, 2, 11, and 12 are each 640 acres and make up GOLD PA. PURPLE CA which straddles Section 12 (60 acres in the PA) and Section 7 (60 acre of a Fee lease) not in the PA. Lease 23456 Lease 12345 Lease 34567 Lease 45678 Fee Lease Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved Assumptions: GOLD PA: Section 1 = Federal Lease 12345 Section 2 = Federal Lease 23456 Section 11 = Federal Lease 34567 Section 12 = Federal Lease 45678 PURPLE CA: Section 7 = Fee Lease Assume: Royalty rate = 12.5% *on Federal leases $100/bbl with no transportation costs. Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Example 3: Participating Area with Overlapping CA Lease 23456 Lease 12345 Lease 34567 Lease 45678 Fee Lease Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Reporting the PA on the ONRR-2014 Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

No Reporting the CA on the ONRR-2014 NOTE: No royalties are reported to ONRR for the the other half of PURPLE CA’s production. Any royalties owed on the Fee portion will be paid directly to the royalty interest owner. Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved OVERLAPPING CAs Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Introducing Lease Line Wells NDIC requires 250’ set back from unit boundaries.In early 2013 the NDIC begin allowing operators to form overlapping spacing units in order to drill a well(s) in the undeveloped 500’ corridor. Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Simplest Overlapping Ca Sections 2 & 11 have been communitized into PEACH CA Sections 1 & 12 have been communitized into GREEN CA Well #3 is a Lease Line well Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved Example 1: All Federal Leases prior to Instructional Memorandum No. 2018-012 PEACH CA and GREEN CA are now part of overlapping PINK CA PEACH CA: Lease 23456 50% Lease 34567 50% GREEN CA: Lease 12345 50% Lease 45678 50% PINK CA (overlap): Lease 23456 Lease 12345 Lease 34567 Lease 45678 Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Reporting the CAs on the ONRR-2014 Well 1 with well level reporting: Well 2 with well level reporting: Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved Well 3 with well level reporting: Combined reporting: Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

BLM: July 3, 2018 Permanent Instruction Memorandum No. 2018-012 IM No. 2018-012 states: “Each new CA will be a ‘stand-alone’ agreement. At the same time, the new CA will not change the allocation of production or associated royalties from the underlying CA.” Well 3 will be reported to the PINK CA and the Leases within. Well 1 will still be reported to PEACH CA Well 2 will report to GREEN CA Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved Example 1: All Federal Leases prior to Instructional Memorandum No. 2018-012 PEACH CA: Lease 23456 50% Lease 34567 50% GREEN CA: Lease 12345 50% Lease 45678 50% PINK CA (overlap): Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

ONRR-2014 reporting after IM No. 2018-012 Well 3: Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Slightly more complex example of an overlapping CA This overlapping CA does not entirely overlap the CAs underneath. According to IM No. 2018-012, only royalty and overriding royalty interest owners in BLUE CA, Sections 13, 14, 23, and 24, will receive royalty from Well #4. Section 11 will continue to receive its share of Well #1 according to PINK CA. Section 12 will continue to receive its share of Well #2 according to YELLOW CA. 1 Lease 56789 Lease 67891 2 Lease 23456 Lease 12345 4 3 Lease 34567 Lease 45678 Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved Overlap BLUE CA: Section 13 = Federal Lease 12345 Section 14 = Federal Lease 23456 Section 23 = Federal Lease 34567 Section 24 = Federal Lease 45678 1 Lease 56789 Lease 67891 2 Lease 23456 Lease 12345 4 3 Lease 34567 Lease 45678 Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Reporting BLUE CA on the ONRR-2014 Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

BLM: July 27, 2018 Permanent Instruction Memorandum No. 2018-004 IM No. 2018-004 affects only North Dakota (Fort Berthold Reservation) and states: “When one or more existing CA’s are in place, that do not overlap one or more CAs…,the Agencies will approve a proposed CA that would overlap the Base CA(s)…only when the proposed Overlapping CA will allocate production and associated royalties only to the interests within the boundary of the proposed Overlapping CA and to the interests within the boundary of any Base CA that are partially or entirely within the boundary of such proposed Overlapping CA.” This means that overlapping CA production is allocated to all royalty interest owners within the underlying CAs. 1 Lease 56789 Lease 67891 2 Lease 23456 Lease 12345 4 3 Lease 34567 Lease 45678 Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved PINK CA: Section 11 = Federal Lease 56789 Section 14 = Federal Lease 23456 YELLOW CA: Section 12 = Federal Lease 67891 Section 13 = Federal Lease 12345 GREEN CA: Section 23 = Federal Lease 34567 Section 24 = Federal Lease 45678 BLUE OVERLAP CA: PINK CA 25% YELLOW CA 25% GREEN CA 50% 1 Lease 56789 Lease 67891 2 Lease 23456 Lease 12345 4 3 Lease 34567 Lease 45678 Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Overlapping CA Lease Allocation Calculation 1 Lease 56789 Lease 67891 2 Lease 23456 Lease 12345 4 3 Lease 34567 Lease 45678 Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Reporting Royalties for Overlapping Well Only to Base CAs Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved Real Life Example Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved PINK – Operated 640 acre CA with one well TIK owner with 30% ownership in each lease Five leases; two Tribe and two Allotted and one Fee PURPLE – Operated 1280 acre CA with six wells Five leases; four Allotted and one Fee GREEN – Non-Operated 1280 acre CA Twelve leases; one Tribe, ten Allotted, and one Fee Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved

Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved Lease Allocations Presentation Title © 2012 WPX Energy, Inc. All Rights Reserved