Pooling in West Virginia A Historical and Prospective Analysis

Overview – What is Pooling? Pooling – the integration of tracts or fractional mineral interests to meet state spacing requirements—e.g. State XYZ requires a minimum of X feet between wells drilled to the ABC formation: Lease A Lease B Well Unit

What is Pooling? Pooling is the assembly of leases and pieces of leases to create a drillable site under state spacing laws, rules and regulations NOTE: WV has NO spacing laws, rules and regulations THUS: There is NO “pooling” in West Virginia utilizing the standard, classical definition BUT: Broadly used term anyway!

Unitization Unitization: joint operations on large scale – e.g. “unit operation” combines leases to develop entire reservoir or defined parts of a reservoir Select Field Area – Operated as one unit B D G A C F E

Unitization “. . . the joint operation of all or some portion of a producing reservoir.” Unitization is important where there is separate ownership of portions of the rights in a common producing pool in order to make it economically feasible to develop minerals at considerable depths. The best results in conservation can be attained only by unitization. W&M Manual of Oil and Gas Terms

Types of Pooling and Unitization Voluntary Pure matter of contract between Lessor and Lessee (typically through lease provision or through lease modification) Usually a right granted to Lessee subject to defined limitations Usually triggered by the recording of a declaration of “pooling and unitization”

Policy Behind Pooling & Unitization Encourages efficient land use Ensures mineral development for owners of small tracts whose minerals would not otherwise be developed Ensures that non-consenting owners cannot impede development of co- tenants’ or neighbors’ minerals

Pooling in West Virginia Statutory Pooling Shallow Wells Deep Wells & Secondary Recovery Coalbed Methane Wells

Pooling in West Virginia Shallow Wells W.Va. 22-6-1 Defined as “any gas well, other than a coalbed methane well, drilled no deeper than one hundred feet below the top of the “Onondaga Group”: Provided, That in no event may the “Onondaga Group” formation or any formation below the “Onondaga Group” be produced, perforated or stimulated in any manner.”

Pooling in West Virginia Shallow Wells – Pooling Process ** Not available generally ** Was included in WVDEP Regulatory Legislation in 2011 Regular Session, but was not passed Marcellus “fatigue” prevented consideration in 2012

Pooling in West Virginia Deep Wells W.Va. 22C-9-1, et seq. Defined as “any well, other than a shallow well, drilled and completed in a formation at or below the top of the uppermost member of the ‘Onondaga Group.’”

Pooling in West Virginia Deep Wells – Pooling Process Operator must drill “discovery well” to establish pool Application then filed by operator of well or other operator affected by a well in the pool Notice, including area to be covered by spacing order O&G Conservation Commission enters order setting spacing and acreage for each drilling unit Must have lease/agreement on tract where drilling operations will be located Operator must have written consent and easement from surface owner of record identifying the well location

Analysis of 2010 – 2011 Proposal Senate Bill 424 Incorporated new pooling provisions for shallow horizontal wells into existing Deep Well statute Provided for administrative pooling of leased and unleased tracts Included a fix to legislatively reverse the Tawney decision by authorizing deduction of PPEs Pooling provisions were included in comprehensive regulatory proposal addressing development of Marcellus Shale Pooling quickly became known as “forced pooling,” and was labeled a taking by critics

Observations – Why Pooling Failed in 2011 Regulatory Portion of SB 424 overshadowed pooling provisions and Legislature had not yet reached consensus on regulatory provisions Lack of unified position within industry Coalition of diverse, vocal opponents to development had platform to oppose bill from environmental, surface owner and royalty owner points of view Tawney fix portion of pooling provisions created additional challenges not squarely related to pooling concepts Critics had defined public perception of industry leading up to 2011 Industry had not adequately educated Legislature on topic

Path Forward Two options: pooling or lease integration? Expand Deep Well Conservation Law Traditional pooling for shallow horizontal wells Apply to leased and unleased tracts Follow current procedure established by the WV Oil and Gas Conservation Commission WV Code Section 22C-9-1 and 39 C.S.R 1 and 2 Create Lease Integration Statute Authorize integration of leased tracts Cannot integrate unleased tracts or tracts controlled by others Limited version of existing Deep Well Conservation Law Limit to shallow horizontal wells

WVONGA Decision Pursue Lease Integration legislation in 2013 Proposed legislation provides that Lessee: Must own or control leases for 100% of mineral interests in tract. Must use reasonable efforts to obtain lease modifications to authorize pooling. Can seek order to integrate leases that do not have pooling clauses if Mineral interests are unknown or unlocatable, or Have obtained modifications authorizing pooling from majority (final percentage to be negotiated) of mineral interest owners. Order will authorize the integration of the leases, which authorizes pooling of the gas in the unit. Order will require the operator to pay the mineral interest owners a lease modification payment, the exact terms of which are still being negotiated.

Big 191H 62 acre lease tract Producer holds lease (lessee) No pooling clause in lease Thus, must modify lease to allow for pooling 21 interest owners 14 signed lease modification 6 unknown / unlocatable 1 refused to sign lease modification Cannot drill two laterals on BIG 191H Oil and gas will likely be left in ground Lateral shortened on BIG 190H H9 well Reserves will be left in ground www.eqt.com

Oxford 152 Pad 200 acre lease tract Producer holds lease (lessee) No pooling clause in lease Need to modify lease 49 interest owners 47 signed lease modifications 2 refused to sign 0.0008% interest non-consent Must shorten 8 laterals Can’t drill 1 lateral Acreage will be stranded and oil and gas will not be developed The 2 parties that refused to sign lease modification wanted $50,000 each for the lease modification. www.eqt.com

Successful Legislative Strategies Horizontal Well Control Act (Marcellus Bill) Special Session December 2011 Only 5 “No Votes” out of 134 Members Provided first step toward regulatory certainty Mine Safety Bill (Response to UBB Disaster) Regular Session 2012 Unanimous Approval Sufficient Compromise Achieved

Common Core Strategies Build consensus within the industry first Involve the interested parties early Establish good rapport with Governor’s Office and legislative leadership in both Houses Convene working sessions with interested parties Work with Chairmen and key committee members Maintain consistent message and outwork opponents

Points to Take Away Lease integration is a good first step in an incremental legislative strategy WVONGA and IOGA must work together Enlist early support of Governor and legislative leadership Reach agreement on as many issues as possible with other interested parties Actively engage during legislative session, and remain agile in order to respond to unanticipated developments

Thank You! G. Kurt Dettinger Charleston, WV kurt.dettinger@steptoe-johnson.com 304.353.8152

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