KIOGA A Brave New World Dynamic Challenges Facing Kansas Oil & Gas Industry Edward P. Cross, P.G., M.B.A. President Kansas Independent Oil & Gas Association KDHE Bureau of Water Geology Section Seminar Sedgwick County Extension Education Center Wichita, Kansas September 6, 2012

What Powers the U.S. KIOGA

Are we about to enter the age of fossil fuels? New & evolving technologies New & evolving technologies Horizontal drilling Horizontal drilling Hydraulic fracturing Hydraulic fracturing Oil & Gas fastest growing manufacturing sector Oil & Gas fastest growing manufacturing sector Crude Oil Imports ~ 45% Crude Oil Imports ~ 45% Natural gas reserves measure in centuries Natural gas reserves measure in centuries KIOGA

Are we about the enter the age of fossil fuels? About 20 new onshore oil fields About 20 new onshore oil fields Led by independent oil and gas industry Led by independent oil and gas industry Increase nation’s oil output by 25% within decade Increase nation’s oil output by 25% within decade $1 trillion to U.S. economy $1 trillion to U.S. economy 1.3 million new jobs this decade 1.3 million new jobs this decade USGS ~ U.S. has 26% of world’s technically recoverable oil reserves & 30% of natural gas reserves USGS ~ U.S. has 26% of world’s technically recoverable oil reserves & 30% of natural gas reserves U.S. largest natural gas producer - 2 nd largest coal producer - 3 rd largest oil producer in world U.S. largest natural gas producer - 2 nd largest coal producer - 3 rd largest oil producer in world KIOGA

Energy Independence Nixon’s “Project Independence” Nixon’s “Project Independence” Prospects of achieving energy independence are now very real Prospects of achieving energy independence are now very real Import 45% today Import 45% today Independents drill 95% of wells in U.S. Independents drill 95% of wells in U.S. An American Oil & Gas Renaissance An American Oil & Gas Renaissance KIOGA

Despite Growth in Renewables, World Consumption of Oil and Gas Will Continue to Increase Source: EIA, International Energy Outlook, 2012

KIOGA Brave New World Fact IEA projects global energy demand increase by 45% from IEA projects global energy demand increase by 45% from Not unconstrained Not unconstrained Assumes significant efficiency improvements Assumes significant efficiency improvements Per Capita Energy Use Per Capita Energy Use Developing world up to only 50% of industrialized world level Developing world up to only 50% of industrialized world level Industrialized world conserve down to same level Industrialized world conserve down to same level World energy production increase by 40% to meet demand World energy production increase by 40% to meet demand

KIOGA More Than Fuel: Petroleum is a Part of Your Everyday Life  Materials: asphalt, linoleum, synthetic rubber  Liquids: antifreeze, refrigerants  Plastics: soccer balls, helmets, telephones, rollerblades, milk jugs, computers  Synthetic fabrics: nylon, polyester  Agriculture: fertilizers, pesticides, food preservatives  Medical: heart valves, vitamin capsules, anesthetics, artificial limbs, bandages

KIOGA ExxonMobil Global Energy Outlook, 2011

KIOGA Crude Oil Market Structure Oligopoly Oligopoly OPEC Cartel Collude to Influence Market Prices OPEC Cartel Collude to Influence Market Prices U.S. Producers are Perfect Competitors U.S. Producers are Perfect Competitors Price-takers not Price-makers Price-takers not Price-makers Cost Structure Optimization Determines Profit Cost Structure Optimization Determines Profit

KIOGA OPEC Market Dynamics When supply is lowered from S 1 to S 2, price rises from P 1 to P 2

KIOGA The Perfect Competitor Kansas Oil & Gas Producers are Perfect Competitors Price-takers not price-makers. Internal cost structure determines profitability.

KIOGA Effect of Supply Constraints on Perfect Competitor Kansas Oil & Gas Producers Strive to Improve Operating Efficiencies

KIOGA

What is Marginal Oil & Gas Lower edge of profitability Lower edge of profitability High Cost High Cost Low Yield Low Yield 10 barrels of oil per day or less 10 barrels of oil per day or less 60 thousand cubic feet (Mcf) per day or less 60 thousand cubic feet (Mcf) per day or less When plugged, resource often lost forever When plugged, resource often lost forever Need policies to enhance American production and reduce dependence on foreign supplies Need policies to enhance American production and reduce dependence on foreign supplies

KIOGA Who are Independents? Small Businesses Small Businesses Drill and produce crude oil and natural gas Drill and produce crude oil and natural gas Not integrated Not integrated Sell crude oil and natural gas to purchasers Sell crude oil and natural gas to purchasers Price-takers not price-makers Price-takers not price-makers Do not generate and market end-products Do not generate and market end-products

KIOGA Who are Independents? Independents drill 95% of wells in U.S. Independents drill 95% of wells in U.S. Independents produce 67% of America’s oil and natural gas Independents produce 67% of America’s oil and natural gas Independents produce 92% of Kansas’ oil and 63% of Kansas’ natural gas Independents produce 92% of Kansas’ oil and 63% of Kansas’ natural gas America’s Oil & Natural Gas Industry America’s Oil & Natural Gas Industry

KIOGA Kansas Oil & Gas Industry Statistics First Oil Well = 1860 First Oil Well = 1860 Miami County Miami County First Natural Gas Well = 1873 First Natural Gas Well = 1873 Montgomery County Montgomery County Current # of Oil Wells = 40,850 Current # of Oil Wells = 40,850 Current # of Gas Wells = 18,639 Current # of Gas Wells = 18,639 Current # of Injection Wells = 15,428 Current # of Injection Wells = 15,428 Current Total # of Wells = 74,654 Current Total # of Wells = 74,654 Current # of Operators = 2,113 Current # of Operators = 2,113 Current Oil Production 41.6 Million Barrels Annually 114,000 Barrels per Day Increased 5 of last 6 years Ranked 9 th Among 31 Oil Producing States Current Natural Gas Production 313 Billion Cubic Feet Annually 860 million Cubic Feet per Day Ranked 9 th Among the 32 Natural Gas Producing States Drilling Permits Issued in 2012 = 4, MSL Permits Permits Issued in 2011 = 5, MSL Permits Number of Active Drilling Rigs = 142

KIOGA Kansas Oil & Gas Fields

KIOGA Kansas Oil & Gas Industry Statistics $4.8 billion Industry $4.8 billion Industry Supports 67,000 Kansas Jobs and $2.7 billion in family income Supports 67,000 Kansas Jobs and $2.7 billion in family income Invests over $1 billion in rural Kansas annually Invests over $1 billion in rural Kansas annually Average Daily Oil Well Production = 2.79 BOPD Average Daily Oil Well Production = 2.79 BOPD 72% of Total Kansas Crude Oil Production from Marginal Wells 72% of Total Kansas Crude Oil Production from Marginal Wells 94% of Total Kansas Oil Wells 94% of Total Kansas Oil Wells Average Daily Natural Gas Well Production = 46 Mcf/Day Average Daily Natural Gas Well Production = 46 Mcf/Day 74% of Total Kansas Natural Gas Production from Marginal Wells 74% of Total Kansas Natural Gas Production from Marginal Wells 81% of Total Kansas Natural Gas Wells 81% of Total Kansas Natural Gas Wells

KIOGA

Kansas Oil & Gas Industry Taxation Severance Tax up nearly 69% since 2000 Severance Tax up nearly 69% since 2000 Oil tax collections up 121% over last 2 years Oil tax collections up 121% over last 2 years Ad Valorem Tax up 171% since 2000 Ad Valorem Tax up 171% since 2000 Oil tax collections up 40% over last 2 years Oil tax collections up 40% over last 2 years Average effective tax rate = 11.61% Average effective tax rate = 11.61% Reduce ROI by 26.5% Reduce ROI by 26.5% KIOGA

Conventional Oil & Gas Development

KIOGA Unconventional Plays Reservoir - seal - and source rock are all one in the same Reservoir - seal - and source rock are all one in the same

Mississippian Limestone Play One of newest oil plays in U.S. One of newest oil plays in U.S. Emerging Play Emerging Play Northern OK and southern KS Northern OK and southern KS $1.2 - $1.5 billion Capex plans $1.2 - $1.5 billion Capex plans BOE per day in first 30 days BOE per day in first 30 days $3 - $3.5 million drilling & completion costs $3 - $3.5 million drilling & completion costs 4,500 feet vertical and 4,500 feet lateral 4,500 feet vertical and 4,500 feet lateral Could add up to 13% to Kansas production Could add up to 13% to Kansas production KIOGA

Energy Policy Trapped by zero-sum game philosophy for energy Trapped by zero-sum game philosophy for energy World will need 45% more energy by 2035 World will need 45% more energy by 2035 U.S. will need 16% more energy by 2035 U.S. will need 16% more energy by 2035 We must abandon policies that pit one resource against another We must abandon policies that pit one resource against another North American energy independent by 2030 with right leadership and policies North American energy independent by 2030 with right leadership and policies Horizontal drilling & hydraulic fracturing essential to realize this energy independence Horizontal drilling & hydraulic fracturing essential to realize this energy independence KIOGA

Perceptions Become Entrenched KIOGA

Hydraulic Fracturing Kansas Kansas First HF operation in 1947 First HF operation in 1947 Vast majority of wells fraced Vast majority of wells fraced National National 60%-80% of wells drilled in next decade 60%-80% of wells drilled in next decade Over 1.2 million fracs since 1947 Over 1.2 million fracs since 1947 Not single verified or documented instance of harm to groundwater Not single verified or documented instance of harm to groundwater Why is HF Necessary Why is HF Necessary To stimulate oil and gas production to increase Net Present Value (NPV) of a well through: To stimulate oil and gas production to increase Net Present Value (NPV) of a well through: Accelerating income through increasing production rates Accelerating income through increasing production rates Reducing well life operating expenses Reducing well life operating expenses Increasing total cumulative production Increasing total cumulative production

Hydraulic Fracturing Brief video animation of horizontal drilling & hydraulic fracturing Brief video animation of horizontal drilling & hydraulic fracturing KIOGA

Policy Considerations America is home to vast natural resources America is home to vast natural resources More oil, coal, & natural gas than any country in world More oil, coal, & natural gas than any country in world Enough energy resources to provide affordable, reliable energy for decades, even centuries to come Enough energy resources to provide affordable, reliable energy for decades, even centuries to come America sitting on enough oil and natural gas reserves to replace Persian Gulf imports for the next 50 years! America sitting on enough oil and natural gas reserves to replace Persian Gulf imports for the next 50 years! Policies supporting oil and natural gas would result in more high-paying jobs, more tax revenues, stronger economic growth, and energy security Policies supporting oil and natural gas would result in more high-paying jobs, more tax revenues, stronger economic growth, and energy security KIOGA

Key Challenges facing the Kansas Oil & Gas Industry Obama Administration FY 2013 Budget Proposal Obama Administration FY 2013 Budget Proposal Repeals oil & gas tax provisions that will result in $3.9 billion negative impact on the Kansas economy Repeals oil & gas tax provisions that will result in $3.9 billion negative impact on the Kansas economy Reduces Kansas jobs Reduces Kansas jobs Increases dependence on foreign energy supplies Increases dependence on foreign energy supplies Hydraulic Fracturing Hydraulic Fracturing 60-year old technology 60-year old technology Ably and aggressively regulated by States Ably and aggressively regulated by States Mixture 99.5% water and sand Mixture 99.5% water and sand

KIOGA Political Environment Actual Energy Landscape Actual Energy Landscape Take time to understand facts Take time to understand facts Obstacles to making energy affordable and reliable Obstacles to making energy affordable and reliable Energy Bills often based on incorrect assumptions Energy Bills often based on incorrect assumptions Revolutionary technology just around corner Revolutionary technology just around corner Energy is scarce and becoming scarcer Energy is scarce and becoming scarcer Obama Administration Policies damaging nation’s energy security Obama Administration Policies damaging nation’s energy security On a course for less energy – not more On a course for less energy – not more Disparity compelling Disparity compelling

Political Environment Recent polls Recent polls 90% of Americans knew more O&G development = more American jobs 90% of Americans knew more O&G development = more American jobs 70% supported increased domestic production 70% supported increased domestic production Never bad idea to listen to American people Never bad idea to listen to American people Cannot stay trapped by zero-sum energy strategy Cannot stay trapped by zero-sum energy strategy Must make choices to move in right direction Must make choices to move in right direction KIOGA

Thank You Kansas Independent Oil & Gas Association Edward Cross, President