1. Pooling for Horizontal Wells in West Virginia and the Potential for Legislative Reform Presented by: G. Kurt Dettinger, Esq. June 18, 2014 Glade Springs Resort – Spring WVONGA Meeting

2. These materials are public information and have been prepared solely for educational purposes to contribute to the understanding of energy and oil and gas law. These materials reflect only the personal views of the author and are not individualized legal advice. It is understood that each case is fact-specific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to any particular situation. Thus, the author and Steptoe & Johnson PLLC cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presentation of these materials does not establish any form of attorney-client relationship with the author or Steptoe & Johnson PLLC. While every attempt was made to ensure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed. Material Disclaimer

3. What We Are Going to Cover 3 Process of creating an industry-wide approach to pooling for horizontal wells in WV Summary of proposed legislation Recap of 2014 effort and plans going forward

4. - Parcel Data - Doddridge Co, WV

5. - Proposed Unit

6. -Placement of the proposed lateral inside the unit -Green dot is the surface location -Red line is the proposed horizontal well -Equal distance from the lateral to the edges of the proposed unit -All acreage inside the unit participates proportionally -Lateral is approximately 5,000 ft. long -Unit size is approximately 115 acres -Optimal location

7. - Let’s assume the owner in the red tract (tract 0) refuses to negotiate -Result is the lateral has to be cut short by 1,000 ft -All owners on the north end (owners 4, 3, and 14), who have pooling rights and want development are no longer included in the unit -Creation of island acreage that may never be developed for Marcellus Shale -Inefficient and waste of WV natural resources

8. - Let’s assume the owner in the red tract (tract 37) refuses to negotiate -Result is the lateral and unit have to be shifted westward -All owners on the east side (tracts 14, 25, 27, 32, 36, 48, 53, 54, 55), who have pooling rights and want development are no longer included in the unit -Creation of island acreage that may never be developed for Marcellus Shale -Inefficient and waste of WV natural resources

9. Process of Creating an Industry- Wide Approach to Pooling for Horizontal Wells

10. Take away from 2013 – Industry support was segmented – View was that the proposed legislation did not provide enough tools to efficiently develop Marcellus acreage – Royalty owners disapproved of constraints placed on amount of integration payments 2013 – Lease Integration Proposal

11. 2014 Coalition From WVONGA Primarily led by E & P companies, including: – Antero – Chesapeake – CNX – EQT – Noble – Statoil – Stone Energy – XTO

12. Process to reach joint proposal Foundation built in prior years Working group meetings – Internal – With IOGA Delegation Bill drafting Informational conference calls Input from interested companies Agreement on common approach with IOGA Joint effort before the Legislature

13. Summary of 2014 Legislative Proposal Horizontal Well Fair Pooling Act

14. 2014 – Pooling Proposal New approach when compared to 2013 Lease Integration Proposal 2014 Pooling Proposal applied to both leased and unleased tracts. Industry support from both major trade associations

15. Multiple prerequisites to filing an application for drilling unit Applied to deep and shallow formations so long as horizontal wells were drilled Oil and Gas Conservation Commission authorized to administer the pooling process 2014 – Pooling Proposal

16. Prerequisites to filing application – Applicant must negotiate in good faith with all executive interest royalty owners and operators – Applicant must obtain consent to the proposed unit from at least 67% of the executive interest royalty owners of target formation oil and gas - determined on a net acreage basis – Applicant must obtain consent to the proposed unit from at least 85% of the working interest owners who meet the definition of “bonded operators” with respect to the target formation - determined on a net acreage basis – The interest of unknown or unlocatable owners is not counted in the threshhold percentages 2014 – Pooling Proposal

17. Public notice upon filing of all applications for a horizontal well unit order – Class II legal advertisement – Commission website – Individual notice to interested parties Hearing process similar to existing law for deep wells – Hearing before Commission – Appeal to the Circuit Court by interested party 2014 – Pooling Proposal

18. Unit size set by statute at a maximum of 640 acres, with a 10% tolerance Development requirements set forth in the proposed legislation – If multiple horizontal wells proposed, operator must timely drill subsequent wells or else modify the unit – Production of gas and other operations on a portion of the unit deemed for all purposes to be conducted on each tract within the unit – Production allocated to tracts based on net acreage of individual tracts compared to net acreage of proposed unit 2014 – Pooling Proposal

19. Unitization consideration required to be paid in an amount determined by the O & G Conservation Commission to non-consenting royalty owners and owners of unleased minerals who elect unitization consideration Unitization consideration required to be just and reasonable 2014 – Pooling Proposal

20. “Just and reasonable” compensation is determined based on relevant evidence adduced at a hearing regarding amounts paid or consideration given in arm’s length transactions in the vicinity of the unit and within a reasonable time prior to the hearing for transactions of the same nature and involving similar geologic conditions as the transaction being considered. Determination of amount of unitization consideration within the Commission’s power 2014 – Pooling Proposal

21. Options for non-consenting owner of unleased oil and gas Elect unitization consideration and lease the target formation oil and gas to the operator on mutually acceptable terms or under just and reasonable terms determined by the Commission Elect to be a royalty owner as to 1/8th and be an operator as to the remaining 7/8ths interest in the oil and gas – With respect to the 7/8ths operator interest, elect between 3 Options 2014 – Pooling Proposal

22. Option 1 – Surrender the oil and gas on terms that are mutually agreeable or determined to be just and reasonable by the Commisison Option 2 – Elect to participate in the drilling of the wells on a limited or carried basis – Risk premium of 200% Option 3 – Enter into farmout, sublease, or other contract with operator 2014 – Pooling Proposal

23. Effect of Horizontal Well Unit Order – Allows drilling of horizontal wells throughout unit – Apportions production on net acreage basis – Establishes which royalty owners and/or operators are unknown or unlocatable – Establishes unitization consideration and rights of non- consenting royalty owners and owners of unleased acreage based on concepts of fairness and evidence of market value adduced at a hearing – Allows efficient drilling to occur, royalties and taxes to be paid and natural resources to be utilized when a supermajority of interested parties consent or agree to the proposed unit operations 2014 – Pooling Proposal

24. Horizontal Well Unit Order does not: – Subject non-consenting parties to liability well site preparation, drilling, completion, maintenance, reclamation, plugging and other operations regarding the unitized operations – Grant or otherwise affect surface use rights 2014 – Pooling Proposal

25. Recap of 2014 Efforts Bill introduced in both chambers – HB 4558 – Sponsored by Speaker Miley and Delegates White, Craig, Andes, Phillips, R., Reynolds and Nelson, E. – SB 578 – Sponsored by President Kessler and Senators, Palumbo, Snyder, Edgell and Green Bill taken up in House Energy, but failed to pass the House prior to cross-over day

26. The Path Forward Motivation and participation of WVONGA members Undertake significant educational initiative with legislators Build broad coalition of support for passing legislation Meetings with stakeholders with competing interests to narrow issues of contention Build support among WV Policymakers Joint lobbying effort from first day of the session in 2015

27. THANK YOU!