1. Presentation to the Louisiana Tax Commission 2011 Rules and Regulations Chapter 9 – Oil and Gas Properties by Louisiana Oil and Gas Association and Louisiana Mid-Continent Oil and Gas Association June 22, 2010
Information included in this presentation is the same as submitted in writing June 4, 2010 to the Louisiana Tax Commission. This presentation is prepared only to facilitate the verbal presentation on June 22, 2010 as indicated in the LTC Docket Number RR-2011, Notice of Hearing.

2. Valuation of Louisiana Oil and Gas Wells for Property Taxes
Exhibit 1
Valuation of Louisiana Oil and Gas Wells for Property Taxes
Legal Conclusions
of Taxable Property
Valuation Approach? Cost
Taxable Cost (studies, company books)
Inflation Factor to Current Cost
Additional Adjustments (if appropriate)
Reality Check
(% of discounted cash flow value, sale of same property, other)
Replacement Cost New
Taxable Market Value
Less
Physical Depreciation (age from serial no.)
Preliminary Market Value
Market Adjustments (obsolescence)
Review Status and Production Data for Shut-In and Low Producing Wells (LDNR, operators, other)
This slide is intended to show the valuation process and help us focus on our goal: taxable market value.
Review Other Market Data (environmental, operators, buyers, sellers, other)
RCNLD Less Some Market Adjustment
Less Shut-In and Low Production Credits
Red above indicates the major ongoing differences between industry and the LAA.
The box indicates where assessors generally stop in their appraisal of wells.

3. Oil Well
Exhibit 2
This slide shows the basic components of an oil well. We’ll reference this as Kean Miller summarizes the legal memo regarding taxable property (Exhibit 4).

4. Louisiana Oil Producing Wells Profile
Exhibit 3
Louisiana Oil Producing Wells Profile
Daily # Of % Of Annual % Of
Production Wells Total Production * Total
0 – 1 barrel 15, % %
> 1 – 10 barrels 7, % %
> 10 barrels 3, % %
Total Producing 26,
Source: LDNR SONRIS database * millions of barrels
The above production brackets below 10 barrels are the thresholds of obsolescence adjustments in the 2010 LTC rules and regs.: >1 to 10 receive a standard 40% reduction below RCNLD; 1 or less receive an additional 60% reduction.

5. Louisiana Gas Producing Wells Profile
Exhibit 3
Louisiana Gas Producing Wells Profile
Daily # Of % Of Annual % Of
Production Wells Total Production * Total
0 – 10 mcf 11, % %
> 10 – 100 mcf 5, % %
> 100 mcf 6, % 1, %
Total Producing 23, ,966.6
Source: LDNR SONRIS database * billion cubic feet
The above production brackets below 100 mcf are the thresholds of obsolescence adjustments in the 2010 LTC rules and regs.: >10 to 100 receive a standard 40% reduction below RCNLD; 10 or less receive an additional 60% reduction.

6. Valuation of Oil & Gas Properties for Investments and Acquisitions/Sales
How do owners, investors, buyers, and sellers value specific oil and gas properties? Discounted Cash Flow (sales of other properties are benchmarks)
What is DCF? “Future cash flows multiplied by discount factors to obtain present values.” Source: Forbes Financial Glossary at
LOGA/LMOGA will preface an overview of their 2011 proposal by briefly explaining how oil and gas properties are actually valued by owners, investors, and parties in a sale.

7. Example of Gas Well Production Decline Curve
Exhibit 5
A DCF valuation begins with a production forecast. This is an example decline. Of course wells vary in their production declines, but most wells have a hyperbolic decline.

8. Example of Discounted Cash Flow Valuation
Exhibit 5
Example of Discounted Cash Flow Valuation
($ thousands)
Net Present Value
Discount Before Tax
Rate Cash Flow
16% $473
Gas Gas Before 16%
Volume x Price = Total - Operating - Production = Tax Cash DCF
Year MMSCF $mcf Revenue Cost Taxes Flow Factor
$4.23 $ $ $ $
Totals $1, $ $ $667.65
This slide is intended to show the concept of the DCF. It is NOT intended to allow an opportunity to pick this apart to find fault in the valuation conclusion. “Before Tax Cash Flow” is before “Income Tax” cash flow.
Note: The above Before Tax Cash Flow x the DCF factors total $434,183. The NPV above is actually calculated in a model by month, which results in a higher value than if discounted by year. Again, this is only an example to show the concept. Other math may not tie exactly due to rounding.

9. What is relevant to the valuation of oil and gas wells and related property in the market?
Irrelevant: Past Capital Cost
Relevant: Anticipated Future Income and Liabilities (Income Approach)
We recognize the LTC Oil & Gas Rules & Regulations represent a Cost Approach mass appraisal system. Our proposals try to stay within this system, but use Income Approach concepts.
It is important to stay focused on what is relevant and irrelevant in valuations in the market. All valuation proposals should be passed through the filter of “Does this make sense related to market value?”

10. Cost

11. 2010 Survey of Authorizations for Expenditure of Louisiana Oil and Gas Properties
Exhibit 6
Wells Wells Tangible Completion
Minimum % %
Simple Average % %
Weighted Average % %
Median % %
Maximum % %
# of
Wells
Region % %
Region % %
% %
% %
% %
% %
% %
Totals % %
Explain what was asked on the survey, responses were sent to LOGA, then LOGA removed company and other identifiers to send to Tax leaders.

12. LOGA/LMOGA Proposal for Cost
Taxpayers should report taxable historical cost for wells, surface equipment, and related property.
If the LTC chooses to continue using the American Petroleum Institute’s Joint Association Survey on Drilling Cost as the source of cost for wells, no more than 25% should be applied to total API cost by depth bracket to estimate taxable cost.
If the LTC chooses to continue using a Surface Equipment schedule, we proposal no change from 2010.
Taxable cost from taxpayer books is the source for other states that tax equipment, but not minerals, including AL, AK, and MI. We recommend the same basis for LA.
This alternative acknowledges the LTC’s current preference for the API JAS.

13. Depreciation

14. LSU Center for Energy Studies Report
Exhibit 6, Page 47
Begin depreciation slides with trends.
First year decline for GAS wells changed from 95% in 1977 to 62% in 2001.
First year decline for OIL wells changed from 89% in 1977 to 68% in 2001.

15. Production decline curves have become steeper (same in Louisiana).
Exhibit 8
This chart shows how gas well decline curves have increased significantly in the last 20+ years.
Production decline curves have become steeper (same in Louisiana).

16. Exhibit 8. This chart shows reality of production compared to Marshall Valuation Service and LTC 2010 depreciation.

17. LTC 2010 depreciation compared to other states that value oil and gas equipment. The AL factors are composite multipliers (inflation x percent good).

18. LOGA/LMOGA Proposal for Percent Good (Depreciation)
Page 10 of Proposal
Year Age Horizontals Gas Oil & Other
& Prior
We acknowledge typical depreciation declines in the above proposal includes some functional obsolescence (equipment values decline as production declines).

19. Chart of percent good in the previous slide.

20. Obsolescence

21. Exhibit 10
LOGA/LMOGA Comparison of Discounted Cash Flow Total Values to LTC Calculated Values
1 Year
1 Yr Rev
DCF
LTC 2010 Rules and Regs.
Region
Parish
Type
Depth
Volume*
Year
% Good
Obs.
Revenue
% DCF
Value
North
South
Offshore 2
Terrebonne
Gas
3,647
535
2008
0.88
$540,270
368%
$147,000
$184,923
$499,954
$2,348,417 1
Bienville
5,574
196
<1996
0.20
$303,440
32%
$960,000
$62,473
$157,800
$692,815
Oil
6,672 15
2005
0.71
$313,590
784%
$40,000
$184,842
$500,050
$2,254,632
7,194
143
$156,190
99%
$157,000
$354,774
$896,113
$3,934,353
8,656
130
$182,790
30%
$618,000
$130,775
$256,564
$1,018,101
9,374
188
2006
0.76
$252,170
53%
$473,000
$538,165
$1,055,812
$4,189,694
9,447
0.9 $0
$16,162
$27,207
$114,012
10,063
149
$184,070
169%
$109,000
$811,513
$1,715,564
$5,278,993
10,498
1,032
2001
0.47
$1,349,420
94%
$1,443,000
$452,157
$955,875
$2,941,341
Claiborne
10,652 9
0.4
$34,300
101%
$34,000
$318,870
$247,633
$761,997
10,918
124
$166,820
47%
$353,000
$760,399
$1,607,510
$4,946,496
Evangeline
11,362 7
$189,680
46%
$413,000
$340,124
$264,139
$812,787
11,719
335
2007
0.82
$391,260
65%
$602,000
$880,622
$1,861,664
$5,728,559
11,913 13
$357,420
70%
$507,000
$2,109,990
$1,638,613
$5,042,205
Webster
12,078
288
$427,890
37%
$1,158,000
$841,189
$1,778,302
$5,472,044
12,544
792
$1,163,610
$2,451,000
$347,143
$628,806
$1,455,430
13,306
1,198
2000
0.41
$1,365,940
58%
$2,364,000
$754,872
$1,367,356
$3,164,876
Vermilion
13,882
511
$1,259,000
16%
$8,043,000
$384,170
$695,877
$1,610,673
Iberia
14,640
1,200
$1,869,970
31%
$6,128,000
$830,552
$1,504,442
$3,482,172
17,058
$53,828
$114,480
$205,361
St. Mary
17,170
$222,145
$472,448
$847,509
* Volume is barrels per day for oil and thousand cubic feet (mcf) per day for gas.
In this sample, all but one well’s first year revenue as a percent of total value is far above the reasonably expected percent of well equipment value in a sale v. the total sale price. The lowest well (the “all but one”) is well within an acceptable percentage in the market (equipment percentages of sale prices are generally 0%-10%. None of these producing wells would be under valued using the one-year revenue as the ceiling value.

22. Conclusions from DCF Analysis
Drilling & completion costs and depth are irrelevant to the value of a well. The same projected income stream with equal risk from any historical cost or depth has the same value.
Age is generally irrelevant to the value of a well. The income stream is the most relevant factor in value.
A property tax appraised value of no more than the current year’s gross revenue per well and related surface equipment is a high “ceiling” that could be reasonably implemented in the LTC rules and regulations to bring a key market factor (income) into the valuation of taxable oil and gas property.
Past drilling cost is irrelevant to current value.
The primary relevance of age may occur in the first few years of production. A typical hyperbolic production curve provides a higher income stream (revenue less expenses) early in the well’s life. As the income stream falls to its lowest quartile, the income stream becomes much flatter (lower percentage decline per year).
This ceiling partially recognizes the income contribution in these properties that were drilled and completed and surface equipment installed or acquired solely for its income producing potential. This “ceiling” would bring more valuation logic to the appraisal process, especially for low producing properties. Even the lowest percentage of the discounted cash flow value in the above sample is well within the percentage of non-minerals value in sales.

23. LOGA / LMOGA Oil & Gas Well Plugging Cost Survey ($ thousands)
# of Average P&A Plugging Net
Region Wells Cost per Well Cost Received Value
$108 $ 1, $ 61 -$ 1,571
, ,822
, ,233
Totals $254 $72, $645 -$71,626
Most shut-in wells have a large negative value. This survey includes a few production platforms and facilities.

24. Conclusions from Plug & Abandonment Survey
Most inactive wells (no potential reentry) have negative market value. Even if salvage value is received, it only slightly offsets the plugging cost (average < 1%).
Only inactive wells with potential reentry have value.
Permanently inactive platforms and facilities also have a negative value. I.e., the cost to decommission is far more than salvage value, which, when present, is relatively minimal. (Decommissioning agreements allowed contractors to keep whatever they could salvage.)
Most shut-in wells have a negative value, waiting to incur the significant cost to plug and abandon (which is more than probable salvage value).
This recognizes a “possible” value.
The survey also includes costs for decommissioning platforms and facilities. As with wells, the cost to decommission is far more than the any probable salvage value.

25. Observations of Orphan Wells
As of June 2, 2010, the LDNR SONRIS database indicated 2,846 orphan wells in Louisiana.
Why were they orphaned? They had no current or anticipated value. Worse than zero value, significant cost was required to plug and abandon ... and they would be liable for annual property taxes on over stated values (assuming current LTC rules and regulations for inactive wells continued).
What is the difference between orphan wells and permanently inactive wells with owners?
The owners of orphan wells walked away from them. (They both have negative values).

26. LOGA / LMOGA Proposal for Obsolescence
Producing – One year revenue as the ceiling value for the well and related equipment (including surface equipment).
Inactive – Wells inactive less than two years should receive 90% reduction from depreciated value. Wells inactive over two years and not approved for reentry should receive an appraised value of $100.
Alternative – If the LTC denies #1 and #2 above, continue obsolescence adjustments a minimum as indicated in the 2010 rules and regulations.
Surface Equipment – Replace “may” with “shall” in Table 907.C-1.
Again, this ceiling value partially recognizes the income contribution in these properties that were drilled and completed and surface equipment installed or acquired solely for its income producing potential. This “ceiling” would bring more valuation logic to the appraisal process, especially for low producing properties. Even the lowest percentage of the discounted cash flow value in the above sample is well within the percentage of non-minerals value in sales.
With the exception of wells that are reentered (severance tax credits help the economics), shut-in wells are a liability, waiting to incur plug and abandonment cost. As wells can’t be removed from the assessment roll until after plugged and abandoned, $100 assigns a token value for property that has a negative value.
This alternative allows industry to go on record to request a minimum of adjustments currently in the rules and regulations.

27. Valuation of Louisiana Oil and Gas Wells for Property Taxes
Exhibit 1
Valuation of Louisiana Oil and Gas Wells for Property Taxes
Legal Conclusions
of Taxable Property
Valuation Approach? Cost
Taxable Cost (studies, company books)
Additional Adjustments (if appropriate)
Inflation Factor to Current Cost
Reality Check
(% of discounted cash flow value, sale of same property, other)
Replacement Cost New
Taxable Market Value
Less
Physical Depreciation (age from serial no.)
Preliminary Market Value
Market Adjustments (obsolescence)
Review Status and Production Data for Shut-In and Low Producing Wells (LDNR, operators, other)
Before we end our presentation for Chapter 9, we come back to this slide to remind everyone of our goal: taxable market value.
Review Other Market Data (environmental, operators, buyers, sellers, other)
RCNLD Less Some Market Adjustment
Less Shut-In and Low Production Credits
Red above indicates the major ongoing differences between industry and the LAA.
The box indicates where assessors generally stop in their appraisal of wells.

28. Thank you!