1. RAILROAD COMMISSION OF TEXAS Lorenzo Garza Drilling Permits and Online Filing – Advanced Topics to be discussed: Stacked Laterals, Allocation and PSA wells, Down-hole Commingling issues and SWR Exceptions

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3. Stacked Laterals- how to qualify 2 or more horizontal drainhole wells within lease/pooled unit in the correlative interval. Horizontal drainholes are drilled from different surface locations. The first well drilled establishes the parameters that the subsequent wells will be tested against. Each point of a Stacked Lateral drainhole shall be no more than 300 feet in a horizontal direction from any point along the “record wells” productive interval. 3

4. Drilling Permits and Online Filing - Advanced Stacked Laterals- how to qualify cont. Each surface location must be permitted separately and assigned its own API number. Plat must clearly show all wellbores attempting to qualify for Stacked Lateral status. To be considered a “regular location” each well must comply to any minimum lease or between well spacing rules 4

5. Drilling Permits and Online Filing - Advanced Stacked Laterals why all the fuss? For each well that qualifies as a Stacked Lateral well your overall well count will not increase when the RRC tests your lease for density exceptions. If your well, when completed, does not remain within the established parameters of the “record well” then you will be required to amend the permit to reflect its new status and count this well against your total well count. If you exceed density then an exception to SWR 38 will be needed. 5

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8. PRODUCTION SHARING AGREEMENTS Supporting Documentation: Authorization letter to include % of participation PSA-12 form showing acreage to be assigned to proposed well Plat showing the external boundary of all tracts contributing acreage to the proposed well Well allocation worksheet 8

9. Drilling Permits and Online Filing - Advanced PRODUCTION SHARING AGREEMENTS Supporting Documentation: Authorization letter Contractual right to develop all proposed tracts To be approved administratively minimum of 65% of mineral and working interest owners must be signed to agreement If less than 65% sign-up then request to set up application for hearing 9

10. PSA/ALLOCATION AUTHORITY LETTER 10

11. Drilling Permits and Online Filing - Advanced PRODUCTION SHARING AGREEMENTS Supporting Documentation: PSA-12 and Plat PSA-12 form filled out showing all tracts and acreage involved Plat that shows the entire boundary of all contributing tracts All supporting lease/unit line calls should be to exterior boundary of the contributing tracts Any un-leased tracts within contributing tracts should be identified 11

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14. Drilling Permits and Online Filing - Advanced PRODUCTION SHARING AGREEMENTS Supporting Documentation: Acreage allocation work sheet Breakdown of activity for each contributing lease/pooled unit If any contributing lease/pooled unit is over assigned then a statement as to how the deficiency will be resolved If SWR 38 density exception is required then application must follow procedures set forth in the rule 14

15. W-1 ACREAGE ALLOCATION WORK SHEET 15

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18. Drilling Permits and Online Filing - Advanced What is the difference between a “PSA” well and an “Allocation” well? 1.On tracts that you have a valid lease in place an “Allocation” well permit will allow you to get a drilling permit application without the qualifier that you have to provide for a “PSA” well that 65% of both mineral and working interest owners have signed an agreement as to how production proceeds will be divided. 2. What it doesn’t allow you to do is incorporate tracts into your “Allocation” unit that the wellbore does not traverse. 18

19. Drilling Permits and Online Filing - Advanced PSA or ALLOCATION WELLS SWR Exceptions: Lease line Allocation well application will always require an exception PSA application will require an exception if there is less than 100% participation Between Well Normal notification procedures will be followed Density Exception Unless specified in the field rules normal notification and data requirements will be followed 19

20. Drilling Permits and Online Filing - Advanced Things to remember when filing applications in which you will be down-hole commingling : All fields must be compliant to applicable Statewide Rules. If exceptions are needed then the field with the strictest notification criteria must be used 20

21. Drilling Permits and Online Filing - Advanced SWR 37 and SWR 38 terminology you should know.  OFFSET - Refers to the operator, lessee, or un- leased mineral owner of a tract that is adjacent to your lease/pooled unit. The type of exception being applied for will dictate which offsets you will be required to notify or supply waivers for. 21

22. Drilling Permits and Online Filing - Advanced SWR 37 and SWR 38 terminology you should know.  WAIVER- A letter signed by an identified offset. In that letter the offset is requested to waive their right to protest the granting of the needed exception. 22

23. Drilling Permits and Online Filing - Advanced SWR 37 and SWR 38 terminology you should know.  SERVICE LIST - List of identified affected offsets that need to be notified concerning the applicant needing to gain an exception to a SWR. The list should include the name and addresses of the affected parties. 23

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25. Drilling Permits and Online Filing - Advanced RESOLUTIONS TO SWR 37 EXCEPTIONS LEASE LINE: You are your own offset. You have waivers from affected offsets. Provide service list for 21-day notification of affected offsets. If unable to locate affected parties request to set up for publication of notice for 4 consecutive weeks. A signed statement must be provided by applicant stating that all possible means have been used to locate affected parties. 25

26. Drilling Permits and Online Filing - Advanced Plat requirements For Between Well SWR 37 exception For Between Well SWR 37 exceptions all offset interests must be clearly labeled on plat around the entire lease or pooled unit. 26

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28. Drilling Permits and Online Filing - Advanced Plat requirements For SWR 38 Density Exceptions For SWR 38 exceptions all offset interests must be clearly labeled on plat around the entire lease or pooled unit unless there are special provisions in the field rules for the applied for field that state different notification parameters. 28

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31. Contact Information Lorenzo Garza Phone: 512-463-2184 Email: Lorenzo.Garza@rrc.state.tx.usLorenzo.Garza@rrc.state.tx.us Valerie Atkins Phone: 512-463-6979 Email: Valerie.Atkins@rrc.state.tx.usValerie.Atkins@rrc.state.tx.us 31